Why Is Cash (Still) So Entrenched? Insights From Canadian Shopping Diaries

Abstract

One similarity among many developed economies is the predominance of cash over electronic payments in terms of payment frequency, especially for the low-value transactions that are the bulk of retail payments. We use the Bank of Canada's 2009 Methods-of-Payment Survey, which collected information on consumers' payment choices through shopping diaries, to estimate a simple model of choice between cash and other payment methods. Results suggest that the main reasons cash is still a popular payment instrument in Canada, especially for low-value transactions, are its wide acceptance among merchants compared with other alternatives, speed and ease of use, and low marginal cost when on hand. (JEL E41, D12, L81)

Cash Management and Payment Choices: A Simulation Model with International Comparisons

“…This feature is presented in the economics literature on money and payments as "cash burning," meaning that an agent prefers to use cash when his cash holdings are su ciently high. For instance, exploiting 2,351 payment diaries and 10,200 transactions realized by two access panels in Canada in 2009, Arango et al (2014) estimate the probability of choosing cash for POS payments as a function of a set of demographic variables, payment attributes, perceptions and transactions characteristics. The authors nd that higher initial cash holdings lead to a higher probability of paying with cash, and that this result holds even after controlling for the possible endogeneity of cash-holding decisions.…”

“…Given the respective costs of payment instruments, Whitesell shows that there are exclusive transaction domains for payment instruments: cash for lowvalue transactions, and other payment instruments (e.g., payment cards) for higher-value transactions. However, this approach is not fully consistent with the empirical fact that, although cash is used more frequently for low-value transactions, there are no exclusive transaction domains, and cards and cash are used to pay for both low-and high-value transactions (Arango et al, 2014;Bouhdaoui and Bounie, 2012). Second, we assess the validity of our model across di erent economies, exploiting four detailed micro data sets based on surveys and payment diaries commissioned by central banks and card payment networks.…”

“…Second, we assume that a consumer prefers to use cash whenever he has enough cash; otherwise, the consumer uses a payment card. This feature of cash as "burning" when it is on hand, called here "Cash First," has been examined empirically in Arango et al (2014), Bouhdaoui and Bounie (2012), and Eschelbach and Schmidt (2013). All three studies con rm that higher cash holdings lead to greater use of cash in payments.…”

Drivers of Payment Patterns at the Point of Sale: Stable or Not?

“…As explanatory variables, we include the following attributes of payment instruments: safety , speed , costs , and user‐friendliness , . In line with recent research on payment behavior (e.g., Arango, Hogg, and Lee ), we include relative measures because relative perceptions are most likely to drive payment behavior . Although we considered using absolute measures, an important drawback is that these measures do not take into account that payment behavior depends on the perceptions of the attributes of other instruments as well.…”

“…Note that, for example, Arango, Hogg, and Lee () take ratios. A drawback of taking ratios is that the effect of a change of a perception on the ratio depends on the starting values and whether the change is an increase or decrease, whereas the effect is always the same when one subtracts perceptions.…”