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Price Incentives and Consumer Payment Behaviour

Author

Listed:
  • 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.

Suggested Citation

  • John Simon & Kylie Smith & Tim West, 2009. "Price Incentives and Consumer Payment Behaviour," RBA Research Discussion Papers rdp2009-04, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2009-04
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    References listed on IDEAS

    as
    1. 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.
    2. Marion Kohler & Anthony Rossiter, 2005. "Property Owners in Australia: A Snapshot," RBA Research Discussion Papers rdp2005-03, Reserve Bank of Australia.
    3. Ron Borzekowski & K. Kiser Elizabeth & Ahmed Shaista, 2008. "Consumers' Use of Debit Cards: Patterns, Preferences, and Price Response," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(1), pages 149-172, February.
    4. 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, vol. 33(2), pages 216-234, May.
    5. Charles Sprenger & Joanna Stavins, 2008. "Credit card debt and payment use," Working Papers 08-2, Federal Reserve Bank of Boston.
    6. Zinman, Jonathan, 2009. "Debit or credit?," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 358-366, February.
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    11. Elizabeth C. Klee, 2006. "Families' use of payment instruments during a decade of change in the U.S. payment system," Finance and Economics Discussion Series 2006-01, Board of Governors of the Federal Reserve System (U.S.).
    12. 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.
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    More about this item

    Keywords

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

    JEL classification:

    • C35 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Discrete Regression and Qualitative Choice Models; Discrete Regressors; Proportions
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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