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The cashless society

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The latest issue of the Review of Network Economics has an interesting article by Garcia-Swartz, Hahn and Layne-Farrar which attempts to quantify the benefits and costs of a more cashless society. Their article is probably one of the most comprehensive so far in trying to take account of the private benefits and costs of all parties (merchants, consumers and the central bank) where previous studies have been more narrowly focused on, for instance, merchant acceptance costs. Their conclusions:

    First, transaction size assumptions are critical in analyzing payment-processing costs. At smaller transaction sizes, the net social marginal cost of all payment instruments – paper and electronic alike – are remarkably similar. No one instrument stands out as more socially efficient. At larger transaction sizes, however, significant differences emerge. For grocery store transactions, electronic payments are considerably less costly on net for society than paper
    Yet another pattern emerges for the larger transactions conducted at electronics stores. Here credit cards with a large proportion of reward cardholders have the lowest net social marginal cost.

    Second, retailer type influences the individual cost elements and thus affects private cost calculations.

    Finally, and most importantly, the relative merits of different payment methods change significantly when all parties are counted and benefits are included. Merchant studies have found that paper methods are the cheapest for merchants … But what is cheap for merchants is relatively expensive for other parties to a transaction. Certain parties, especially consumers, receive considerable benefits from payment cards, which tip their net private costs in favor of that method of payment.

    The fact that the shift away from cash and checks is probably economically beneficial does not imply that all parties have benefited. Our analysis suggests that certain groups, notably consumers, are likely to gain from this shift. In contrast, some merchants may not benefit.

A companion paper which sets out their calculations and methodology is available here.


Written by Admin

June 15, 2006 at 7:21 pm

Posted in Uncategorized

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