PDF Ebook Consumers’ Use of Debit Cards: Patterns, Preferences, and Price Response
Debit card use at the point of sale has grown dramatically in recent years in the U.S., and now exceeds the number of credit card transactions. However, many questions remain regarding patterns of debit card use, consumer preferences when using debit, and how consumers might respond to explicit pricing of card transactions. Using a new nationally representative consumer survey, this paper describes the current use of debit cards by U.S. consumers, including how demographics affect use. In addition, consumers’ stated reasons for using debit cards are used to analyze how consumers substitute between debit and other payment instruments.
We also examine the relationship between household financial conditions and payment choice. Finally, we use a key variable on bank-imposed transaction fees to analyze price sensitivity of card use, and find a 12 percent decline in overall use in reaction to a mean 1.8 percent fee charged on certain debit card transactions; we believe this represents the first micro economic evidence in the U.S. on price sensitivity for a card payment at the point of sale.
Annual debit card transactions at the point of sale have been growing at over twenty percent per year since 1996 and now exceed credit card transactions. In sharp contrast, the volume of checks has decreased dramatically since the mid-1990’s and is currently falling at three to five percent per year. The trends in ATM cash withdrawals and credit card transactions are both flat or growing only slightly. As a result, debit is becoming the dominant form of payment for many consumers.
This shift raises important questions for both public policy and corporate strategy; however, little information is available on patterns of debit card use or the preferences and motivations of consumers adopting this technology. From a macroeconomic perspective, the extent to which debit card transactions substitute for cash and checks has a direct impact on money demand and the efficiency and overall social cost of the payment system. The rapid growth and innovation in this area has also raised micro economic concerns regarding industry structure and organization, as well as the appropriate role of regulatory and antitrust policy. Recent years have witnessed substantial government and private litigation over payment card associations’ network governance and the rules surrounding fee setting and card acceptance.
Questions about consumers’ use of debit cards and other payments are made more intriguing by the fact that payment instruments are seldom priced explicitly: Although merchant cost and card issuer revenue may vary dramatically with the method of payment, this fact is generally unknown to the consumer. Charging consumers more for using a given payment method (“surcharging”), is not currently practiced in the U.S.; however, it is a key component of several proposals to reform the payment system in the U.S. and abroad. Our results on consumer price response are highly relevant for this debate.
This paper examines these questions using a nationally representative sample of consumers from midyear 2004. We begin by describing the current state of debit card holding and use in the U.S. and how each varies with household demographic characteristics. We then examine the motivations for using debit, how consumers substitute between debit and other payment methods, and what underlying needs debit satisfies in consumer utility, including the extent to which debit cards serve as a method of behavioral restraint. These issues are addressed using responses to open-ended questions from the survey.
Finally, we estimate a series of probits to investigate how demographics and financial conditions relate to debit card use and, most importantly, how consumers respond to fees assessed by banks on debit card transactions. It is here that we investigate how consumers’ choice of payment instrument responds to price. As mentioned, the vast majority of consumers face no price variation at the point of sale. A notable exception, however, are customers of the minority of banks who charge debit cardholders for certain types of transactions at the point of sale. Using our survey’s information on these fees, we are able to provide what we believe to be the first micro economic evidence on the price sensitivity of consumers to fees on a specific payment method at the point of sale.
Our results indicate that the likelihood of using a debit card decreases monotonically with age, and is higher for women than for men, but does not vary substantially with income. The frequency of use varies with age, family structure, and income, but not gender. We also find that household financial conditions and expectations affect debit card use: Households who have recently experienced bad financial outcomes are more likely to substitute credit for debit, while consumers with negative expectations about the future are more likely to use debit rather than credit. These findings suggest that consumers may have an underlying preference for spending from liquidity, and that credit cards serve as a source of liquidity following adverse financial events.
Debit cards appear to serve primarily as a substitute for cash and checks, and contrary to some popular wisdom (but consistent with other empirical evidence), only a small share of debit card holders (5.8 percent) explicitly report using debit as a method of behavioral restraint. Finally, we find a substantial price response. Consumers respond strongly to fees charged for so-called PIN debit transactions by using a signature rather than a PIN to secure transactions; however, the fee also reduces the likelihood that the consumer uses a debit card at all. On average, a 1.8 percent fee on a debit card transaction (nearly all of which are charged only on PIN transactions) is associated with a 12 percent decline in the likelihood of use. We believe this to be a conservative estimate of price response at the point of sale. This estimate suggests that surcharging of payment methods would likely cause a sharp decrease in use of the surcharged instrument.
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PDF Ebook Consumers’ Use of Debit Cards: Patterns, Preferences, and Price Response
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