Applied Economics, 2004, 36, 291–303

What determines the value and volume

of noncash transactions? Evidence from
a panel of European and North American
countries
§ A L E SS A N D R A G U A R I G L I A * and zY IIN G J I A LOK E
§School of Economics, University of Nottingham, Nottingham NG7 2RD,
UK and zSchool of Social Sciences, Universiti Sains Malaysia, 11800 Minden,
Penang, Malaysia

Using data from a panel of 15 countries over the period 1990–1998, the determinants
of the use of non cash payment instruments are analysed. The estimation results
highlight the importance of distinguishing between the determinants of the value and
volume of noncash transactions. It is found in fact that the volume of these transac-
tions is generally affected by changes in the determinants more strongly than their
value, and that variables such as the interest rate have a different impact on the
volume and the value of the transactions. The findings also suggest that past habits
play a dominant role in the intensity of use of noncash payment instruments.

I. INTRODUCTION and developments of noncash payment mechanisms at

Owing to improved computer technology and to the dereg-
ulation of banks, the past decade has been characterized
by rapid financial innovation, which brought about the
extended use of various payment instruments other than
cash, such as cheques, credit and debit cards, and direct
debits.1 One aspect of the effects of financial innovation
that has been widely stressed in recent research includes
the implications of the growth in the density of ATM
(Automated Teller Machines) and EFTPOS (Electronic
Funds Transfer at Point-of-Sale) terminals,2 and of the
development of noncash payment instruments on cash use
and its consequence on the demand for money (Trundle,
1992; Johnston, 1984; Boeschoten, 1992; Snellman et al.,
2000, 2001).
However, little attention has been given to understand-
ing the underlying factors that actually influence the trends
retail level. As Hancock and Humphrey (1998) put it:
‘. . .although the popular press is full of references on the
potential use of new types of payment arrangements – from
the effect of ATMs and smart cards on cash use to the
potential for electronic payments over the Internet to
replace cheques or credit cards for bill payments – little
theoretical (and even less empirical) work has been done
in this area.’ (pp. 1574–5). More specifically, given the wide
disparities in the payment systems across developed coun-
tries, it would be interesting to understand how tech-
nological and institutional factors affect these disparities
compared to macro-monetary determinants; the extent to
which the respective determinants of the different payment
instruments can explain the variation in the payment trends
across countries; and what the relationship among the
noncash payment instruments looks like in various coun-
tries. This paper aims to provide an understanding of these

*Corresponding author. E-mail: alessandra.guariglia@nottingham.ac.uk

1
A direct debit is an authority given to one’s bank or building society to make regular payments from a current account at the request of,
and to the account of, a specified organization. Direct debits are generally used to pay bills. They save the time and trouble of writing and
sending a cheque or paying in cash.
2
EFTPOS terminals are terminals that accept debit and credit cards.

Applied Economics ISSN 0003–6846 print/ISSN 1466–4283 online # 2004 Taylor & Francis Ltd 291
http://www.tandf.co.uk/journals
DOI: 10.1080/0003684041000167222
292
issues, and more in general to give a clear idea of what the
determinants of various noncash payment instruments are
in developed countries.
Three recent studies have analysed the determinants of
noncash payment instruments. The first one, Humphery
et al. (1996a), uses data for a panel of 14 developed countries
over the period 1986–1993 to study the determinants of the
volume of transactions conducted in five noncash payment
instruments, namely credit and debit cards, paper and elec-
tronic giros, and cheques. The second one, Snellman et al.
(2000, 2001), uses a panel of ten European countries over the
period 1989–1996 to analyse the determinants of the value of
card transactions. The third one, Humphrey (2002), focuses
on the determinants of the value of card transactions, using
a time-series of US data for the period 1974–2000.3
In this paper, the comprehensive payment statistics
data sets compiled by the European Monetary Institute
(EMI) and the Bank for International Settlements (BIS)
for selected EU and G10 countries from 1990 to 1998 are
exploited to provide a further analysis of the determinants
of noncash payment instruments. Within Groups and
Generalized Method of Moments (GMM) estimators are
used to regress the value and the volume of the per capita
transactions financed by each of three noncash payment
instruments, namely cards,4 direct debits, and cheques, on
selected explanatory variables such as interest rates, avail-
ability of ATM and EFTPOS terminals, past habits, cash
holdings per capita, and private consumption per capita.
Using panel data techniques allows particular attention
to be paid to the country heterogeneity and the dynamic
features of the model.
The principal contribution of this study is that, contrary
to the previous literature, which focused on the determi-
nants of either only the volume or only the value of trans-
actions conducted in noncash payment instruments, it
considers both the volume and the value of transactions.
This is important as it turns out that the explanatory
variables used have very different effects on these two
types of transactions. Thus, if a country aimed at achieving
a specific payment system, it should first establish what
this system looks like in terms of volume or value of
A. Guariglia and Y. J. Loke
transactions, and then manipulate the relevant technologi-
cal, institutional, and macro-monetary variables necessary
to achieve this system.
The second contribution of this paper is methodological:
updated estimation techniques compared to those in
previous literature are used. Humphrey et al. (1996a) and
Snellman et al. (2000, 2001) estimate in fact their panel
regressions applying either Ordinary Least Squares (OLS)
to their pooled panel data set or simple fixed effects tech-
niques. Applying OLS to panel data is however likely to
lead to biased and inconsistent estimates, as it does not
take into account unobserved country heterogeneity.
Similarly, using a fixed effects estimator is also likely to
lead to biased and inconsistent estimates when the model
to be estimated is dynamic and the time dimension of the
panel is small (Nickell, 1981). Furthermore, both estima-
tion techniques do not take into account the possible endo-
geneity bias, which might affect some of the regressors. In
this paper, the dynamic equations for the demand of non-
cash payment instruments are estimated using the GMM
estimator, which allows both unobserved country hetero-
geneity and the endogeneity bias to be taken into account.5
The remainder of the paper is laid out as follows. In the
next section, the data set is described. In Section III, the
empirical specification is presented and the methodology
used in estimation discussed. Section IV reports the econo-
metric results of the estimation of the regressions for the
volume and value of the transactions conducted using three
noncash payment instruments, namely credit and debit
cards, direct debits, and cheques. Section V concludes the
paper.
I I . DA T A A N D D E SC R I P T I V E S T A T I ST I C S
The basic payment data set used in this paper draws from
the payment statistics complied by the European Monetary
Institute and the Bank for International Settlements. The
latter is used for payment data on Canada, Switzerland, and
the USA, while the data for Austria, Belgium, Denmark,
Finland, France, Germany, Italy, the Netherlands, Portugal,

