Keywords: Payments, debit, price response
Abstract: Dramatic changes have occurred in the U.S. payment system over the past two
decades, most notably an explosion in electronic card-based payments.
Not surprisingly, this shift has been accompanied by a series of policy
debates, all of which hinge critically on understanding consumer behavior
at the point of sale. Using a new nationally representative survey, we
transform consumers' responses to open-ended questions on reasons for using
debit cards to estimate a characteristics-based discrete-choice demand model
that includes debit cards, cash, checks, and credit cards. Market shares
computed using this model line up well with aggregate shares from other
sources. The estimates are used to conduct several counterfactual experiments
that predict consumer responses to alternative payment choices. We find that
consumers respond strongly to elapsed time at the checkout counter and to
whether the payment instrument draws from debt or liquidity. In addition,
substitution patterns vary substantially with demographics. New "contactless"
payment methods designed to replace debit cards are predicted to draw market share
from cash, checks, and credit, in that order. Finally, although we find an effect
of cohort on payment technology adoption, this effect is unlikely to diminish
substantially over a 10-year horizon.
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Last update: May 8, 2006