Analysis of the competition between cash and mobile payments in markets with mobile partnerships. A monetary search model point of view

Abstract

In this article cash competes with mobile money (M-money) in order to settle lowvalue transactions in the retail trade. Only an exogenous fraction of “mobile sellers” accepts M-money and creates partnerships with buyers to reduce search frictions. The remaining part consists of “traditional sellers” who accept cash exclusively and do not establish any partnership. Therefore, in a transaction between a buyer and a « mobile seller » M-money will be used as the medium of exchange. In the case of a transaction with a traditional seller, only a cash payment will be retained. Buyers who are not linked to a seller by any partnership, may hold cash, M-money, both monies or even none of them. On the contrary, buyers with a partner will alwayshold M-money alone or in addition to cash. Consequently, developing a partnership constitutes a coordination mechanism that makes M-money circulation permanent. Our contribution to monetary search models shows that accepting M-money exclusively is a necessary but not sufficient condition to lead to the substitution of cash by M-money. It also enables to show why retailers set up loyalty programs prior to launching their own mobile payment apps. However, cash will cease to to be used as a medium of exchange only if traditional sellers have almost all disappeared.