Second, central banks are the sole institutions that are entitled to issue legal tender money. Thus, understanding the demand for cash is crucial to evaluating the costs of payment systems. (2013) estimated the substantial costs of cash, which amount to one half percent of GDP for the EU-27 member states. van Hove (2008) measured the costs of cash usage in the Netherlands as being 0.48% of GDP. The number and transaction size of cash payments affect the efficiency of payment systems, as expressed in social welfare costs. First, one of the main responsibilities of central banks is to provide efficient payment services to ensure financial system stability. This is because contactless cards-due to their improved speed and convenience-are likely to substitute low cash value payments, which are high in frequency but have low budget impact.Īnalyzing the effect of contactless payment on cash usage is relevant for three reasons. ![]() The effect on the number of cash transactions is expected to be larger compared to cash expenses. Thus, I hypothesize that contactless payment adopters are more likely to exhibit lower cash usage. The speed of a transaction is key to determining the choice of payment instruments (e.g., Klee (2006) Jonker (2007)). (2013) found that contactless payment cards compete with cash payments with respect to speed and under certain conditions even outperform cash. Contactless payment therefore offers instantaneous payment, speed, and convenience compared to traditional cards. A signature or PIN verification is not necessary below a certain transaction value. This standard radio communication technology allows paying within a 4-cm range by waving or tapping the payment card. Contactless payment is based on near-field communication (NFC) technology. The sign is the only distinction to traditional chip cards. Contactless cards include a chip and a simple wireless sign. The contactless antenna is usually embedded in conventional payment cards such as debit and credit cards. This paper explores the effect of contactless credit and debit cards on cash usage in the early stage of diffusion. Thus, discussing the prospects of cash usage is high on the agenda of central banks, which are responsible for cash distribution. Contactless payment is therefore seen as a more competitive payment alternative to traditional cash payments compared to conventional payment cards. They promise efficient and convenient payment services that may reduce the transaction costs of payment for consumers. Recent innovative payment means (e.g., contactless payment) attempt to mimic the desirable features of cash. ![]() However, the promotion of various technological innovations in retail payment markets such as credit, debit, and prepaid cards has led to a decline in cash usage in recent years (e.g., Lippi and Secchi (2009) Amromin and Chakravorti (2009) Stix (2003)). (2014) Bouhdaoui and Bounie (2012) Arango et al. Cash is still the most prominent payment method at the point-of-sale (POS) in numerous developed countries, especially at low transaction values (e.g., von Kalckreuth et al.
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