3
Note that the 2000 version of Snellman et al.’s work is a much longer version of their 2001 paper. Also note that the main focus of
Snellman et al. (2000, 2001) is on the effects of the development of cards and cheques as noncash POS payment instruments on cash use,
whereas the main objective of Humphrey (2002) is the implementation of a model aimed at determining the share of cash payments in the
USA in the last 25 years.
4
Contrary to Humphrey et al. (1996a), who estimate separate regressions for credit cards and debit cards, in this paper, credit and debit
cards are pooled together (see Snellman et al., 2000, 2001, for a similar approach). This is motivated by the fact that in the data set
disaggregated data for credit and debit cards were only available for the USA, Canada, and France.
5
It is also worth noting that this study is based on a time period and a sample of countries slightly different from those used by
Humphrey et al. (1996a) and Snellman et al. (2000, 2001). In particular, the analysis covers the payment trends over the period 1990–
1998, whereas Humphrey et al. (1996a) only focus on the period 1989–1993, and Snellman et al. (2000, 2001) consider the period 1988–
1996. In addition, the data set includes three EU countries namely Austria, Portugal, and Spain which are not included in Humphrey
et al. (1996a) and Snellman et al. (2000, 2001)’s samples, but it excludes Japan and Norway, which are part of Humphrey et al. (1996a)’s
sample. The latter two countries were excluded from the data set due to missing data on several payment instruments such as the volume
of cards and the value and volume of direct debits.
Determinants of the value and volume of noncash transactions 293
Table 1. Aggregate descriptive statistics for 15 selected EU and G10 countries over the period 1990–1998

Mean Std. deviation Min Max

Part I: Value and volume of transactions for each payment instrument (per year per person)

Real Value (US$)

Cards 1421.4 1037.16 54.5 4830
Direct debits 7879.607 9383.78 467 44 700
Cheques 84 523.99 150 795.70 230 714 000
Volume
Cards 23.346 20.922 0.283 86
Direct debits 15.401 15.067 0.822 65.7
Cheques 36.421 59.100 0.339 248

Part II: Macro-monetary variables

Interest rate (%) 5.132 2.818 0.69 14.8

Real cash holdings per person 1208.2 629.379 366 3340
Real private consumption per person 13 871.78 3726.188 6210 26 000
ATM terminals per person 0.000 392 1 0.000 1731 0.000 0545 0.009 62
EFTPOS terminals per person 0.004 935 2 0.003 9218 0.000 087 0.0184

Source: Bank for International Settlements, (1993, 1996, 2000), Statistics on Payment Systems in the Group of Ten Countries, Basle.
European Monetary Institute/European Central Bank, (1993, 1996, 2000), Payment Systems in the European Union, Frankfurt. Inter-
national Monetary Fund (2000), International Financial Statistics Yearbook 1999.
Spain, Sweden, and the UK are obtained from the European tively US$1412.4 and US$7897.6.7 The statistics also
Monetary Institute. The data coverage spans from 1990 to show that there exists a very strong contrast between the
1998.6 The data set consists therefore of 135 pooled obser- maximum value of cheque and card transactions per per-
vations accounting for 15 countries over nine years. son, while there is a smaller difference between the max-
All variables are annual end of year time series data. For imum volume of the two transactions. In particular, the
ease of international comparisons, where appropriate, pay- maximum value of cheque transactions is approximately
ment data are given in per capita terms and, where values 147 times higher than the maximum value of card transac-
are involved, they are deflated to adjust for inflation, and tions, while the maximum volume of cheque transactions is
converted to US dollars. only 2.88 times higher than the corresponding volume of
Table 1 presents the descriptive statistics relative to all card transactions. This corroborates the previous conclu-
the variables used in this study, obtained by pooling the sion that cheques are used for larger value transactions
data for all the selected EU and G10 countries over the than cards.
period 1990–1998. Part I of the Table refers to the value Second, according to Part II of Table 1, the wide disper-
and volume of per capita transactions undertaken using sion of interest rates between the maximum and minimum
cards, direct debits, and cheques. Part II refers to the value describes the downward trend in interest rates which
other variables that will be included in the regressions for characterized the period 1990–1998. The maximum value
the determinants of noncash payment instruments, namely (14.8) was found in 1991 in Portugal and the minimum
the interest rate, real cash holdings per capita, real private value (0.69) was registered in 1998 in Switzerland.
consumption per capita, and the number of ATM and Third, there is a wide gap between the maximum and
EFTPOS terminals per person. minimum values of the real cash holdings per person,
Several stylized trends can be observed from these sta- reflecting the differences in the intensity of the use of
tistics. First, it can be see from Part I of the Table that cash in the sample countries. The minimum real value of
there are only minor differences in the mean volume of cash holdings per person was recorded in Finland in 1993
transactions per person compared to the wide disparity in (US$366), whereas the maximum value was found in
the mean value of transactions between the noncash pay- Switzerland in 1995 (US$3340).
ment instruments. In value terms, cheques seem to be asso- Fourth, the large differences between the maximum and
ciated with much higher value transactions than cards or minimum values of the ATM terminals per person and
direct debits. The mean value of cheque transactions per the EFTPOS terminals per person illustrates the evolution
person is in fact US$84524.0, whereas the corresponding and the gaps in the stage of development in the payment
figures for card and direct debit transactions are respec- systems amongst the countries.
6
Data for 1999 were only available for eight countries. This is why the analysis is limited to the period 1990–1998.
7
These means represent the average per capita values of the relevant transactions per year over the period 1990–1998. The very wide
standard deviation characterizing the value of cheque transactions should also be noted. The smallest cheque transaction, 230 US$, was
recorded in the Netherlands in 1998, whereas the largest, 714 000 US$, was recorded in Canada in 1990.
294
III. EMPIRICAL SPECIFICATION AND
E ST I M A T I O N M E T H O D O L O G Y
Main empirical specification
Following Humphrey et al. (1996a), for each payment
instrument, dynamic reduced form regressions of the fol-
lowing type will be estimated:
Mj, it ¼
þ X 0it  þ Cj Mj, iðt
1Þ þ i þ t þ "it
A. Guariglia and Y. J. Loke
which represents a time-specific component that pick up
business cycle effects; and "it, which represents an idiosyn-
cratic component. The time-specific component of the error
term is taken into account by including time dummies in
all the specifications. A log-linear model is used in all the
regressions. Hence, the coefficients can be interpreted as
elasticities. Both dynamic specifications as in Equation
(1) and static specifications not including the lagged depen-
ð1Þ dent variable are estimated.

