Cash management and choice of payment media: a critical survey of the theory

This report addresses the question whether economic theory can explain the choice of payment media for over-the-counter payments. A survey of the literature reveals that most of the existing microeconomic models are limited to the explanation of the size of cash balance. Only two models describe the optimal choice between different modes of payment such as cash payment, payment by electronic money and debitcard payment. One of these approaches has been extended in this report, in order to study the effects on transaction balances and optimal mode of payment, for exmple, caused by interest rate changes or the introduction of new payment media.