Academic journal article The Journal of Consumer Affairs

The Impact of Electronic Payments for Vulnerable Consumers: Evidence from Social Security

Academic journal article The Journal of Consumer Affairs

The Impact of Electronic Payments for Vulnerable Consumers: Evidence from Social Security

Article excerpt

Financial transactions are increasingly conducted using electronic payments rather than paper checks (GAO 2008; Schuh and Stavins 2014). Consumers have gradually adopted new instruments to both receive and send electronic payments, potentially helping them manage their money more effectively (Hogarth and Anguelov 2004). Large-scale payers such as the federal government are especially motivated to adopt electronic payments, which lower their costs relative to printing and mailing paper checks. The US Department of the Treasury phased out paper checks for Social Security Administration (SSA) payments beginning in May 2011. At that time, all new payees had to receive electronic payments. The 15% of SSA payees still receiving paper checks, representing over five million households, had 22 months to transition to electronic payments (Federal Register 2010).

This policy change disproportionately affected households at the intersection of two vulnerable consumer groups: households without a checking or savings account at a bank, and households receiving disability or means-tested payments. While the option of receiving electronic payments had long been available to these households if they were to open a bank account, they had resisted doing so. The new policy also included the introduction of a special payment card that could replace some of the functions of a bank account. The key question for consumer welfare within these groups is whether the benefits of electronic payments outweighed the costs of removing access to payments by paper check.

To address this question, this study measures the size of the unbanked SSA payment recipient population, as well as their characteristics and self-reported preferences before the policy change took place. We also observe revealed preferences through households' responses to the policy change. We do so by linking longitudinal administrative data on SSA payments to a nationally representative Current Population Survey (CPS) supplement on the use of bank accounts and other financial services.

Prior studies imply that the impact of mandated electronic payments could be substantial because of the size and preferences of the population using paper checks. Several studies have estimated that a large fraction of paper check recipients lack bank accounts to receive payments, finding that 20%-30% of people receiving checks for old age, survivor, and disability insurance (OASDI), and 55%-70% of people receiving checks for supplemental security income (SSI), are not banked (Boo/. Allen. & Hamilton and Shugoll Research 1997; Dove Associates, Inc. 1999; Federal Reserve Bank of St. Louis 2004; GAO 2002; KRC Research 2007). In addition, households receiving paper checks appear resistant to adopting electronic payment instruments, as evidenced by both survey responses and actual behavior (Booz, Allen, & Hamilton and Shugoll Research 1997; GAO 2002; KRC Research 2007). Despite this resistance, there is potential for electronic payments to reduce transaction costs of using alternative nonbank financial services.

In the current policy environment, we find that the impact of mandated electronic payments was smaller than anticipated. Using more recent data, we find that households receiving SSA payments are unbanked at the same rate as households not receiving SSA payments, at approximately 6% of households. We find that three-fourths of SSA recipient households who were unbanked in January 2009 had taken up electronic payments by December 2011, more than a year before the final deadline of March 2013. This represents a large voluntary shift toward electronic payments by consumers who had previously predominantly used paper checks. Overall, we find no evidence that this policy change increased the use of bank accounts, or decreased the use of alternative financial services (AFS) among impacted households.

We find that economically vulnerable households are slowest to adopt electronic payments. …

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