The role of card acceptance in the transaction demand for money

Abstract

In developed economies, payment cards (debit and credit) are widely accepted for retail trans-actions and their diffusion among the population is almost ubiquitous. Nevertheless, cash usage still remains widespread. We hypothesize that the lack of card acceptance at the point-of-sale is a key explanation why cash continues to play an important role. We use payment diary survey data from Austrian and Canadian consumers which provide information on cash balances and on card acceptance at individual transactions. We estimate an inventory-theoretic model of cash demand and establish that card acceptance exerts a substantial quantitative im-pact on cash demand. The consumption elasticity of money demand—0.23 and 0.11 for Aus-tria and Canada—is smaller than predicted by the classic Baumol-Tobin inventory model (0.5). Counterfactual experiments reveal that cash demand decreases but will not disappear as accep-tance increases.