Cash Management and Payment choices

15 January 2016

The European Central Bank (ECB) has published a working paper on cash management and payment choices in order to explain cash usage despite various payment innovations.

The working paper is a simulation model based on two optimal cash management and payment policies. First, cash is preferred to other payment instruments whenever consumers have enough balances at hand. Second, it is optimal for consumers to hold a stock of cash for precautionary reasons. The two models have been tested with data from Canada, France, Germany and the Netherlands.

The results of the simulations show that both optimal policies are operating in Canada, France and Germany but, to a lesser extent in the Netherlands. Indeed, a significant fraction of low-value transactions are paid with cards even though Dutch consumers have enough cash on hand.

The ECB notes that cash is still perceived as less costly than cards by consumers in France, Germany and Canada. The case of the Netherlands, where consumers use cards more intensively, is the result of a set of strategies in order to increase debit card usage and acceptance. The Netherlands encourage merchants to adopt the payment card and deter retailers from imposing a surcharge on low-value debit card payments. An interesting example is the number of active POS terminals among retailers with an increase of 35 percent in the first six years of this set of strategies. Finally, in contrast to Canada and Germany, cash withdrawals are usually free in the Netherlands, so people do not carry high cash balances.

The working paper shows that political decisions can change payment behavior in the retail sector. The limited acceptance of alternatives to cash encourages the public to hold more cash for precautionary reasons and to use more cash in payments.

Future researches will be needed to answer the questions raised by this analysis. Why german consumers are more cash oriented than others? Why consumers in the Netherlands still tend to use cash for medium- to higher-value transactions?