Competing Technologies for Payments: ATMs, POS Terminals and the Demand for Currency

Acknoweldgements: We thank Bob Chakravorti and our discussant Bijorn Imbierowicz and other participants in the 2008 Australasian Finance and Banking Conference for the comments on an earlier version of the paper entitled " ATM vs. POS terminals: a horse race? ". * The views in this paper are those of the authors and may not represent the views of the Federal Reserve Bank of Chicago or the Federal Reserve System. Abstract: Payment cards are considered as the main drivers of the shift from paper-based towards electronic-based payment instruments, which is commonly viewed as a significant socioeconomic and welfare improvement. This shift, however, is following a slow path in many developed countries which can be, at least partially, due to the over time overlapping of the objectives of banks in deploying ATMs (moving some front-desk activities away from branches) and POS devices (increasing the use of cards for purchase transactions). However, the interaction between both technologies remains largely unexplored as well as the effects of these interactions on the overall demand for currency. In this paper we employ a unique database to explore these issues. The results of various empirical tests suggest that the intensity of adoption and diffusion of ATM and POS transactions is mostly driven by rival precedence, network effects and market power while demand factors do not seem to be significant. Additionally, the growth of ATMs is found to negatively affect POS adoption which, in turn, suggests that the promotion of cards relative to cash is diminished by the coexistence and joint promotion of these two rival technologies. Additionally, we provide estimates of the effects of these technologies on the demand for currency, showing that POS devices and higher debit and credit POS transactions may significantly reduce the demand for currency and offset the negative effects that the deployment of ATMs and ATM usage may have on the demand for currency.