where i indexes countries; t, time; and j, the noncash pay-

ment instrument considered (i.e. cards, direct debits, and
cheques).8
The dependent variables M represent in turn the value
and the volume of transactions per person conducted in
each of the selected noncash payment instruments.
Mj,i(t
1) includes the lagged dependent variable, as well as
past values of the value or volume of competing payment
instruments. These variables are included to measure the
influence of past habits on the current use of selected pay-
ment instruments. Following Humphrey et al. (1996a), the
remaining regressors (Xit) include macro-monetary vari-
ables, i.e. the interest rate,9 the real value of cash holdings
per person,10 and the real value of private consumption
per person; and technological support factors data, i.e.
the number of ATM and EFTPOS terminals per person.11
The latter variable is used to represent the availability of
credit and debit card equipment. The number of ATM
terminals per person is included because the more terminals
there are, the easier it is to obtain cash, lowering therefore
the relative user cost of cash.12
The error term is made up of three components: i,
which denotes a country-specific unobservable effect; t,
Estimation methodology
Initially Equation 1 is estimated using a Within Groups
estimator, which transforms the equation to eliminate the
i component of the error term. The transformation con-
sists in expressing all variables as deviations from indi-
vidual means. The model provides an estimate, reported as
rho (), representing the proportion of the observed total
variance of the error term accounted for by unobserved
heterogeneity. On top of taking into account unobserved
country heterogeneity, another advantage of the Within
Groups estimation technique is that it allows the potential
time-invariant measurement error in the regressors (which
will be encompassed in i) to be dealt with. However, for
panels where the number of time periods is relatively small,
the estimates obtained using this method are likely to be
biased and inconsistent, as the transformed lagged depen-
dent variable and the transformed error term will be
negatively correlated (Nickell, 1981).13
Equation 1 is also estimated using a Generalized-
Method-of-Moments (GMM) first-differenced estimator,
which allows to control for both the country-specific het-

8
Unlike Humphrey et al. (1996a), the determinants of paper and electronic giros are not considered. The latter noncash payment instru-
ments are in fact essentially used for large value transactions, and are therefore not directly comparable to cards, direct debits, and
cheques. Also note that Humphrey et al. (1996a) did not analyse the determinants of direct debits individually. However, direct debits are
included in their wider electronic giros category, which also includes direct deposits and other automated clearing house payments.
9
The interest rate is used as a proxy for the price of the single transactions undertaken using the noncash payment instruments. Note that
because, as documented in Humphrey et al. (1996a), in a number of countries, users typically do not pay a per transaction price, and even
if they do, this price is generally below cost, using the interest rate as a proxy for transaction prices is a reasonable simplification. For
general information on the estimated cost of using each type of noncash payment instruments such as credit cards, direct debits, and
cheques for retailers and consumers, see Drehmann et al. (2002, Part C of the Appendix). Snellmann et al. (2000, 2001) and Humphrey
(2002) also used the interest rate as an explanatory variable in their regressions for the value of card transactions.
10
Note that only the real value of cash holdings per person is included in the regressions. Ideally, the volume/value of cash transactions
should have been included, but these data do not exist.
11
Snellman et al. (2000, 2001) do not include EFTPOS as a direct determinant of the value of card transaction. They use it as a
determinant of the coefficient on their (currency þ cheques) regressor, which they allow to vary over time as a function of the number
of EFTPOS per person and of country-specific effects.
12
Like other existing studies on the role of ‘bad behaviour’ on the demand for currency (Rogoff, 1998; Drehmann and Goodhart, 2000;
and Drehmann et al., 2002), Humphrey et al. (1996a) have tried to evaluate the impact of crime on the use of the various noncash
payment instruments. Like Snellman et al. (2000, 2001), crime rates are not included in the set of explanatory variables in this empirical
analysis. Unlike Humphrey et al. (1996a) and like Snellman et al. (2000, 2001), a bank concentration variable is also not included. It is
not thought that not accounting for crime and bank concentration in the specifications can significantly bias the results, as these omitted
variables are likely to vary slowly over time, and can thus be considered to be included in the country-specific component of the error
term. Even Humphrey et al. (1996a) found in fact that these variables were largely insignificant in those specifications which included
country dummies and the lagged dependent variable.
13
Assuming that the other regressors are exogeneous, the Within Groups specification is appropriate when a static model, not including
the lagged dependent variable, is estimated. All the static specifications will therefore be estimated using a Within Groups estimator.
Determinants of the value and volume of noncash transactions
erogeneity and the endogeneity bias characterizing some of
the regressors, and in particular the lagged dependent vari-
able. This estimator delivers consistent estimates of the
parameters. The GMM first-differenced specification esti-
mates the original specification expressed in first-differ-
ences, and uses ‘internal instruments’, i.e. instruments
that are based on lagged values of the endogenous expla-
natory variables.14 First-differencing allows to control for
unobserved heterogeneity,15 and instrumenting the regres-
sors, to correct for the endogeneity bias. The chosen instru-
ment set includes values of the dependent variable and of
the other noncash payment instruments lagged three
times.16 Since the regressors included in Xit are assumed
to be exogenous, they are instrumented with current values
of themselves.17
In order to evaluate whether the model used is correctly
specified and whether the instruments are valid, two cri-
teria are used: The Sargan/Hansen statistic and the test
for second-order serial correlation of the residuals in the
differenced equation (m2). The former, also known as the
J statistic, is a test for overidentifying restrictions, which,
under the null of instrument validity, is asymptotically dis-
tributed as a chi-square with degrees of freedom equal to
the number of instruments less the number of parameters.
If the model is correctly specified, the variables in the
instrument set should be uncorrelated with the idiosyn-
cratic component of the error term "it. The m2 test is
asymptotically distributed as a standard normal under
the null of no second-order serial correlation, and provides
a further check on the specification of the model and on the
legitimacy of variables dated t
2 as instruments.18
IV. ESTIMATION RESULTS
The estimation results are reported in Tables 2–4. Table 2
refers to the determinants of the value and volume of card
transactions, Table 3 refers to direct debit transactions,
295
and Table 4 to cheque transactions. All Tables report the
estimates obtained with the dynamic model in Equation 1
estimated both with the Within Groups and the GMM
specifications, and those obtained with a static model,
estimated with the Within Groups estimator.
The determinants of card transactions
Column 1 of Table 2 refers to the dynamic Within Groups
model and shows that the main determinant of the value
of card transactions is the lagged dependent variable. The
coefficient suggests that if the value of card transactions
undertaken in the past had been higher by 10%, then the
value undertaken in the present would be higher by 6.6%.
This can be seen as indication of a strong habit component.
Cash holdings per person, which are added in the regres-
sion to measure the relationship between cash and noncash
payment instruments, are also positively related with the
value of card transactions, suggesting a relationship of
complementarity between the two types of payment instru-
ments. This complementarity might be due to the fact that
in most countries, either there still exists a minimum value
for card transactions or an extra cost is imposed on card
transactions below a certain threshold. The coefficient on
the number of EFTPOS terminals per person is positive
and precisely determined: it suggests that if the number
of EFTPOS terminals per person increases by 10%, then
the value of card transactions will rise by 1.1%. This effect
is not surprising as EFTPOS terminals increase the
convenience of card use.
The panel variance component, , which represents the
proportion of the observed total variance of the error term
accounted for by unobserved heterogeneity is precisely deter-
mined and equal to 0.92. This suggests that it is important
to take unobserved country-specific characteristics into
account.
Similar results hold when the GMM specification is used
(column 2). In the latter specification, the Sargan and m2

