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The choice at the checkout: quantifying demand across payment instruments

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Author Info
Ron Borzekowski
Elizabeth K. Kiser

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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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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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This paper has been announced in the following NEP Reports: References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
  2. 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. [Downloadable!]
  3. Nicole Jonker, 2005. "Payment Instruments as Perceived by Consumers - a Public Survey," DNB Working Papers 053, Netherlands Central Bank, Research Department. [Downloadable!]
  4. Jonathan Zinman, 2005. "Debit or credit?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston. [Downloadable!]
  5. 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.). [Downloadable!]
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  6. David Humphrey & Magnus Willesson & Ted Lindblomand & Goran Bergendahl, 2003. "What does it Cost to Make a Payment?," Review of Network Economics, Concept Economics, vol. 2(2), pages 159-174, June. [Downloadable!]
  7. Hirschman, Elizabeth C, 1982. "Consumer Payment Systems: The Relationship of Attribute Structure to Preference and Usage," Journal of Business, University of Chicago Press, vol. 55(4), pages 531-45, October. [Downloadable!] (restricted)
  8. Fumiko Hayashi & Elizabeth Klee, 2003. "Technology Adoption and Consumer Payments: Evidence from Survey Data," Review of Network Economics, Concept Economics, vol. 2(2), pages 175-190, June. [Downloadable!]
  9. 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. [Downloadable!]
  10. Wilko Bolt & Alexander F. Tieman, 2004. "Skewed Pricing in Two-Sided Markets: An IO approach," DNB Working Papers 013, Netherlands Central Bank, Research Department. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. W. Scott Frame & Lawrence J. White, 2009. "Technological change, financial innovation, and diffusion in banking," Working Paper 2009-10, Federal Reserve Bank of Atlanta. [Downloadable!]
  2. Sumit Agarwal & Paige M. Skiba & Jeremy Tobacman, 2009. "Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?," NBER Working Papers 14659, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  3. Wilko Bolt & David Humphrey & Roland Uittenbogaard, 2008. "Transaction Pricing and the Adoption of Electronic Payments: A Cross-Country Comparison," International Journal of Central Banking, International Journal of Central Banking, vol. 4(1), pages 89-123, March. [Downloadable!]
  4. Andrew Ching & Fumiko Hayashi, 2006. "Payment card rewards programs and consumer payment choice," Payments System Research Working Paper PSR WP 06-02, Federal Reserve Bank of Kansas City. [Downloadable!]
    Other versions:
  5. Hirokazu Ishise & Nao Sudo, 2008. "Inventory-Theoretic Model of Money Demand, Multiple Goods, and Price Dynamics," IMES Discussion Paper Series 08-E-19, Institute for Monetary and Economic Studies, Bank of Japan. [Downloadable!]
  6. Allan Shampine, 2007. "Another Look at Payment Instrument Economics," Review of Network Economics, Concept Economics, vol. 6(4), pages 495-508, December. [Downloadable!]
  7. Nicole Jonker, 2007. "Payment Instruments as Perceived by Consumers – Results from a Household Survey," De Economist, Springer, vol. 155(3), pages 271-303, September. [Downloadable!] (restricted)
  8. Hyytinen, Ari & Takalo, Tuomas, 2008. "Consumer awareness and the use of payment media: evidence from young Finnish consumers," Research Discussion Papers 2/2008, Bank of Finland. [Downloadable!]
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