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Consumer Use of Multiple Payment Methods

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Abstract

This article investigates the degree to which buyers choose to diversify their use of payment methods for in-person purchases. Some buyers use only one payment instrument. Others combine the use of mostly cash, credit, and debit cards, and a few paper checks and prepaid cards. To each survey respondent, I apply three concentration and inequality measures over the use of payment instruments. Results show that the average and median degree of consumers’ payment concentration only slightly decline with payment volume and exhibit almost no correlation with consumer demographics.

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Notes

  1. Merchant type 5 also includes online shopping, which is not relevant for this research because all of the payment observations are restricted to in-person purchases only.

  2. The survey and the diary are conducted in collaboration of the Federal Reserve Banks of Atlanta, Boston, Richmond, and San Francisco. The data and assisting documents (codebooks) are publicly available for downloading from the Federal Reserve Bank of Atlanta website: https://www.frbatlanta.org/banking-and-payments/consumer-payments.aspx, and are summarized in Greene and Stavins (2019) and Kumar and O’Brien (2019). Similar surveys are conducted by the Bank of Canada, see Henry et al. (2018). The data and the R-code that were used in this analysis are available for downloading from the author’s web page: www.ozshy.com. Binomial logit regressions and multinomial regressions were estimated using the mfx and the multinom function in the nnet R-packages.

  3. Jonker and Kosse (2009) compare payment diaries with different time lengths and find that shorter diaries yield more accurate information due to “survey fatigue” which leads respondents to under-report their payment activities.

  4. For the sake of completeness, Sect. 6.4 computes payment concentration using five payment instruments which will be based on a much smaller sample of respondents who also carry (adopt) checks and prepaid cards and who made at least five payments during their \(3\times 3\) diary days.

  5. Credit card fees (or subsidy via “cash-back” programs) may also influence consumers’ overall use of credit cards, see Zinman (2009) and references therein. These fees are not included in the regressions because the data do not include information on the exact fee or reward that consumers pay or receive for each specific transaction.

  6. Curry and George (1983) analyze and compare several concentration indices that can be used to measure market concentration, some of which will be applied in the analysis that follows.

  7. See, https://en.wikipedia.org/wiki/Gini_coefficient. Based on the sample described in Table 2, the Gini coefficient was computed using the Gini function in the ineq R-package.

References

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Acknowledgements

I thank two anonymous referees and the editor for most valuable comments and suggestions on earlier drafts. The views expressed here are the author’s and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.

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Correspondence to Oz Shy.

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Shy, O. Consumer Use of Multiple Payment Methods. Rev Ind Organ 58, 339–355 (2021). https://doi.org/10.1007/s11151-020-09803-w

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