14
See Arellano and Bond (1991) on the application of the GMM approach to panel data. The program DPD by Arellano and Bond
(1998) has been used in estimation.
15
In fact, if one first-differences Equation 1, the country-specific component of the error term, i, drops out.
16
The idiosyncratic component of the error term in the first-differenced equation is ("it
"i(t
1)). In order not to be correlated with this
component of the error term, the instruments relative to the first-differenced equation should therefore be lagged twice or more. The
instrument set that we use does not include variable lagged twice because when those variables were included, the m2 and/or Sargan/
Hansen tests rejected the validity of the instruments (see below for a description of the two tests). For similar reasons, other lags of the
instruments beyond the third one were also not included.
17
It could be claimed that the real value of cash holdings per person is endogenous. Similarly, the number of ATM and EFTPOS
terminals per person could be considered as endogenous variables. In fact, it is possible that the number of these terminals is determined
in response to changes in the demand for various noncash payment instruments. Therefore some specifications were estimated, in which
not only the lagged noncash payment instruments, but also cash holding per person, and the number of ATM and EFTPOS terminals per
person were instrumented. The results were not qualitatively different from those presented in the paper. They are not reported for
brevity, but are available from the authors upon request.
18
If the undifferenced error terms are i.i.d., then the differenced residuals should display first-order, but not second-order serial
correlation. In such case, variables lagged twice are valid instruments. Note, however, that, as pointed out in footnote 16, variables
lagged three times had to be used as instruments, as the variables lagged twice did not pass the m2 and/or Sargan/Hansen tests. Also note
that neither the Sargan/Hansen test nor the m2 test allow to discriminate between inappropriate instruments and model specification.
296 A. Guariglia and Y. J. Loke
Table 2. Determinants of the value and volume of card transactions per person

Value of card transactions per person Volume of card transactions per person
Within groups: First diff. Within groups: Within groups: First diff. Within groups:
dynamic GMM: dynamic static dynamic GMM: dynamic static
(1) (2) (3) (4) (5) (6)
Interest rate 0.723
1.138 3.724** 0.313
1.365
1.490
(0.65) (
0.74) (1.98) (0.19) (
1.02) (
0.61)
ATM terminals per person 0.007 0.051 0.355**
0.053
0.138 0.269*
(0.09) (0.47) (3.06) (
0.47) (
1.05) (1.66)
EFTPOS terminal per 0.112*** 0.165** 0.291*** 0.157** 0.212** 0.363***
person (2.65) (2.01) (4.20) (2.53) (2.54) (4.13)
Real private consumption 0.085 0.056 0.235** 0.055 0.208 0.189
per person (1.35) (0.65) (2.21) (0.57) (0.90) (1.31)
Real cash holdings per 0.426** 0.660*** 0.552* 0.033
0.406
0.774**
person (2.52) (3.80) (1.90) (0.13) (
0.76) (
2.10)
Card transactions per 0.660*** 0.609*** – 0.759*** 0.813*** –
person (lagged once) (13.35) (7.74) (10.58) (9.69)
Direct debit transactions
0.036
0.028
0.107
0.09
0.366
0.134
per person (lagged once) (
0.77) (
0.20) (
1.35) (
1.02) (
0.76) (
0.97)
Cheque transactions per
0.087
0.123
0.397*** 0.011
0.144
0.111
person (lagged once) (
1.24) (
0.51) (
3.47) (0.11) (
1.27) (
0.78)
R2-adjusted 0.979 – 0.939 0.977 – 0.948
 0.979 – 0.973 0.543 – 0.920
m2 –
0.433 – –
0.727 –
Sargan/Hansen – 2.094 – – 1.208 –
(d.f.) (15) (15)

