The substitution of noncash (check, giro, and credit and debit card) payments for cash transactions is difficult to gauge because there are no data series on the actual value or volume of cash transactions in any country. However, determining the degree of cash substitution is important because it will negatively affect government seigniorage revenue and, if cash use falls fast enough, may require tax revenues to redeem excess currency holdings. We utilise a novel method for approximating the volume of cash transactions using public information on currency stocks and noncash payments. Applying this method, we estimate how cash has been substituted by other payment instruments in 10 European countries. We also provide a forecast of future cash use by country. We find that the trend in cash substitution across countries is quite similar. However, the countries themselves are at significantly different stages of this substitution process. The spread of debit and credit card payments has been the key factor behind the substitution away from cash as use of e-cash innovation is still in its infancy. Country-specific differences in the substitution process are largely explained by differences in the level of implementation of each country’s card payment technology.
Introduction: This paper develops and implements a methodology for determining the extent that noncash payment instruments have substituted for cash transactions at the point of sale in 10 European countries over 1987–1996. We also develop forecasts of future cash use since this can affect government seigniorage revenues and the related need to invest in cash printing, storage, and distribution facilities. In addition, if cash use is forecasted to fall to low levels in the future, governments would need to seriously consider establishing a “sinking fund” from current tax revenues to redeem the value of excess currency holdings. Past reductions in the stock of currency outstanding have been associated with cyclical downturns and rapid phases in the ongoing substitution of noncash for cash payments. Based on our analysis, the near term threat of central banks having to redeem large amounts of cash seems to be small. However, this situation could change if new payment
innovations, such as e-cash (cash-in-a-chip card) become popular.
Author: Jussi Snellman,Jukka Vesala, David Humphrey
Source: Research Discussion Papers, Bank of Finland
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