Lola Hernandez

Cash Management and Payment Choices: A Simulation Model with International Comparisons

Despite various payment innovations, today, cash is still heavily used to pay for low-value purchases. This paper develops a simulation model to test whether standard implications of the theory on cash management and payment choices can explain the use of payment instruments by transaction size. In particular, using diary survey data from Canada, France, Germany and the Netherlands, we test the assumption that cash is still the most efficient payment instrument, and the idea that people hold cash for precautionary reasons when facing uncertainty about their future purchases. The results of the simulations show that these two factors are significant determinants of the high shares of low-value cash payments in Canada, France and Germany. Yet, they are not so crucial in the Netherlands, which exhibits a significant share of low-value card transactions. We discuss how the differences in payment markets across countries may explain the performance of the model.

Cash versus Debit Card: The Role of Budget Control: Cash Versus Debit Card: The Role of Budget Control

Due to the financial crisis, an increasing number of households faces financial problems. This may lead to an increasing need for monitoring spending and budgets. We demonstrate that both cash and the debit card are perceived to be helpful in this respect. We show that on average consumers who are responsible for the financial decision making within a household consider the debit card to be more useful for monitoring the total value and nature of their expenses than cash. There are however important differences across individuals. In particular, low income people and the liquidity-constrained attach the greatest value to cash as a monitoring and budgeting tool. Finally, we present evidence that these preferences strongly affect consumers’ payment behaviour at an aggregated level. We herewith suggest that the substitution of cash by cards may slow down because of the financial crisis. Also, we show that cash still brings benefits that current electronic counterparts have not yet succeeded to provide. This suggests that consumers may be encouraged to use electronic payment instruments more frequently by incorporating enhanced budgeting and monitoring features.

In love with the debit card but still married to cash

Using shopping diary survey data we show that changing payment patterns is a challenging task; even when consumers have fallen in love with the debit card, they find it hard to divorce from cash. While seven out of ten Dutch consumers report to prefer using the debit card, only seven out of twenty actually mostly pay by debit card. The likelihood that reported preferences and actual behaviour do not match increases with income, education and age. Consumers with payments in cash-intensive sectors, where the wide acceptance of the debit card is a relatively recent phenomenon, are more likely to overestimate debit card usage than other consumers. The likelihood of a gap also increases with the amount of cash that consumers carry with them and decreases with the average transaction size. Our findings indicate that persistent habits are an important explanation why the substitution of cash by debit cards took place at a slower pace than was expected.

Cash versus Debit Card: The Role of Budget Control

Due to the financial crisis, an increasing number of households face financial problems. This may lead to an increasing need for monitoring spending and budgets. We demonstrate that both cash and the debit card are perceived as helpful in this respect. We show that, on average, consumers responsible for the financial decision making within a household find the debit card more useful for monitoring their household finances than cash. Individuals differ in major respects, however. In particular, low earners and the liquidity-constrained prefer cash as a monitoring and budgeting tool. Finally, we present evidence that at an aggregated level, such preferences strongly affect consumer payment behaviour. We suggest that the substitution of cash by cards may slow down because of the financial crisis. Also, we show that cash still brings benefits that electronic alternatives have been unable to match. This suggests that inclusion of enhanced budgeting and monitoring features in electronic payment instruments may encourage consumers to use them more frequently.

Determinants of the Rate of the Dutch Unsecured Overnight Money Market

This paper investigates how changes in the monetary policy framework have affected the overnight money market lending rate for the Dutch segment of the euro area during tranquil and crisis times. We present an EGARCH model on the volatility of the overnight lending rate. The results show that modifications of the monetary policy framework in 2004 decreased the volatility of the rate. Since the turmoil of the crisis started the volatility increased again. Our method makes it possible for central banks to monitor the volatility of the rate and the impact of changes in the policy for the whole euro area.