Contactless Payments Have Little Impact on Cash Usage

Does a rise in contactless payments equal a decline in cash transactions? According to the Bank of Canada, the short answer is no. The critical factor in cash usage instead seems to be geography, with the proximity of bank branches and ATMs having a greater effect than contactless options.

Prepared by Marie-Hélène Felt, Senior Economist at the Bank of Canada, the working paper ‘Losing Contact: The Impact of Contactless Payments on Cash Usage’ investigates the relationship between people’s use of contactless credit cards (CTCs) and the impact this had on ‘cash share’ in the payments landscape.

Introduced to Canada in 2006, CTCs saw slow adoption until around 2015, with the following two years being a turning point. A key factor is likely the growth of infrastructure to support the use of contactless payment, which, the paper reports, grew at a rate of 24 percent annually between 2013 and 2018. Cash usage steadily declined over the same period.

The profile of CTC users shows they are most often employed homeowners with young families, and over time the trend shifted for these people to have higher incomes than non-CTC users. The paper notes that some of these factors are more significant than others, with being ‘tech savvy’ potentially mattering more than, for example, home ownership.

Overall, the CTC-using households used cash around 10 percent less, in terms of number of transactions and value, than non-CTC households, with the latter using cash for 31 percent of their transactions, and 22 percent by value. The paper concludes that while CTCs did impact the ‘intensive margin of cash usage’, it did not affect the ‘extensive margin’, meaning the starting point for attitudes towards cash use were difference in CTC users and non-users, so the impact of contactless payments differed between them.

The lack of evidence for a causal relationship between CTCs and cash usage was consistent with previous research conducted in the field, including a 2020 piece—Financial Innovation, Payment Choice and Cash Demand: Causal Evidence from the Staggered Introduction of Contactless Debit Cards—which found a small average reduction in the share of cash payments after the introduction of cashless options in Switzerland (0.6 percent relative to an average cash share of 68 percent).

The Canadian study found households that used cash held more of it, and spent it more frequently and in larger quantities. The author concluded the amount of cash spent depends on personal preferences and merchant-side factors (such as availability of places to obtain cash) rather than withdrawal costs.

The paper’s final conclusion was that overall impact of contactless payments on the transactional usage of cash was very small between 2010 and 2017, and the critical factor was the distance people had to travel to withdraw cash, with bank branch closures and shrinking ATM networks likely significant drivers.

For those who seek to preserve payment choice, the paper is a strong indicator that maintaining access to cash is a far more important area of focus than the ever-increasing number of alternative payment options.