Effect of Electronic Payments on Demand for Cash

The costs of using electronic payment instruments have to be lower than the paper-based instruments and so, there has been a tendency to shift to the use of a relatively more cost effective type of payment instruments in many countries. In this regard, it is interesting to see whether, and to what extent, such a changing payment landscape toward the greater use of electronic payments is of particularly successful to the case of retail payment system in Iran. More specifically, this paper analyzes how credit card, POS payments and ATM withdrawals affect cash demand. In this study, two methods are employed to estimate the model. They comprise Autoregressive distributed lag (ARDL) and panel data methods. We estimated the effects of different electronic means of payment on demand for cash using 1995–2005 panel data for Iran and other nine countries and also time series data over the period 1981–2004 for Iran. The results confirm that the number of POS and interest rate have negative effect and the number of ATM and income have positive effects on the demand for cash.