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Cash facilitates budgetary control

Cash gives consumers better control of their budgets as they can actually see how much money they have. The pain of paying is more intense when cash is used and this encourages sound financial behaviour.

Another distinctive feature of cash is that it is a realtime, ubiquitous budget-control instrument. A quick glance into the pocket or wallet immediately tells the consumer how much money is left. This is faster, easier and more efficient than any digital app. 

This feature becomes essential in times of economic hardship. The recent global financial crisis has provided a clear illustration. In the US, between 2008 and 2009, consumers increased their use of cash and reduced their use of credit cards and, to a lesser extent, debit cards. In 2009, cash payments increased by 26.9% and cash holdings and monthly withdrawals also increased by 26.5% and 29.2% respectively. At the same time, credit card payments declined by 21.9% and debit card payments by 10%81. One explanation is that with the economic slowdown, people needed to keep better control of their budgets and reverted to a form of “envelope budgeting”, preparing separate envelopes for key expenses such as rent, food, school, electricity, etc.

Using data from Germany, von Kalckreuth, Schmidt and Stix82 concluded that the need to monitor liquidity is an important reason for cash usage. Consumers who need to keep control over their budgets, and who have elevated costs of information processing and storage conduct a larger percentage of their payments using cash, hold fewer non-cash instruments, withdraw less often and hold larger cash balances than other consumers. 

The idea that payment behaviour is influenced by the instrument used has been well documented in payments literature. The sensation of paying is more intense when cash is used and the transfer of banknotes can be visualised. Payment cards on the other hand, only require a signature or pin code and the impact is significantly less. Further, the migration to contactless payments has removed the need to enter a code or verify the amount. And with mobile payments, payers do not have to take out their wallet.

One report83 even concludes that consumers are more likely to buy unhealthy food products when they pay by credit card than when they pay in cash. Indeed, the pain of paying in cash can curb impulse purchasing of unhealthy products. 
Use of payment instruments in a typical month in the US
 

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