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The choice at the checkout: quantifying demand across payment instruments

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  • Ron Borzekowski
  • Elizabeth K. Kiser

Abstract

Dramatic changes have occurred in the U.S. payment system over the past two decades, most notably an explosion in electronic card-based payments. Not surprisingly, this shift has been accompanied by a series of policy debates, all of which hinge critically on understanding consumer behavior at the point of sale. Using a new nationally representative survey, we transform consumers' responses to open-ended questions on reasons for using debit cards to estimate a characteristics-based discrete-choice demand model that includes debit cards, cash, checks, and credit cards. Market shares computed using this model line up well with aggregate shares from other sources. The estimates are used to conduct several counterfactual experiments that predict consumer responses to alternative payment choices. We find that consumers respond strongly to elapsed time at the checkout counter and to whether the payment instrument draws from debt or liquidity. In addition, substitution patterns vary substantially with demographics. New "contactless" payment methods designed to replace debit cards are predicted to draw market share from cash, checks, and credit, in that order. Finally, although we find an effect of cohort on payment technology adoption, this effect is unlikely to diminish substantially over a 10-year horizon.

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Bibliographic Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2006-17.

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Date of creation: 2006
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Handle: RePEc:fip:fedgfe:2006-17

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Related research

Keywords: Consumer behavior ; Debit cards ; Payment systems ; Credit cards;

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References

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  1. Arthur B. Kinneckell, 1997. "Who uses electronic banking? results from the 1995 Survey of Consumer Finances," Proceedings 534, Federal Reserve Bank of Chicago.
  2. Wilko Bolt & Alexander F. Tieman, 2004. "Skewed Pricing in Two-Sided Markets: An IO approach," DNB Working Papers 013, Netherlands Central Bank, Research Department.
  3. Hahn, Robert W. & Layne-Farrar, Anne & Swartz, Daniel D. Garcia, 2004. "The Move Toward a Cashless Society: Calculating the Costs and Benefits," Working paper 316, Regulation2point0.
  4. Hayashi Fumiko & Klee Elizabeth, 2003. "Technology Adoption and Consumer Payments: Evidence from Survey Data," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-16, June.
  5. Nicole Jonker, 2005. "Payment Instruments as Perceived by Consumers - a Public Survey," DNB Working Papers 053, Netherlands Central Bank, Research Department.
  6. Hirschman, Elizabeth C, 1982. "Consumer Payment Systems: The Relationship of Attribute Structure to Preference and Usage," The Journal of Business, University of Chicago Press, vol. 55(4), pages 531-45, October.
  7. Humphrey David & Willesson Magnus & Lindblom Ted & Bergendahl Göran, 2003. "What Does it Cost to Make a Payment?," Review of Network Economics, De Gruyter, vol. 2(2), pages 1-16, June.
  8. Terri Bradford, 2005. "Contactless: the next payment wave?," Payments System Research Briefing, Federal Reserve Bank of Kansas City, issue Dec.
  9. Hausman, Jerry A. & Ruud, Paul A., 1987. "Specifying and testing econometric models for rank-ordered data," Journal of Econometrics, Elsevier, vol. 34(1-2), pages 83-104.
  10. Beggs, S. & Cardell, S. & Hausman, J., 1981. "Assessing the potential demand for electric cars," Journal of Econometrics, Elsevier, vol. 17(1), pages 1-19, September.
  11. Zinman, Jonathan, 2009. "Debit or credit?," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 358-366, February.
  12. Gene Amromin & Carrie Jankowski & Richard D. Porter, 2005. "Transforming payment choices by doubling fees on the Illinois Tollway," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
  13. Ron Borzekowski & Elizabeth K. Kiser & Shaista Ahmed, 2006. "Consumers' use of debit cards: patterns, preferences, and price response," Finance and Economics Discussion Series 2006-16, Board of Governors of the Federal Reserve System (U.S.).
  14. Brian Mantel, 2000. "Why do consumers pay bills electronically? an empirical analysis," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 32-48.
  15. Jean-Charles Rochet & Jean Tirole, 2002. "Cooperation Among Competitors: Some Economics Of Payment Card Associations," RAND Journal of Economics, The RAND Corporation, vol. 33(4), pages 549-570, Winter.
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