Based on the cost structure between payment instruments, this paper constructs a payment choice model for heterogeneous consumers and merchants, and analyzes the substitution mechanism of non-cash payment instrument for cash and its impact on social transaction volume and social welfare. The results show that (i) due to the cost advantages of non-cash payment instrument and the ability to reduce the payment matching frictions, the substitution of non-cash payment instrument for cash will reduce social payment costs, increase social transaction volume and improve social welfare. (ii) Although non-cash payment instrument reduces consumers’ demand of cash transactions, the users’ network externalities increase consumers’ precautionary demand for cash. This leads to the long-term coexistence of cash and non-cash payment instrument. (iii) The pricing strategy of non-cash payment instrument would affect the two-sided users’ payment choices, change consumers’ transaction demand and precautionary demand of cash, and ultimately affect the social demand of money. Therefore, it is of vital importance to integrate the users’ payment choices in micro market into payment and monetary policies for macro regulation.