Notes: T-statistics are reported in parentheses. Standard error and test statistics are asymptotically robust to heteroscedasticity. Time
dummies were included in all equations. Instruments used in columns (2) and (5): card, direct debit, and cheque transactions per person
lagged three periods. The other variables, i.e. EFTPOS terminals per person, ATM terminals per person, interest rates, real private
consumption per person, and real cash holdings per person are assumed to be exogenous and are used to instrument themselves. The time
dummies were always included in the instrument set. The sample size in columns 1, 3, 4, and 6 is 120 for the period 1991–1998. The
sample size in columns 2 and 5 is 90 for the period 1993–1998 due to the lags in the instruments used.  represents the proportion of the
total error variance accounted for by unobserved heterogeneity. m2 is a test for second-order serial correlation in the first difference
residuals, asymptotically distributed as N(0,1) under the null hypothesis of no serial correlation. The Sargan/Hansen statistic (J test)
provides a test of the overidentifying restrictions distributed as chi-square under the null hypothesis that instruments are valid. The
abbreviation ‘d.f.’ stands for degrees of freedom. *indicates significance at the 10% level. **indicates significance at the 5% level.
***indicates significance at the 1% level.

tests do not suggest the existence of any problems with the
specification of the model or the choice of the instruments.
In the static specification, cash holdings and the number
of EFTPOS terminals per person are once again positively
associated with card transactions, together with the interest
rate, private consumption, and the number of ATM term-
inals per person (column 3). These findings are in line with
those in Snellman et al. (2000, 2001). It is not surprising
that the interest rate and card transactions are positively
related: the interest rate can in fact be interpreted as the
opportunity cost of holding money, so the higher the inter-
est rate, the higher one would except the value and vol-
ume of noncash transactions to be. The positive association
between private consumption and card transactions can
be explained by the fact that the higher the consumption,
the more transactions are likely to be made in all forms.
Finally, the availability of ATMs reduces average cash
balances, and since credit and debit cards can be used for
cash withdrawals, ATMs increase the benefits of holding
and using such cards.19
The main determinants of the volume of card transac-
tions are the number of EFTPOS per person and the lagged
dependent variable (columns 4–6). These results are com-
parable with the findings in Humphrey et al. (1996a) who
estimated separate equations for the volume of transac-
tions conducted using credit and debit cards and found
that especially for credit cards, habits play an important
role. However, while they found that the number of
EFTPOS terminals affects the volume of debit card transac-
tions positively, they also found a negative and significant

19
The coefficient on the ATM variable is in fact precisely determined (although only marginally), also in the static specification relative to
the volume of card transactions (column 6). See the Appendix for an analysis of the coefficients on the country-specific dummy variables
in the static specifications relative to cards, direct debits, and cheques.
 Determinants of the value and volume of noncash transactions
Table 3. Determinants of the value and volume of direct debit transactions per person

Value of direct debit transactions per person Volume of direct debit transactions per person
Within groups: First diff. GMM: Within groups: Within groups: First diff. GMM: Within groups:
dynamic dynamic static dynamic dynamic static
(1) (2) (3) (4) (5) (6)
Interest rate
0.127
1.683
0.902
3.541*
5.122*
4.010**
(
0.05) (
0.47) (
0.33) (
1.93) (
1.84) (
2.17)
ATM terminals
0.038
0.467 0.201 0.0133 0.587
0.057
per person (
0.24) (
0.88) (1.17) (0.11) (1.13) (
0.47)
EFTPOS terminal 0.008
0.002
0.015 0.114* 0.219** 0.113
per person (0.09) (
0.01) (
0.14) (1.66) (2.34) (1.62)
Real private
0.027
0.007
0.061 0.166 0.067 0.213**
consumption per person (
0.20) (
0.08) (
0.39) (1.53) (0.89) (1.98)
Real cash 0.113
0.179 0.344
0.060 0.079
0.086
holdings per person (0.31) (
0.37) (0.83) (
0.21) (0.33) (
0.30)
Card transactions
0.031 0.083
0.100
0.117
0.254*
0.123
per person (lagged once) (
0.30) (0.52) (
0.82) (
1.48) (
1.85) (
1.53)
Direct debit transactions 0.566*** 0.278*** – 0.207** 0.495*** –
per person (lagged once) (5.68) (2.63) (2.01) (3.08)
Cheque transactions 0.111 0.287 0.160
0.039
0.195
0.023
per person (lagged once) (0.74) (0.93) (0.92) (
0.36) (
0.77) (
0.21)
R2-adjusted 0.942 – 0.922 0.960 – 0.959
 0.804 – 0.938 0.936 – 0.958
m2 –
1.264 – – 1.268 –
Sargan/Hansen – 1.347 – – 2.385 –
(d.f.) (15) (15)

Note: See Notes to Table 2. *indicates significance at the 10% level. **indicates significance at the 5% level. ***indicates significance at the 1% level.

297
 298
Table 4. Determinants of the value and volume of cheque transactions per person

Value of cheque transactions per person Volume of cheque transactions per person
Within groups: First diff. GMM: Within groups: Within groups: First diff. GMM: Within groups:
dynamic dynamic static dynamic dynamic static
(1) (2) (3) (4) (5) (6)
Interest rate 0.352
2.414 2.496* 0.718
0.393 0.818
(0.34) (
1.36) (1.84) (0.58) (
0.41) (0.34)
ATM terminals 0.284*** 0.065 0.509*** 0.033
0.026 0.636***
per person (4.20) (0.58) (6.10) (0.39) (
0.35) (4.28)
EFTPOS terminals
0.052 0.055
0.097*
0.017 0.021 0.024
per person (
1.30) (0.90) (
1.83) (
0.37) (0.56) (0.26)
Real private 0.046
0.030 0.115 0.039 0.071 0.160
consumption per person (0.77) (
0.66) (1.47) (0.53) (1.32) (1.12)
Real cash 0.453*** 0.660** 0.812***
0.195
0.04
0.064
holdings per person (2.85) (2.44) (3.98) (
1.00) (
0.27) (
0.17)
Card transactions
0.175***
0.107*
0.304***
0.073
0.087*
0.176*
per person (lagged once) (
3.77) (
1.70) (
5.21) (
1.36) (
1.89) (
1.69)
Direct debit transactions
0.053 0.018
0.031
0.004
0.154 0.078
per person (lagged once) (
1.21) (0.197) (
0.54) (
0.06) (
1.08) (
0.58)
Cheque transactions 0.563*** 0.842*** – 1.165*** 1.158*** –
per person (lagged once) (8.48) (6.81) (16.11) (10.01)
R2-adjusted 0.994 – 0.990 0.990 – 0.963
 0.984 – 0.994 0.624 – 0.969
m2 –
2.712 – –
2.295 –
Sargan/Hansen – 4.906 – – 0.013 –
(d.f.) (15) (15)

