Media Briefings

How Far Towards A Cashless Society?

  • Published Date: April 2003

Are we headed for a cashless society, where all payments are made by cards
via the technology of EFTPOS (electronic fund transfers at point of sale)? Not
necessarily, according to Sheri Markose and Yiing Jia Loke, writing in the
latest issue of the Economic Journal. Their research indicates that the low
cost of getting cash from an ATM (automated teller machine) means that cash
can hold its own and even enjoy a resurgence when interest rates are low.
Innovations in payments system underpinned by an electronic technology are
transforming the monetary landscape of many countries, the researchers
note. But the potential technology-driven substitution of cash by card
payments raises a number of crucial issues for monetary policy-makers. In
particular, the decline in transactions balances of cash is governed by the rate
of adoption by consumers and merchants alike of card payments facilitated by
Adoption of a ‘network good’ such as a new payments medium in an economy
depends on mutual expectations of providers and users of the goods. Thus,
against the status quo of a fully versatile currency, consumers will be
encouraged to adopt card payments only if they expect a critical mass of
merchants will accept it in lieu of cash. Similarly, merchants will hesitate to
subscribe to EFTPOS links unless they expect a growing proportion of retail
expenditures to be card-financed by consumers.
Using analysis of this kind, Markose and Loke throw light on the complex
dynamics between the four crucial elements that characterise the modern
‘cash-card economy’:
· deposit interest rates;
· the number of merchants with EFTPOS facilities;
· the proportion of retail expenditures that are card-financed as opposed
to cash-financed;
· and the keen cost competitiveness in the ATM provision of cash.
It is last element that drives the balance between the two competing
payments media, cash and card. At the margin, both media can co-exist only
if their user costs are equal.
This produces two important features of the analysis. First, the interest rate
elasticity of cash-card substitution is a function of the level of EFTPOS
adoption in the economy and this elasticity is very high at low interest rates.
This may result in perverse effects from attempts to contract (expand) bank
credit and liquidity by raising (lowering) interest rates.
Second, the cost competitiveness of ATM cash provision suggests that cash
can hold its own and even enjoy a resurgence when interest rates are low.
Further, the researchers argue that the slowdown in the growth of monetary
base is governed by the levels of EFTPOS adoption and the relative network
costs of cash and card use. Using historical payments data from the Bank of
International Settlements and the European Monetary Institute from 1990-8,
they devise a methodology to estimate the level of EFTPOS adoption in an
Notes for Editors: ‘Network Effects on Cash-card Substitution in
Transactions and Low Interest Rate Regimes’ by Sheri Markose and Yiing Jia
Loke is published in the April 2003 issue of the Economic Journal.
Dr Markose is Director of the Institute of Studies in Finance at the University
of Essex, Wivenhoe Park, Colchester C04 3SQ; Loke is at Universiti Sains
For Further Information: contact Sheri Markose on 01206-872742 (home:
01206-853037; fax: 01206-872724; email:; or RES
Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095