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Price Incentives and Consumer Payment Behaviour

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  • John Simon

    (Reserve Bank of Australia)

  • Kylie Smith

    (Reserve Bank of Australia)

  • Tim West

    (Reserve Bank of Australia)

Abstract

In this paper we estimate the effect of particular price incentives on consumer payment patterns using transaction-level data. We find that participation in a loyalty program and access to an interest-free period, both of which lower the price of credit card use, tend to increase credit card use at the expense of alternative payment methods, such as debit cards and cash. Specifically, we find that a loyalty program increases the probability of credit card use by 23 percentage points and access to the interest-free period increases the probability by 16 percentage points. Interestingly, the pattern of substitution from cash and debit cards is different in each of these cases. A loyalty program reduces the probability of cash use by 14 percentage points and has little effect on debit card use, while access to the interest-free period has little effect on cash use but reduces the probability of debit card use by 19 percentage points. We find these effects to be economically significant and large enough that they can help to explain observed aggregate payments patterns. An implication is that the Reserve Bank reforms of the Australian payments system are likely to have influenced observed payment patterns.

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Bibliographic Info

Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2009-04.

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Date of creation: Jun 2009
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Handle: RePEc:rba:rbardp:rdp2009-04

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Keywords: consumer choice; retail payment systems; price incentives; loyalty programs;

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References

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  1. Zinman, Jonathan, 2009. "Debit or credit?," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 358-366, February.
  2. Carbó Valverde Santiago & Massoud Nadia & Rodríguez-Fernández Francisco & Saunders Anthony & Scholnick Barry, 2007. "The Economics of Credit Cards, Debit Cards and ATMs: A Survey and Some New Evidence," Working Papers, Fundacion BBVA / BBVA Foundation 201074, Fundacion BBVA / BBVA Foundation.
  3. Elizabeth Klee, 2006. "Families' use of payment instruments during a decade of change in the U.S. payment system," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2006-01, Board of Governors of the Federal Reserve System (U.S.).
  4. Bolt, Wilko & Jonker, Nicole & van Renselaar, Corry, 2010. "Incentives at the counter: An empirical analysis of surcharging card payments and payment behaviour in the Netherlands," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1738-1744, August.
  5. Ron Borzekowski & Elizabeth K. Kiser & Shaista Ahmed, 2006. "Consumers' use of debit cards: patterns, preferences, and price response," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2006-16, Board of Governors of the Federal Reserve System (U.S.).
  6. Marion Kohler & Anthony Rossiter, 2005. "Property Owners in Australia: A Snapshot," RBA Research Discussion Papers, Reserve Bank of Australia rdp2005-03, Reserve Bank of Australia.
  7. Humphrey, David B & Kim, Moshe & Vale, Bent, 2001. "Realizing the Gains from Electronic Payments: Costs, Pricing, and Payment Choice," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 33(2), pages 216-34, May.
  8. 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.
  9. Charles Sprenger & Joanna Stavins, 2008. "Credit card debt and payment use," Working Papers, Federal Reserve Bank of Boston 08-2, Federal Reserve Bank of Boston.
  10. Rivers, Douglas & Vuong, Quang H., 1988. "Limited information estimators and exogeneity tests for simultaneous probit models," Journal of Econometrics, Elsevier, Elsevier, vol. 39(3), pages 347-366, November.
  11. Schuh, Scott & Stavins, Joanna, 2010. "Why are (some) consumers (finally) writing fewer checks? The role of payment characteristics," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1745-1758, August.
  12. Simon, John & Smith, Kylie & West, Tim, 2010. "Price incentives and consumer payment behaviour," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1759-1772, August.
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