The Effect of Financial Innovation on Cash Demand

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.