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Why use debit instead of credit? Consumer choice in a trillion-dollar market

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  • Jonathan Zinman

Abstract

Debit cards are overtaking credit cards as the most prevalent form of electronic payment at the point of sale, yet the determinants of a ubiquitous consumer choice-"debit or credit?"-have received relatively little scrutiny. Several stylized facts suggest that debit-card use is driven by behavioral factors. The popular view is that debit-card use presents a puzzle for canonical economic models. However, we should not overlook standard cost-based motives for using debit cards. Principally, the 50 percent of debit-card users who revolve credit-card balances would pay interest to charge purchases on the margin and hence might rationally choose to use debit rather than credit to minimize transaction costs. Debit-card use might also be rational for consumers lacking access to a credit card or facing a binding credit limit. I document robust effects of these types of credit-card use on debit use and show that such effects are consistent with a canonical model of consumer choice. This paper also shows, however, that it is difficult to distinguish sharply between canonical and behavioral motives for debit-card use in publicly available data. More generally, I develop analytical frameworks for testing competing canonical and behavioral models and find evidence consistent with important roles for both pecuniary and psychological motives.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 191.

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Date of creation: 2004
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Handle: RePEc:fip:fednsr:191

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Keywords: Debit cards ; Credit cards ; Electronic funds transfers;

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References

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Citations

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Cited by:
  1. Ching, Andrew T. & Hayashi, Fumiko, 2010. "Payment card rewards programs and consumer payment choice," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1773-1787, August.
  2. Marianne Bertrand & Dean S. Karlan & Sendhil Mullainathan & Eldar Shafir & Jonathan Zinman, 2005. "What's Psychology Worth? A Field Experiment in the Consumer Credit Market," Working Papers 918, Economic Growth Center, Yale University.
  3. Aprajit Mahajan, 2006. "Identification and Estimation of Regression Models with Misclassification," Econometrica, Econometric Society, vol. 74(3), pages 631-665, 05.
  4. Nicole Jonker, 2007. "Payment Instruments as Perceived by Consumers – Results from a Household Survey," De Economist, Springer, vol. 155(3), pages 271-303, September.
  5. Wilko Bolt & David Humphrey & Roland Uittenbogaard, 2005. "The effect of transaction pricing on the adoption of electronic payments: a cross-country comparison," Working Papers 05-28, Federal Reserve Bank of Philadelphia.
  6. Amanda King & John King, 2011. "Golden eggs versus plastic eggs: hyperbolic preferences and the persistence of debit," Journal of Economics and Finance, Springer, vol. 35(1), pages 93-103, January.

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