Cash, Paper, and Electronic Payments: A Cross-Country Analysis

The social cost of a payment system comprises between 1% to 1.5% of GDP. This cost can be reduced if non-cash payments shift from paper to electronics since the cost of an electronic payment is estimated to be from one-third to one-half that of a paper-based transaction. We examine the use of cash and five non-cash payment instruments in 14 developed countries over 1987-1993. Our purpose is (1) to outline the current use of check, paper giro, electronic giro, credit card, and debit card payments and (2) to determine why some payment instruments are used more intensively than others, especially electronic versus paper-based payments. Standard demand theory influences (own price and incomes, institutional factors, and simple availability measures across countries are examined, as is the effect of habit formation. Payment substitution relationships are also estimated and indicate that checks will decline with further growth of electronic payments while the instruments that make up electronic payments will tend to expand together rather than replace one another. Copyright 1996 by Ohio State University Press.