Cash versus card: Payment discontinuities and the burden of holding coins

Abstract

Cash is the preferred method of payment for small value transactions generally less than $25. We provide insight to this finding with a new theoretical model that characterizes and compares consumers' costs of paying with cash to paying with cards for each transaction. Our novel method accounts for how much change is received in the form of banknotes and metal coins, assuming that the weight and size of coins are inconvenient to carry. We use the regression discontinuity design (RDD) approach to estimate the model using the 2013 Bank of Canada Method-of-Payments (MOP) Survey and find a significant number of cash users who switch to paying with debit or credit cards at transaction values marginally above $5 and $10. We attribute this finding to the burden of receiving coins as change associated with the currency denomination structure. Our proposed methodology is general and can be applied to other countries and institutional details. Bank topics: Bank notes; Econometric and statistical methods JEL codes: D03, E42 Résumé L'argent comptant est le mode de paiement privilégié pour les petites transactions qui en général ne dépassent pas 25 $. Nous apportons des éclaircissements sur ce point à l'aide d'un nouveau modèle théorique qui permet de définir et de comparer, pour chaque transaction, les coûts associés au paiement en argent comptant par rapport à ceux qui sont rattachés au paiement par carte. Notre modèle inédit permet de déterminer à combien s'élève la petite monnaie reçue sous forme de billets et de pièces, en partant du principe que ces dernières sont peu pratiques vu leur poids et leur taille. Nous adoptons l'approche de discontinuité de la régression pour estimer le modèle à partir de l'enquête sur les modes de paiement réalisée en 2013 par la Banque du Canada. D'après nos conclusions, un grand nombre d'utilisateurs d'argent comptant paient par carte de débit ou de crédit dès que la valeur des transactions dépasse légèrement 5 $ et 10 $, respectivement. Cette observation s'explique par le fardeau associé au fait de recevoir de la petite monnaie en pièces ainsi que par la nature même des dénominations monétaires. Notre proposition de méthode a une portée générale et peut s'appliquer à d'autres pays et dispositifs institutionnels.

How the ATM Affects the Way We Pay

“…Using payment and scanner data, Klee (2008) and Fujiki and Tanaka (2017) document that transaction value is a strong determinant of payment choice. Further studies by Schuh and Stavins (2010), Arango, Huynh, and Sabetti (2015), Bounie, François, and Waelbroeck (2016), Wakamori and Welte (2017), Shy (2018), and Chen, Huynh, and Shy (2019) confirm this finding using payment diary data.…”

“…Knotek (2008Knotek ( , 2011 call it the "rela-1 tive inconvenience of price" where inconvenience is measured by the minimum number of coins and bills needed to make a transaction. The burden of coins on buyers was analyzed in Chen, Huynh, and Shy (2019) using Canadian consumer diary data collected by the Bank of Canada. In contrast, this paper uses U.S. diary data to investigate whether the $20 payment amount threshold (between paying cash and paying with cards) is more common than other payment amount thresholds.…”

How currency denomination and the ATM affect the way we pay

“…In general, cash use at the point-of-sale (POS) remains strong in most countries. Krüger and Seitz (2014), Fung, Huynh, and Stuber (2015), Arango, Huynh, and Sabetti (2015), Bounie, François, and Waelbroeck (2016), Wang and Wolman (2016), Wakamori and Welte (2017), Chen, Huynh, and Shy (2019), and Shy (2018Shy ( , 2019 This article is organized as follows. Section 2 sketches a single-currency denomination model of consumer preferences that provides some intuition for the empirical findings on how the decision to pay cash is influenced by currency denomination.…”

“…The δ k are linearly independent because I{Amounti > k − 1} = 1 whereas I{Amounti > k} = 0 for any Amounti ∈ (k − 1, k]. A similar model was estimated inChen, Huynh, and Shy (2019) using Bank of Canada's 2013 Methods of Payment diary data.…”

Microcontroller Based Money Card Sorter with Pre-online Application Feature

“…Being the only reloadable electronic cash card that works with mobile phones at present, The system has been serving their customers for years [3]. It can be used in any partner bank ATMs nationwide [4]. The process of applying for a Money card starts at the filing of application forms to any Wireless Centers [5].…”