The choice at the checkout: Quantifying demand across payment instruments

Ron Borzekowski, Elizabeth K. Kiser
2008 International Journal of Industrial Organization  
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
more » ... ce 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. * Federal Reserve Board, 20th and C St., NW, Washington, DC 20551, ron.borzekowski@frb.gov † Federal Reserve Board, 20th and C St., NW, Washington, DC 20551, elizabeth.k.kiser@frb.gov. The views expressed herein are those of the authors and do not necessarily reflect those of the Board of Governors or the staff of the Federal Reserve System. The authors thank Elizabeth Klee for providing estimates on the checkout time for payment options, and Shaista Ahmed and Elise Tosun for outstanding research assistance.
doi:10.1016/j.ijindorg.2007.07.006 fatcat:yb5kvh5dsrd4xcxbc7ehziwchq