Cash or card? A structural model of payment choices

We use a large granular dataset to analyze the households’ choice between cash and card payments. Empirically, both the size of the transaction and the amount of cash on hand appear as significant covariates of the payment choice. We unveil a novel interaction between these two variables: the critical size for a card purchase depends on the amount of cash on hand. We present a tractable model of payment choices, featuring non-universal acceptance of cards by merchants, and a random expenditure flow. The model generates a precautionary motive for holding a cash buffer: cards are used to avoid “running out of cash”, accounting for the interaction discussed before. We use a calibrated version of the model to quantify the benefits of card ownership, the welfare costs of imperfect card acceptance by merchants, and to identify conditions under which a cashless economy emerges. • A new inventory model with a cash vs card payment choice is presented. • The calibrated model uses payment diaries collected by the ECB over 2015–2024. • The merchant card acceptance influences payment choices and cash demand. • The model quantifies the consumer value of owning a payment card. • The model allows us to study the evolution of cash as digitization spreads.