Academic journal article Contemporary Economic Policy

Why Is Cash Still So Entrenched? Insights from Canadian Shopping Diaries

Academic journal article Contemporary Economic Policy

Why Is Cash Still So Entrenched? Insights from Canadian Shopping Diaries

Article excerpt

One similarity (wrong many developed economies is the predominance of cash over electronic payments in terms of payment frequency, especially Pr 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 Pr 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. D 12, L81)


The retail payments landscape in Canada, as in many other developed countries, has changed markedly in the recent past. As shown in Figure 1, cash has continuously lost its market share to debit and credit cards during the past two decades. Indeed, cash currently accounts for only about one-fifth of total payments in terms of value. In terms of payment volumes, however, cash is still king in Canada and in most developed countries, where it represents at least half of retail transactions--and more than 75% in the case of Germany and Austria. (1) However, its supremacy may be in jeopardy with the entry of recent innovations that are close substitutes for cash. Examples include stored-value cards, contactless (2) cards, and the enabling of debit and credit payments through mobile phones (3) for both point-of-sale and person-to-person transactions.

As issuers of bank notes, these developments are of interest to central banks, since they shed light on the likely evolution of cash usage, aid in the banks' long-term planning and, more broadly, highlight the policy issues that may arise regarding the efficiency and safety of the payment system. Therefore, many central banks have commissioned detailed surveys to study consumers' decisions regarding the choice of payment instruments. Among these efforts is the Bank of Canada's 2009 Methods-of-Payment (MOP) Survey, which includes a shopping diary where consumers record their purchases and the payment instruments used over a 3-day period.

This paper uses data from the 2009 MOP Survey to study the main factors underlying the high frequency of cash usage for day-to-day payments. Not surprisingly, the survey confirms that cash is still the predominant payment instrument in Canada in terms of volume, accounting for 54% of all transactions recorded in the diaries. This predominance is due to the fact that cash accounts for about 70% of small-value payments, which make up the bulk of retail payments.

The empirical literature on payment choices has emphasized the strong relationship between cash payments and transaction values. (4) However, these results are of limited use in understanding potential shifts in cash usage or informing policy. It is improbable, for instance, that changes in the use of cash will come from changes in the distribution of transaction values in the economy. Our work contributes to this empirical literature, both by identifying the key underlying behavioral and economic factors that make cash more likely to be used at low transaction values and by deriving implications for the future of cash.

The results of a probit model of cash payment choices at the point of sale (POS) suggest that cash is still frequently used in Canada because of the following factors:

1. Consumers perceive that cards are not widely accepted. Indeed, where cash, debit and credit cards are all believed to be accepted, cash payment shares are 27 percentage points lower. Lack of card acceptance, in particular, explains one-third of the share of cash payments for transactions below $25.

2. Cash has several characteristics that make it more appealing to consumers than other payment methods. Consumers find it fast, cheap, safe against fraud, and convenient for budget-control purposes. …

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