Contactless cards do not (yet) reduce cash demand

Are recent payment innovations accelerating the move to a cashless society? Our study presents causal evidence from the staggered introduction of contactless debit cards by a retail bank. We find that access to the contactless payment technology causes a sizable increase in the use of debit cards for small-value payments.  However, the average impact on the use of cash and on cash demand is economically small and statistically insignificant. Our results suggest that central banks — in cash-affine countries — might still have some time to get ready for the cashless society.

Tapping a card on a terminal has become the new normal in many countries around the world, in particular since the outbreak of the coronavirus crisis. Does this payment technology actually lead to more card payments in "normal" times? And will cash therefore become obsolete?

A first glance at the data would strongly favor such an interpretation. In almost all developed economies, contactless payments have increased rapidly (already before the pandemic) while the use of cash has declined. It is tempting to regard this coincidence as causally related. Yet to date there is no evidence documenting that this payment innovation has a sizable causal effect on payment choice and cash demand. This is by no means a trivial question. First, while consumers may increasingly use contactless technology at payment terminals, this may simply replace existing non-contactless card transactions. Second, even if contactless cards increase the total number of card transactions, the impact on overall payment volume may be economically irrelevant (given their use for small-value transactions). Thus, the concurrent increase in contactless payments and decline in cash use may simply reflect a correlation in times of broader changes in consumption and payment behavior.

To study this issue, we examined strictly anonymized bank account data for a random sample of about 30,000 customers of a Swiss retail bank. The data cover all card transactions and cash withdrawals between 2015 and 2018. This is an interesting period, because starting in 2016, the bank rolled out contactless debit cards to clients as their existing cards expired. This setting constitutes a "natural experiment" that allows us to isolate the causal effect of the new payment technology on customers' payment behavior. The bank issues new debit cards at year-end; thus, we could divide the clients into three groups: Early Adopters received a new contactless-enabled debit card at the end of 2016, Late Adopters at the end of 2017, and Non Adopters only at the end of 2018, which is outside the observation period (Figure 1). Because the expiry dates are random, the three groups are very similar in socio-demographic characteristics such as gender, age, and income and their payment habits and money demand. Thus, any change in behavior after receiving the new debit card can be attributed to the contactless function.

Figure 1. Staggered rollout of contactless debit cards (research design)

Cash still rules…

Aside from the identification of the causal effect, an outstanding feature of our data is that we can observe consumers’ cash and card use over a period of four years. The respective results showcase the importance of cash — in a highly developed economy with a well-developed payment card infrastructure. By 2018, the majority of everyday payments by value were still conducted in cash — although all the clients in the sample had a debit card. The average customer visited an ATM three times a month to withdraw on average 338 Swiss francs. By comparison, the average customer paid only four times per month by debit card for an average amount of 70 Swiss francs. Cash was slowly losing ground; its value share in payments fell from 2015 to 2018 by about 2 percentage points a year. But continuing at that pace, it would take another 35 years for the average Swiss consumer to ditch cash completely.

…but consumers do start tapping

The contactless payment function does lead consumers to use their debit cards more often. After consumers have access to the contactless technology, the frequency of debit card point-of-sale transactions increases by 7% per year. This causal effect almost doubles the trend increase as identified for the non-adopter group (+9% per year). Figure 2 shows that the increase in card transactions is clearly related to the time at which consumers received a contactless card.

Figure 2. Number of debit card transactions at the point of sale by adopter group

Note: This figure displays, by treatment group, the monthly average number of point-of-sale debit card transactions with a value of at most 40 CHF (the threshold for PIN-exempt transactions). Early adopters received the card in 2016q4; late adopters received the card in 2017q4; and non-adopters did not receive a contactless card.

The vast majority (75%) of additional debit card transactions attributed to the contactless technology are small-value payments (below 20 CHF). As a consequence, the causal impact of the contactless technology on the volume of debit card transactions is marginal. This implies that the average effect of the contactless payment technology on consumers’ share of cash payments is economically small and statistically insignificant. Likewise, we find no average effect of contactless cards on cash demand, that is, the frequency of cash withdrawals or the average cash withdrawal amount. Our results thus suggest that the contactless payment technology increases the average consumer’s use of payment cards. But as the effect is concentrated in small-value transactions, which start from a low level, the economic effect on cash demand is negligible.

Large differences in payment behavior among clients

We observe substantial variation in payment behavior across consumers: one-quarter of the sample population relied almost exclusively on cash, while another quarter made their purchases already predominantly by card. The impact of contactless technology on these groups differs considerably: cash lovers hardly changed their payment behavior, but intermediate users increasingly used cashless payments, especially for small amounts. And who are those contactless card lovers? As expected, young people (below age 35) are more likely to adopt new technologies. Their annual trend decline in the use of cash is seven times larger than that for people over age 55. Surprisingly, contactless cards only changed the use of cash of the youth in urban settings; we find no effect on the use of cash among youth living in the countryside.

It might be a long way to a cashless society

In the last century, we have witnessed major innovations in payment technology, such as credit cards (late 1950s), ATMs (late 1960s), and debit cards (1970s). None of these innovations has questioned the future of physical money issued by central banks. However, it is a widely held presumption that the recent innovations of contactless, mobile, and instant payments will accelerate the move to a cashless society. This would pose challenges to central banks that have a mandate to guarantee a safe, efficient, and broadly accessible payment system. To counterbalance ongoing payment innovations and an expected strong decline in cash demand — as has been observed in Sweden, for example — many central banks are now contemplating the introduction of electronic cash substitutes, that is, central bank digital currencies.

Our results suggest that it still might be some way to a cashless society — even when considering that the trend decline in the use of cash might accelerate.  This conjecture applies to economies where cash is still much used, like Germany, Switzerland, Austria, and various other European countries (European Central Bank, Deutsche Bundesbank, Swiss National Bank). For consumers in countries that are less cash affine, like the United Kingdom, Sweden, and Canada, high cash use rates might be a reminiscence. However, our results also document significant and persistent heterogeneities in payment choice across consumers, which points toward the importance of habit and/or behavioral motives. We conjecture that such persistent behavior may also apply to specific socio-demographic subgroups (for example, older cohorts) in countries where cashless payments are more prevalent.

COVID-19 and the use of cash

Recent data reveal that non-cash payments and in particular contactless payments have increased strongly and the use of cash has declined (for example, Deutsche Bundesbank; Ardizzi, Nobili and Rocco; Jonker et al., Kraenzlin et al.).¹ Although our results do not allow us to make evidence-based predictions about the impact of the COVID-19 pandemic on payment behavior, they suggest that in normal times consumers might have perceived the incremental convenience of contactless cards as too small, on average, to cause large shifts in cash demand. The strong increase in the use of contactless cards during the COVID-19 pandemic could thus be seen as an exogenous shock that shifted relative costs and benefits enough to affect money demand (Alvarez and Argente). It remains to be seen whether these changes are permanent and which groups of consumers changed their behavior.

Disclaimer

The findings, interpretations and conclusions presented in this article are entirely those of the authors and should not be attributed in any manner to the Oesterreichische Nationalbank or the Eurosystem.