The Effect of Financial Innovation on Cash Demand

Abstract

To assess the importance of payments system related innovations in Pakistan,
this paper attempts to address two questions: First, has the modern
technology diminished the importance of paper based financial transactions?
Second, does the increased use of electronic financial infra structure and
economic factors affect the transactions demand for cash payments.
Although data analysis clearly shows that the share of paper based
transactions has declined during the period 2003-2012, retail payments in
Pakistan happen to be largely paper based. Results of the cointegration test
statistics based on quarterly data show that among the two most accepted
electronic financial transactions, automated teller machines increase the
demand for cash withdrawals while the online bank branches reduce it. It is
also found that deposit rate and low financial inclusion influence the demand
for cash payments negatively.