GROWING digital payments adoption is beginning to reduce the country’s reliance on cash, the Bangko Sentral ng Pilipinas (BSP) said in a discussion paper.
In a study titled “Digital Payments and Cash Demand in the Philippines,” the BSP said that it had found evidence of a “negative long-run relationship” between digital payments and total cash demand, indicating cashless transactions were gradually substituting for physical currency.
The research, which analyzed data from late 2019 to 2024, examined how the rise of digital financial services — from QR-based payments to more advanced electronic transactions — had influenced the public’s need for cash.
“Our results suggest that there is a generally negative relationship between digital payments and total cash demand,” the paper states.
The BSP used two indicators of cash demand: currency in circulation relative to gross domestic product and bank cash withdrawals from the central bank. It also measured digital payments using both QR PH person-to-person (P2P) and person-to-merchant (P2M) transactions and a broader measure that included electronic financial services such as bills payments, fund transfers and merchant payments across digital channels.
The findings showed that as digital payments expanded, demand for cash declined over time, although the strength of this relationship varied depending on how both cash and digital transactions were measured.
The effects also differ across denominations, reflecting how consumers use various types of cash for different purposes.
“The negative relationship of digital payments with total bank cash withdrawals is driven by their negative relationship with the demand for large denomination cash,” the BSP said.
As digital transactions expand, banks are withdrawing fewer large bills from the central bank, signaling a structural shift in payment behavior.
A 1-percent increase in electronic payment financial services was associated with a 0.31-percent drop in withdrawals of P1,000 bills and a 0.47-percent decline in P500 notes. This effect is notably stronger than that of QR-based payments, which show a more modest reduction of around 0.13 percent and 0.10 percent, respectively.
However, the central bank emphasized that cash remains an important part of the Philippine financial system. Indicators of cash demand have remained relatively stable over time, even as digital payments have grown rapidly.
Globally, similar trends have been observed, with some economies experiencing increased adoption of cashless payments without a corresponding sharp drop in cash usage.
In the Philippines, digital payments have expanded significantly in recent years, supported by the rollout of interoperable QR systems and the wider use of mobile and internet-based financial platforms.
Cashless payments in emerging economies grew by 29 percent in 2023, far outpacing the 4-percent increase in advanced economies.
In the Philippines, the share of digital payments in total retail transactions rose from 8 percent in 2013 to 20 percent in 2020, reflecting accelerating adoption even before the pandemic.
The BSP said that understanding the relationship between digital payments and cash demand was crucial for effective policymaking, particularly in managing currency supply.
“Decreasing cash requirements can lead to savings in production, transportation, and insurance costs,” it said, noting that efficient cash management could reduce operational expenses.
The central bank cautioned that maintaining adequate cash supply remained essential, as shortages could create disruptions in economic activity and undermine public confidence in the financial system.
Future studies could expand on its findings, the BSP said, as the paper only covered a short period due to limited data.
“Analyzing a longer time series might show patterns such as structural changes in the coefficients across time, threshold effects, and non-linearities,” it said.
“Revisiting this study when a longer time series becomes available may shed light on some nuances on the relationship between digital payments and cash demand.
