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

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Listed author(s):
  • 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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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
Handle: RePEc:fip:fednsr:191
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Keywords: Debit cards ; Credit cards ; Electronic funds transfers;

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Cited by:

  1. Wilko Bolt & David Humphrey & Roland Uittenbogaard, 2005. "The Effect of Transaction Pricing on the Adoption of Electronic Payments: A Cross-Country Comparison," DNB Working Papers 071, Netherlands Central Bank, Research Department.
  2. Marianne Bertrand & Dean Karlin & Sendhil Mullainathan & Eldar Shafir & Jonathan Zinman, 2005. "What's Psychology Worth? A Field Experiment in the Consumer Credit Market," NBER Working Papers 11892, National Bureau of Economic Research, Inc.
  3. 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.
  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. Aprajit Mahajan, 2006. "Identification and Estimation of Regression Models with Misclassification," Econometrica, Econometric Society, vol. 74(3), pages 631-665, 05.
  6. Amanda King & John King, 2011. "Golden eggs versus plastic eggs: hyperbolic preferences and the persistence of debit," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 35(1), pages 93-103, January.

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