The recent innovations in the payments technology have resulted in considerable replacement of cash payments by non-cash ones, and of paper-based payment instruments by electronic ones. Do these innovations mean that the modern economy is heading toward one without currency and checks? This paper uses Canadian data from 1983 to 2001 to find answer to this question. It relies on Gompertz and logistic S-curve growth analyses to model the future replacement of cash payments by non-cash ones and of paper-based payment instruments by electronic ones and predict the saturation levels. Under current technology, while card payments will continue to further substitute for cash at the Point of Sale (POS), their share in total retail payments will saturate at around less than 40%. By comparison, the predicted satiation level for the replacement of checks by electronic payments is about 80%. Hence, under the current technologies, Canada will almost do away with checks, but will continue to use currency to a substantial extent.

A payments system is essentially a network of services that facilitates transactions through the exchange of means of payment in return for goods, services and assets. In order to facilitate payments, people use payment instruments, which usually involve a claim on financial institutions. In most cases, these payments also need to be processed by a clearing and settlement system.

The payments system of most countries has experienced dramatic changes over the past 30 years. New innovative technologies have been developed and adopted, and new financial services and instruments have become available. The payment industry now provides economic agents with a variety of payment instruments, including cash (i.e., currency and coins), paper-based ones (mainly checks), and electronic ones (i.e., debit and credit cards, direct credit and debit transfers and e-money). The decision regarding which instrument to use depends on its relative cost, risk, consumer preferences and cultural heritage. Recent decades have witnessed two distinct trends: (1) Payments by cash are being replaced by non-cash, mostly card; and (2) Paper-based instruments are being replaced by electronic payment instruments/transfers. To illustrate the magnitude of these changes using the Canadian data, the cash/M1 ratio in Canada dropped from 42.75% in 1985 to 31.75% in 2002, while the volume of check transactions in Canada declined from 2,161 million in 1988 to 1,658 million in 2000, slipping from 71% to 28% of total non-cash payments. By comparison, the volume share of electronic payment in total non-cash payments in Canada grew from 24% in 1988 to 54.7% in 2000. Hence, for many economies, especially developed ones, the payments system has evolved away from the one based almost exclusively upon cash and paper transactions toward an electronic one. Based on the work of Liao (2005), this paper seeks to quantify and forecast these two substitutable processes, using the Canadian data for evidence on where most financially developed and developing economies seem to be headed.

Bank Management Journal, Modern Economy, Payments System, Financial Services, Credit Cards, Electronic Payment, Payment Industry, Commercial Banks, Canadian Payments Association, Canadian Dollar Payments, Foreign Exchange Transactions, Electronic Wire Transfer System, Financial Market Transactions, Electronic Bill Payment.