Academic journal article The Journal of Consumer Affairs

Cash versus Debit Card: The Role of Budget Control

Academic journal article The Journal of Consumer Affairs

Cash versus Debit Card: The Role of Budget Control

Article excerpt

Due to the financial crisis, an increasing number of households face financial problems. This may lead to an increasing need for monitoring spending and budgets. We demonstrate that both cash and the debit card are perceived as helpful in this respect. We show that, on average, consumers responsible for financial decision making within a household find cash and the debit card equally helpful for monitoring their household finances. Individuals differ in major respects, however. In particular, low earners and the liquidity-constrained prefer cash as a budgeting tool. Finally, we present evidence that at an aggregated level, such preferences strongly affect consumer payment behavior. These findings suggest that the substitution of cash by cards may slow down because of the financial crisis.


Many studies have sought to gain insight into the drivers and barriers underlying consumers' payment choices at the point-of-sale (POS)--see Kosse (2014) for a summary. Overall, consumers' choice between alternative payment instruments has been found to depend on factors such as the amount of the transaction, the availability of payment terminals, and financial incentives. In addition, the payments literature suggests that the use of different payment instruments is strongly related to demographic factors such as age. education, and income.

So far, the literature has largely ignored the impact of budget control on consumers' payment choices. Since the start of the financial crisis in 2008, households' financial situations have deteriorated in many European countries, including the Netherlands. In 2013, the purchasing power of the Dutch declined for the fourth consecutive year. The reasons include rising unemployment, downward pressures on wages and pensions, and rising taxes and inflation (e.g., CPB 2013). In order to cope with declining purchasing power, households need to examine their expenses more closely and make cuts where necessary.

Traditionally, Dutch households that need to cut down expenses have been advised by consumer organizations like NIBUD (National Institute for Family Finance Information) to record all their payments in order to realize how much they spend. Also, households are traditionally advised to withdraw a fixed amount of cash. By solely relying on this amount for their daily expenditures for a pre-set period, households can avoid spending more than they can afford. This is where cash usage differs from the use of a payment card, which requires spending constraints to be set mentally. Therefore, the card leaves more freedom to overspend if the balance in the account exceeds the predefined budget.

In addition, solely paying in cash has traditionally been perceived as an easy way to keep track of how much consumers have left to spend, as it only requires a quick look into the wallet. This comparative advantage of cash was especially strong in the early years of the payment card. At the time they were introduced as a means of payment in the Netherlands at the end of the 1980s, it was hard for card users to have accurate and up-to-date information about their latest current accounts, as banks sent them a balance statement only once a week (or even less often). Nowadays, banks have introduced several online and mobile innovations that consumers can use to monitor expenses and balances at any time they want. As a result, debit card users now have access to almost the same kind of account balance information as consumers using cash. However, it still requires more effort, as they have to consult their bank statements, either on a computer or via a mobile phone, or to memorize their pre-set budget and past expenses and make their own calculations.

Given the recent financial crisis and the differences between the two payment methods, the question arises which payment method, cash or payment cards, is considered as most helpful by consumers to balance their budgets. …

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