Paper or Plastic? The Effect of Time on Check and Debit Card Use at Grocery Stores

Economists have long recognized that the time costs of using different forms of money can be significant and potentially affect the type of media of exchange used. Banks and retailers recognize these costs as well, and market transponder devices to pay for tolls, food and gas as a way to minimize checkout time. But although there is theoretical research and anecdotal evidence that suggest time is an important element in determining the use of media of exchange, there is little empirical work documenting the magnitude of this effect. Most empirical work on consumer’s use of payment systems uses survey data. The results from this literature indicate that payment choices depend critically on consumer income, age and demographic characteristics. To fill this gap, this paper uses scanner data from grocery store transactions to examine time costs associated with media of exchange. Grocery store scanner data has been used extensively in other contexts, for example, in estimating elasticities of demand for consumer products and in constructing price indexes for goods. Scanner data is an ideal medium for examining time costs associated with media of exchange as well. First, these data represent actual market exchanges, are very accurate, and are available at a very high frequency. Second, grocery store retailers spend much time and effort in minimizing the length of time for checkout transactions, partly driven by the industry's relatively low margins. And third, everyone eats, everyone eats often, and everyone goes grocery shopping. Because groceries are perishable, consumers shop often, and thus this type of exchange is arguably one of the more frequent that a typical consumer makes. Using check and debit card transactions only to control for the effects of availability of different payment instruments, census tract information to proxy for demographic characteristics, and econometric procedures to control for the endogeneity of the choice of payment instrument and the realized length of time of the transaction, the results indicate that check transactions are, on average, predicted to be approximately 40 seconds longer than debit card transactions. Moreover, payment choices are correlated with the demographics of the local market. Furthermore, tests for enodgeneity show that consumers choose debit cards over checks in part because they expect debit card transactions to be faster than check transactions. Interestingly, the results suggest that debit card users are, on an absolute basis, more time sensitive than check users, and in particular, these sensitivities vary by the demographics of the local market. Overall, the results in this paper support the theoretical literature on media of exchange and the empirical literature using survey data. Time factors significantly determine use of media of exchange, and sensitivity to these time factors depend on the income, age and demographic characteristics of the local market