A. Guariglia and Y. J. Loke

Note: See Notes to Table 2. *indicates significance at the 10% level. **indicates significance at the 5% level. ***indicates significance at the 1% level.
Determinants of the value and volume of noncash transactions
association between this variable and the volume of credit
card transactions in their static specification.20
The regressions in Table 2 show that both the effect of
the number of EFTPOS terminals and the habit compo-
nent are larger in the volume regressions compared to the
value regressions. The fact that the coefficient on the
EFTPOS variable is larger in the volume compared to
the value regression suggests that the availability of
EFTPOS terminals essentially increases the convenience
of using cards, and therefore the frequency of their use.
In the static specification (column 6), a negative relation-
ship emerges between real cash holdings and the volume of
card transactions per person, indicating the substitutability
between the two payment methods.21 Thus, in the static
specification, cash and card transactions work as comple-
ments if the value of transactions is focused on, and as
substitutes if their volume is focused on. As pointed out
above, this may suggest that although cash and cards can
both be categorized as retail instruments, cards cannot
completely substitute for cash in terms of the value of
transactions because there exists a minimum threshold
value for which a transaction can be undertaken by card.22
It is also worth noting that in the volume regressions, the
coefficient on the interest rate variable is never statistically
significant, whereas it was precisely determined in the static
specification for the value of card transactions. This high-
lights the fact that the interest rate can be seen as a cost to
the value rather than the volume of card transaction. This
finding corroborates the importance of looking at the deter-
minants of the volume and value of transactions separately.
The determinants of direct debit transactions
In the dynamic Within Groups specification, lagged direct
debits are the main determinant of current direct debit
transactions (Table 3, column 1), indicating once more
the importance of habits. Although smaller in magnitude,
this variable is also precisely determined in the GMM spe-
cification (column 2). It has to be noted that the specifi-
cations relative to the value of direct debit transactions
are less satisfactory than those for cards, as less variables
appear to be statistically significant. In particular, in the
299
static Within Groups specification, none of the regressors is
precisely determined. This can be explained by the fact that
the value of direct debit transactions is largely driven by
the value of similar transactions undertaken in the past. It
is also worth noting that direct debits are a relatively new
form of electronic payment that has only gained popularity
from the mid-1990s onwards.
Focusing on the volume regressions, it can be seen that
in all models, the EFTPOS variable is positively and sig-
nificantly or marginally significantly associated with the
volume of direct debits (columns 4–6). In the GMM speci-
fication (column 5), for instance, the coefficient associated
with the EFTPOS variable suggests that if the number of
EFTPOS terminals per person rises by 10%, then the
volume of direct debit transactions will go up by 2.2%.
Although direct debits operate through an electronic system
which does not use the same infrastructure as EFTPOS, this
result can be explained by the fact that the increased avail-
ability of EFTPOS terminals makes people more favourable
to electronic fund transfers in general. In the Within Groups
and GMM dynamic models, the lagged dependent variable
is also precisely determined and positive (columns 4 and 5).
The coefficient on the interest rate variable is negative and
statistically significant in all specifications (columns 4–6). In
the GMM specification (column 5), a negative relationship
emerges between current direct debit transactions and
lagged card transactions. This suggests that the two pay-
ment instruments can be considered as substitutes.23
Finally, in the static specification, the coefficient on private
consumption is also positive and precisely determined.
In all the Within Groups specifications, the  coefficient
lies between 0.80 and 0.96, suggesting the importance of
taking the country-specific effects into account. In none of
the GMM specifications do the Sargan/Hansen and m2
tests indicate problems with the instrument selection or
the general specification of the model.
The determinants of cheque transactions
The value of lagged cheque transactions is positively asso-
ciated with the value of current transactions both in the

