Effect of Consumer Characteristics on the Use of Payment Instruments

By Stavins, Joanna | New England Economic Review, May-June 2001 | Go to article overview

Effect of Consumer Characteristics on the Use of Payment Instruments


Stavins, Joanna, New England Economic Review


Economist, Federal Reserve Bank of Boston. The author thanks Katharine Bradbury and Richard Kopcke for helpful comments and Joshua Congdon-Martin for excellent research assistance.

Even though predictions about a cashless and checkless society have been made for many years, retail payment transactions made with electronic payment instruments still constitute only a small fraction of all payments made in the United States. (1) The rate of growth of electronic payments is estimated to exceed that of paper checks, but the number of checks written still increases each year, and the transition to electronic payments has been slower than forecasted (Bank for International Settlements 2000).

The slow rate of adoption of electronic payment instruments could be caused by supply-related or demand-related factors. While the literature on the supply side of payment systems in the United States is extensive, relatively few empirical studies analyze the demand side. Several articles have examined the cost structure of individual payment instruments (see, for example, Bauer and Hancock 1995; Bauer and Ferrier 1996; Hancock, Humphrey, and Wilcox 1999), and a few others have compared the costs of various payment instruments. The evidence shows that electronic payments are less costly to process than are paper instruments. For example, previous studies have found that automated clearinghouse (ACH) items and electronic check presentments (ECP) cost less to process than do paper checks (Humphrey and Berger 1990; Wells 1996; Stavins 1997).

Yet despite the differences in cost and despite marketing and educational campaigns conducted by the Federal Reserve and other institutions, the volume of electronic payments constitutes a fraction of the number of check or cash transactions. One of the reasons the cost differences have little effect is that the differences in cost among payment instruments typically are not evident to consumers. For example, even though surveys show that retailers consider credit cards to be a more expensive form of payment than cash (Food Marketing Institute 1998), consumers are charged the same amount regardless of how they pay; even differentiated gasoline prices, common in the past, have largely been eliminated, either because including the cost of processing payments in retail prices is more acceptable to consumers than differentiated prices, or because it is too costly to employ differentiated prices. (2)

Thus, the reasons for the slow adoption of electronic payment instruments may lie on the demand side. This article examines the effect of consumer characteristics on the use of electronic payments. Employing data from the 1998 Survey of Consumer Finances (SCF), the study evaluates the effect of demographic attributes such as education and income on the probability of using electronic payment instruments. The article begins with an overview of the most common types of payment instruments used by households, such as checks, credit and debit cards, direct deposit, and direct payment. Following a brief summary of market research findings, we estimate the effect of several demographic characteristics on the probability of using various electronic payment instruments. The results show a strong effect of demographic characteristics on consumers' use of payment instruments. And even after controlling for many individual characteristics of the consumers, their location also has a large influence on the use of payment instruments. In particular, the fraction of other people in the region using the same type of payment instrument is highly significant in affecting consumers' usage patterns, suggesting that factors other than demographics are important as well. We employ reduced-form regressions, which do not control for supply-related factors. Therefore the effect of consumer characteristics on their use of electronic payments indicates their choice of payment instruments only in the absence of supply-side constraints, such as limited access to credit cards for low-income consumers. …

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