Payment card rewards programs and consumer payment choice

Card payments have been growing very rapidly. To continue the growth, payment card networks keep adding new merchants and card issuers try to stimulate their existing customers’ card usage by providing rewards. This paper seeks to analyze the effects of payment card rewards programs on consumer payment choice, by using consumer survey data. Specifically, we examine whether credit/debit reward receivers use credit/debit cards relatively more often than other consumers, if so how much more often, and which payment methods are replaced by reward card payments. Our results suggest that (i) consumers with credit card rewards use credit cards much more exclusively than those without credit card rewards; (ii) even among those who carry a credit card balance, consumers with credit card rewards use a credit card more often than those without rewards; (iii) among consumers who receive credit card rewards, those who receive credit card rewards as well as debit card rewards tend to use debit cards more often than those who receive credit card rewards only; and (iv) reward card transactions seem to replace not only paper-based transactions but also non-reward card transactions.

Payment Card Rewards Programs and Consumer Payment Choice

We estimate the direct effects of rewards card programs on consumer payment choice for in-store transactions. By using a data set that contains information on consumer perceived attributes of payment methods and consumer perceived acceptance of payment methods by merchants, we control for consumer heterogeneity in preferences and choice sets. We conduct policy experiments to examine the effects of removing rewards from credit and/or debit cards. The results suggest that: (i) only a small percentage of consumers would switch from electronic to paper-based payment methods, (ii) the effect of removing credit card rewards is greater than that of removing debit card rewards, and consequently, (iii) removing rewards on both credit and debit cards would reduce credit card transactions, but increase debit card transactions.Consumer Choice; Payment Methods; Rewards Programs; Interchange fees

Payment Choice in REIT Property Acquisitions

This study examines payment choice in equity real estate investment trust (REIT) property acquisitions. Particular attention is paid to the tax-advantaged medium of exchange available to some REITs (i.e., operating partnership units). The tax argument that is often cited as an underlying rationale for hypotheses relating bidder gains, payment method and acquisitions is empirically tested via the relationship between sales price differentials and the method of payment. The payment signaling hypothesis and other competing medium of exchange hypotheses are also empirically tested using a data set generously provided by the National Association of Real Estate Investment Trusts.

Why Do Shoppers Use Cash? Evidence from Shopping Diary Data

Recent studies find that cash remains a dominant payment choice for small-value transactions despite the prevalence of alternative methods of payment such as debit and credit cards. For policy makers an important question is whether consumers truly prefer using cash or merchants restrict card usage. Using unique shopping diary data, we estimate a payment choice model with individual unobserved heterogeneity (demandside factors) while controlling for merchants’ acceptance of cards (supply-side factors). Based on a policy simulation where we impose universal card acceptance among merchants, we find that overall cash usage would decrease by only 7.7 percentage points, implying that cash usage in small-value transactions is driven mainly by consumers’ preferences

Efficiency and costs of payments: some new evidence from Finland

This paper deals with optimal payment systems. The issue boils down to how large are the costs of different payment media, which can be interpreted as a question of the efficiency of the means of payment. However, there are other qualifications related to the choice of payment media. Here, at least three issues can be distinguished. First is the question of optimal payment medium for each individual payment (size, location, EFTPOS etc.). This choice is not independent of the individual characteristics of the payer and payee. Secondly, there is the question of cost effectiveness of payments for different institutions and sectors. The final issue concerns the social optimum for each payment medium. These issues have been particularly controversial in the case of cash, which is still the dominant payment medium in most euro countries. Part of the controversy arises from the fact that the costs and benefits of different payment media affect different market participants in quite different ways, so that a possible social optimum might not correspond eg to the optima for different firms. The paper contains a short review of calculation methods and empirical results for a sample of countries. It also provides new evidence from Finland, which is to an extent one of the front-runners in payment technology and institutional design in payment systems. This shows up in relatively low overall costs of payments. Our estimate of total costs of payment media is 0.3 per cent of GDP, which is very low by international standards.payment media; cash; payment systems; costs of payments

How do you pay? The role of incentives at the point-of-sale

This paper uses discrete-choice models to quantify the role of consumer socioeconomic characteristics, payment instrument attributes, and transaction features on the probability of using cash, debit card, or credit card at the point-of-sale. We use the Bank of Canada 2009 Method of Payment Survey, a two-part survey among adult Canadians containing a detailed questionnaire and a three-day shopping diary. We find that cash is still used intensively at low value transactions due to speed, merchant acceptance, and low costs. Debit and credit cards are used more frequently for higher transaction values where safety, record keeping, the ability to delay payment and credit card rewards gain prominence. We present estimates of the elasticity of using a credit card with respect to credit card rewards. Reward elasticities are a key element in understanding the impact of retail payment pricing regulation on consumer payment instrument usage and welfare. JEL Classification: E41, C35, C83credit card rewards, discrete-choice models, Retail payments

Payment instrument choice: the case of prepaid cards

The costs and benefits to payment system participants can differ depending on which payment mechanism is used. The authors specifically explore the costs and benefits of prepaid card applications versus other payment instruments, such as cash, checks, and debit cards, for certain payment segments, including gift, payroll, and employer-initiated and government benefit programs.Payment systems

Consumer choice and merchant acceptance of payment media

We study the ability of banks and merchants to influence the consumer's payment instrument choice. Consumers participate in payment card networks to insure themselves against three types of shocks -- income, theft, and their merchant match. Merchants choose which payment instruments to accept based on their production costs and increased profit opportunities. Our key results can be summarized as follows. The structure of prices is determined by the level of the bank's cost to provide payment services including the level of aggregate credit loss, the probability of theft, and the timing of income inflows. We also identify equilibria where the bank finds it profitable to offer one or both payment cards. Our model predicts that when merchants are restricted to charging a uniform price for goods that they sell, the bank benefits while consumers and merchants are worse off. Finally, we compare welfare-maximizing price structures to those that result from the bank's profit-maximizing price structure.Payment systems ; Credit cards ; Consumer credit

Contract Adjustment under Uncertainty

Consider a contract over trade in continuous time between two players, according to which one player makes a payment to the other, in exchange for an exogenous service. At each point in time, either player may unilaterally require an adjustment of the contract payment, involving adjustment costs for both players. Players’ payoffs from trade under the contract, as well as from trade under an adjusted contract, are exogenous and stochastic. We consider players’ choice of whether and when to adjust the contract payment. It is argued that the optimal strategy for each player is to adjust the contract whenever the contract payment relative to the outcome of an adjustment passes a certain threshold, depending among other things of the adjustment costs. There is strategic substitutability in the choice of thresholds, so that if one player becomes more aggressive by choosing a threshold closer to unity, the other player becomes more passive. If players may invest in order to reduce the adjustment costs, there will be over-investment compared to the welfare maximizing levels.