20
It has to be noted that Humphrey et al. (1996a)’s static specification does not include the country-specific dummies and therefore boils
down to applying OLS to the pooled data set. Because this approach does not take unobserved heterogeneity into account, the estimated
coefficients are likely to be biased.
21
In their static specification, Humphrey et al. (1996a) also found a negative (although insignificant) relationship between the volume of
credit card transactions and real cash holdings, but they observed a positive and significant relationship between the volume of debit card
transactions and real cash holding. Contrary to the present findings, they also found a negative and significant relationship between
the volume of credit card transactions and the volume of lagged cheque transactions; and a positive and significant association
between the volume of debit card transactions and the volume of lagged cheque transactions.
22
In Table 1, it can be seen that the minimum value of card transaction is US$54.50. This is obviously higher than the usual value of cash
transaction that one typically makes.
23
In their static electronic giros specification, Humphrey et al. (1996a) found evidence that electronic giros and credit cards are sub-
stitutes, whereas electronic giros and debit cards are complements. As stated above, however, their electronic giros category is wider than
the direct debits category that we use.
300
Within Groups and the GMM specifications (columns 1
and 2 of Table 4).
The coefficient on lagged card transactions is also nega-
tive and precisely determined in all specifications, indicat-
ing that cheques and cards are used as substitutes. Cash
holdings are positively associated with the value of cheque
transactions, indicating the existence of some sort of
completementarity between the two payment methods.
In both Within Groups specifications (columns 1 and 3),
the coefficient on the ATM variable is positive and signifi-
cant, whereas that on the EFTPOS variable is negative and
precisely determined in the static model (column 3). Since
EFTPOS terminals increase the convenience of card use,
the negative effect that they have on cheque use is not sur-
prising. The positive sign of the coefficient on the ATM
variable could be due to the fact that ATM machines
allow the transfer of money between saving and checking
accounts, making cheque transactions indirectly easier. In
the static model, there is also a positive association between
the interest rate and the value of cheque transactions
(column 3).
As for the volume of cheque transactions, its main deter-
minant in the dynamic model is the lagged dependent vari-
able (columns 4 and 5), indicating once more a strong habit
component.24 Like in the case of cards, past habits seem to
have a stronger hold on the volume of cheque transactions
than on their value. When the coefficient on the lagged
volume of cheque transactions in the cheques’ regression
is compared with the coefficient on the lagged volume of
card transactions in the cards’ regressions, it is found that
the former is larger than the latter. The stronger hold that
past habits seem to have on the use of cheques relative to
cards might be due to the observed strong cheque payment
habit (cheque base) which is found especially in USA and
Canada (Humphrey et al., 1996b; McAndrews, 1997;
Hancock and Humphrey, 1998).
The coefficients on the lagged card transactions in the
estimation relative to the volume of cheque transactions
are negative and significant or marginally significant in
the dynamic GMM specification and in the static specifica-
tion (columns 5 and 6), confirming that the two methods of
payment can be considered as substitutes.25 These coeffi-
cients are lower than the coefficients of cash transactions
in the static regressions for the volume of card transaction,
suggesting that the use of cards is substituting for cash
more than for cheque use.
Finally, unlike Humphrey et al. (1996a), in the static
specification, it is found that ATM terminals per person
affect the volume of cheque transactions positively and
significantly (column 6). Like in the case of cards, the coef-
ficient on the interest rate variable is never statistically sig-
24
Also Humphrey et al. (1996a) found a strong habit component in their regression for cheques.
25
Humphrey et al. (1996a) only found a negative association between lagged credit card transactions and the volume of current cheque
transactions in their static specification.
A. Guariglia and Y. J. Loke
nificant in the regressions relative to the volume of cheque
transactions, whereas it is positive and precisely determined
in the static regression for the value of cheque transactions.
This finding confirms that the interest rate can be seen as
a cost incentive factor for cash economization in value
terms only, and stresses once again the importance of
analysing the determinants of the volume and value of
transactions conducted using various noncash payment
instruments, separately.
In both the volume and value GMM specifications, the
m2 test seems to indicate some problems with the instru-
ment selection and/or the general specification of the
model. However, since the Sargan/Hansen statistic is satis-
factory in both cases, this is not thought to be a serious
problem.
V. CONCLUSIONS
In this paper, the determinants of noncash payment instru-
ments in 15 EU and G10 countries between 1990 and 1998
have been analysed. More specifically, the roles of selected
variables which include technological innovation factors,
financial variables, and past habits have been explored.
Moving one step further with respect to previous literature,
the focus has been both on the value and the volume of
noncash transactions, and a GMM estimation technique
has been applied.
The main findings can be summarized as follows. First,
past habits play a dominant role in determining both the
value and the volume (intensity of use) of all noncash pay-
ment instruments, the latter effect being generally larger
than the former. Moreover, past habits affect the volume
of cheque transactions more strongly than the volume of
card transactions. This is likely to be due to the fact that
the cheque payment base is relatively more established than
cards, as cheque use has begun much earlier than card use.
Second, technological innovation through EFTPOS
terminals has a clear and positive influence on the use of
card payments both in terms of volume and value of trans-
actions, as well as on the volume of direct debit transac-
tions. Third, the interest rate is positively related with the
value of card and cheque transactions, but not with the
volume of these transactions, suggesting that it can be
seen as a cost incentive factor for cash economization in
value terms only. Fourth, it has been shown that if the
focus is on the volume of transactions, there is a negative
relationship between cash and cards, whereas the two pay-
ment instruments are positively related if the focus is on
their value. This may suggest that although cash and cards
can both be categorized as retail instruments, cards cannot
Determinants of the value and volume of noncash transactions
completely substitute for cash in terms of the value of
transactions because there exists a minimum threshold
value for which a transaction can be undertaken by card.
Fifth, a negative relationship was found between the value
of cheque transactions and that of card transactions, indi-
cating that the two payment instruments can be seen as
substitutes. A similar, but generally weaker relationship
was observed for the volume of the same transactions.
Furthermore, focusing on the volume of transactions,
cards seem to substitute for cash more than for cheques.
In summary, the estimation results generally showed a
distinct difference in the nature of the determinants of the
value and volume of transactions in various noncash pay-
ment instruments, with cost factors being the main deter-
minants of the value of transactions, and past habits and
adequate infrastructures being important in terms of
volume of transactions.
These results are important because, by providing an
indication of what the determinants of various noncash
payment instruments are, they can give guidance for devel-
oping and emerging market economies on how to achieve a
payment system compatible with the infrastructure neces-
sary to achieve sustained growth (Humphrey et al., 1996b).
Because of the significant differences noted in the deter-
minants of the value and volume of the transactions con-
ducted in various noncash payment instruments, these
countries will have to first establish what they think their
‘optimal’ payment system is, either in terms of volume or in
terms of value of transactions, and then to manipulate the
relevant technological, institutional, and macro-monetary
variables necessary to achieve this system. Defining the
‘optimal’ payment system for a country is, however, a
difficult task, which is beyond the scope of this paper.
A C K NO WL E D G E M E N T S
We wish to thank P. Mizen and an anonymous referee for
useful comments and suggestions.
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26
Only static estimates undertaken using the Within Groups estimator are presented because the GMM specifications do not provide
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estimates of the country-specific effects are not reported for the dynamic Within Groups specifications because, as explained above,
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APPENDIX
Table A1 presents the estimates of the coefficients of the
country dummies relative to the static specification for the
volume and the value of each of the three noncash pay-
ment instruments that have been considered.26 The
302 A. Guariglia and Y. J. Loke
Table A1. Country-specific effects in the use of noncash payment instrument

