We use a two-stage model to explain Canadian consumers’ choices of payment method at the point of sale. First, we employ data from the Bank of Canada’s Methods-of-Payment Survey to identify the critical characteristics of payment methods Canadians consider when choosing between cash, debit and credit. These characteristics include transaction costs as well as consumer perceptions of ease-of-use, affordability and security. We also allow consumer decisions to depend on observed demographic variables such as age, income and education. Second, we consider what would happen if a central bank digital currency (CBDC) with given characteristics were also available.

In our experiments, we use three different potential designs of CBDC: a cash-like CBDC, a debit-like CBDC and a CBDC that combines the best features of cash and debit. For each design, we simulate two new market equilibria: one where the new product is uniformly adopted and accepted by consumers and merchants, and another where consumer adoption is voluntary and merchant acceptance is fixed at a given level. We investigate whether consumers would adopt the new product and the impact adoption would have on their use of existing payment methods. We consider only the demand side—that is, we assume a certain level of merchants’ acceptance and we do not consider the changes banks could make to the costs or benefits of using debit and credit cards.

Our results show that a CBDC that combined the best features of debit cards and cash would still leave significant market share for both debit and cash. To completely replace cash and debit cards as payment methods, a CBDC would have to be significantly easier to use, much more cost-effective and more secure than the other payment instruments.