Card transactions per person Direct debit transactions per person Cheque transactions per person
Countries Value Volume Value Volume Value Volume
Canada 2.725*** 2.445***
0.135
1.593*** 3.917*** 2.589***
(5.70) (4.43) (
0.18) (
3.75) (18.96) (5.07)
Switzerland
0.267 1.503** 3.487***
3.127***
2.442***
1.085*
(
0.58) (2.58) (6.40) (
8.87) (
9.59) (
1.84)
USA 2.756*** 3.508*** 1.016*
2.303*** 2.799*** 4.122***
(9.57) (5.36) (1.94) (
4.50) (17.31) (7.25)
Austria
0.369* 0.922*** 1.519***
0.705***
1.386***
0.409*
(
1.67) (4.32) (5.18) (
4.34) (
12.34) (
1.78)
Belgium 0.952*** 1.826*** 1.408***
1.603*** 0.983*** 1.176***
(4.30) (5.03) (4.83) (
5.79) (6.11) (2.85)
Denmark 2.129*** 2.529*** 2.888***
1.122*** 1.908*** 2.017***
(5.65) (5.57) (6.14) (
2.91) (6.87) (4.12)
Spain
1.183*** 0.440
0.050
1.000***
0.482***
0.345
(
5.74) (1.47) (
0.15) (
4.45) (
2.95) (
1.14)
Finland 1.936*** 1.227* 3.025***
2.632*** 1.800***
1.589**
(4.29) (1.86) (5.23) (
6.10) (5.54) (
2.50)
France 1.202*** 2.033***
0.156
0.491 1.520*** 2.872***
(4.33) (4.15) (
0.37) (
1.19) (8.43) (7.24)
Italy
0.577***
0.378 0.701***
3.407*** 0.039 0.684
(
3.18) (
0.69) (2.70) (
19.72) (0.28) (1.29)
Netherlands
1.206*** 1.792*** 1.358**
0.333
3.602*** 0.428
(
2.79) (8.75) (2.10) (
1.57) (
30.45) (1.54)
Portugal 0.849** 1.131* 2.240***
2.424*** 1.344*** 1.838***
(2.07) (1.78) (4.27) (
6.21) (4.66) (3.10)
Sweden 0.597** 1.205*** 2.666***
2.220***
0.640***
0.149
(1.96) (2.94) (9.11) (
9.62) (
3.04) (
0.34)
UK 1.807*** 1.796*** 0.337
0.756* 2.144*** 2.361***
(4.61) (3.28) (0.57) (
1.76) (8.70) (4.85)

Note: The coefficients reported in this Table are those associated with the country-specific dummies obtained by estimating the static
models for the value and volume of card, direct debit, and cheque transactions per person. The dummy variable relative to Germany was
omitted from all the specifications, so the coefficients in this table have to be interpreted relative to Germany. T-statistics are reported in
parentheses. *indicates significance at the 10% level. **indicates significance at the 5% level. ***indicates significance at the 1% level.

country-specific dummies absorb differences in the per
person payment instrument use not accounted for by the
other regressors, relative to Germany.27 In all specifica-
tions, it appears that most of the country-specific dummies
are precisely determined. This confirms the importance of
taking unobserved country-specific heterogeneity into
account.
Columns 1 and 2 of Table A1 refer to the value and
volume of per capita card transactions, respectively. It
can be seen that Canada and the USA make a very high
relative use of cards, both in terms of value and in terms of
volume. Although in the USA, only about 20% of noncash
transactions are electronic, the country still ranks very high
in terms of value and volume of card transactions essen-
tially because it is characterized by many more noncash
transactions than other countries (see Humphrey et al.,
1996b). Denmark also ranks high in terms of card transac-
tions value, whereas France ranks high in terms of volume.
The countries making a lower relative use of cards appear
to be the Netherlands and Spain in terms of transactions
value, and Austria, in terms of volume.
Columns 3 and 4 refer to direct debits. In terms of value
of transactions, Switzerland and Finland make the highest
relative use of direct debits. In terms of volume of transac-
tions, the coefficients on most country-specific dummies are
negative, suggesting that most countries make a lower rela-
tive use of direct debits compared to Germany. It is inter-
esting to note that Switzerland ranked highest on the scale
for the value of direct debit transactions, whereas it ranks
fairly low on the scale relative to the volume of transac-
tions. This suggests that relatively few high-value direct
debit transactions are made in this country. In general
terms, the strong differences in the coefficients of the coun-
try dummies in columns 3 and 4 confirms once again the
importance of looking at the two types of transactions
separately.

27
The dummy relative to Germany is in fact omitted. Examples of differences in the per person payment instruments use not accounted
for by other regressors could be due to cultural factors, crime rates, banking concentration, etc.
Determinants of the value and volume of noncash transactions
Columns 5 and 6 refer to the value and volume of
cheque transactions. The USA and Canada rank high in
both columns, suggesting that these two countries make a
very high relative use of cheques.28 As explained in
Humphrey et al. (2000), in the USA, this is due, among
other things, to the lack of a strong price incentive to
demand and use lower-cost electronic payment instru-
ments and to the benefit of obtaining cheque float versus
an immediate debit to a transaction account that occurs
with a debit card or a direct debit. Other factors, like for
303
instance, costs by banks that are sunk in cheque proces-
sing arrangements, a highly unconcentrated banking sys-
tem, and strong antitrust laws also explain why the USA
and Canada rely so much on cheques. In terms of the
value of cheque transactions, the Netherlands and
Switzerland appear to make a lower relative use of che-
ques, whereas Switzerland and Finland seem to make a
lower relative use of cheques if the volume of transactions
is focused on.29

28
Humphrey et al. (2000) document that in the USA, cheques account for 75% of all noncash payments.
29
Time dummies were also added to the regression and in most cases, the relevant coefficients did not suggest any significant difference
across the years analysed. However, there was a notable exception for the volume and value of cheque transactions, which showed a
significant downward trend. This is consistent with the gradual shift towards paperless processes and the substitution away from cheques
towards electronic payment instruments, which has been observed in the literature (see Humphrey et al., 1996a, 1996b). In line with this
conclusion, the analysis of the coefficients associated with the time dummies also suggested an increase in the volume of direct debits over
the period considered.