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Debit or Credit? (Why “Model” Consumer Payment Choice) FRBBOS Retail Payments Conference Jonathan Zinman Dartmouth College October 28, 2005 Primer: “Modeling” Consumer Choice • Why social scientists “model” human behavior: – Get to essence/drivers of choices – Explain, and ultimately predict behavior – That’s why we’re here today! Primer: “Modeling” Consumer Choice • How we model: – Behavior very complex • Hard to identify what causes what – Our tools (math and statistics) have “bandwidth” limits – So: we simplify by making assumptions • Makes problem tractable • Permits focus on what really matters Primer: Empirical Social Science 1. Ask an interesting question – I.e., formulate a hypothesis 2. Build or modify a model that makes realistic simplifying assumptions 3. Find/collect/generate the right data for testing your model 4. Test it My paper does not satisfy all 4 criteria! Two Views of Consumer Choice and Payment Choice #1. Homo economicus (“rational” man) – Recognizes when a choice needs to be made (i.e.., no confusion) – Makes a choice (i.e., no procrastination) – Chooses based on: • Stable preferences (i.e., I know what I want) • Full/adequate info (i.e.., know what I’m choosing) – Sticks to choice (i.e.., no self-control problem) View #1: Economic Model of Consumer Payment Choice • “Cost is king”: – Including implicit costs, not just fees, but: – Finance charges, foregone interest – Time/hassle costs View #2: Psychological Model of Consumer Payment Choice • Homo consumaloticus (“psychological man”) – Lots of things drive payment choice – How I pay impacts how much I spend – In particular, credit leads me to spend more • Perhaps more than I want to in more reflective moments – Other payment media, including debit, help me control spending by helping me: • “Feel the pain” (salience) • Track spending (mental accounting) Psychological Model • Thought experiment to show how this works: – Randomly assign debit cards to a pool of credit users – If “salience” dominates • debit users’ overall spending will fall • debit used at times/places where temptation is greatest – If “mental accounting” • debit users’ spending falls • payment choice varies systematically with what is being purchased (conditional on transaction size, acceptance) • This seems to be the conventional framework for explaining debit use (at least relative to credit) – Trade press – Popular press What My Paper Does • Test whether choice between debit and credit is consistent with economicus model – In coarse but nationally representative data • Fairly convincingly rules out widespread indifference among payment choices • Casts doubt on primacy of spend-control motives for choosing debit over credit What Paper Does Not Do • Nothing to say about choice mechanics – Not solving calculus…. – Intuition – Rules-of-thumb? – Trial-and-error? • Little to say about why debit has grown • Paper can not directly rule out spending-control motives – Merely questions their importance • Paper’s findings should not shift your prior beliefs – Only question them – Motivate you (bank/issuers) to give me data needed for direct testing of psychologicus explanations How Paper Tests Economic Model: Data • Survey of Consumer Finances (SCF) – Only nationally representative data, with decent sample size, that knows anything about both debit and credit use – But doesn’t know much • Do use debit regularly • Good measure of credit card holding • Decent measures of credit revolving and utilization • Nothing on rewards, cash back, acceptance, etc. • Nothing on transactions – And only a snapshot • Most recent survey in 2001 (2004 out soon) How Paper Tests Economic Model: Focus on Debit v Credit • No data on cash or check use SCF • Debit and credit very similar re: most attributes: – acceptance (at least by 2001) – portability – security – time at POS • So can focus in on costs as driver of choice Testing the Economic Model 3 key predictions on who’s most likely to use debit: 1. Those lacking a credit card • otherwise float and get miles, except… 2. Revolvers more likely to use debit • to minimize costs from “borrowing-to-charge” 3. High intensity revolvers even more likely Results of Tests • All economic predictions borne out • Correlations are big • Robust to controls for: – Demographic characteristics – Spending patterns (rough proxies) • All this despite data limitations that work against finding support for the model’s predictions Other Data/Findings Cast Doubt on Spending Control • Most important/provocative: – May 2004 Survey of Consumers (“Michigan Survey” used to measure consumer confidence, etc.) – Asked open-ended questions: “Why do/don’t you use debit to make purchases?” • 5.8% of debit users said something related to spend control • 5.5% of nonusers said something related to spend control • See Borzekowski, Kiser, and Ahmed 2005 for this & more interesting results Some Food for Thought: From Modeling to Business Apps • What’s (irr)rational consumer behavior? Be careful. • Example. Free checking: – Not necessarily irrational (Stavins) – Intense transactors should choose min balance option – (Not necessarily irrational for banks either.) • Example. Slow e-payments adoption. – Small benefits to adoption – (Perceived) big downside risk – High cost of getting info to accurately assess downside risk – Inertia may be rational/optimal From Modeling to Business Apps: Learning About Customers • How do we ask them? – Survey responses depend greatly on how you ask/frame questions (psych wins here!) • May explain difference between market research and Survey of Consumers on spending control – Will customer’s responses to hypothetical questions have useable content? • General concern in social science • Particularly so here: stakes of payments decision are small for most consumers (maybe $10 a month on average) From Modeling to Business Apps: How Much Should the Consumer Know/Deliberate? • Not much, necessarily – Rational to devote little energy/attention to payments choice in face of small stakes • So… how to communicate with or “educate” consumers – Less is more • “Information overload” with debt, saving, jam(!), doctor’s Rx choices (psych wins again) • Be especially careful in payments– small stakes Going Forward • With richer data: – From bank/issuer – With deposit/debit and credit customers (account-level info) – Transaction level data • Direct tests of spending-control models • Finer tests of economicus model: – Impact of rewards – Impact of credit pricing – Time costs vs. (implicit) pecuniary costs • Insight into choice mechanisms: – Adoption – Learning Take-Aways • Understanding of “rational” behavior must be nuanced. Impacts how we: – Develop, market, and price products – Collect and interpret info on customers – Communicate info to customers • Paper’s findings not rich enough to change your mind on what drives debit use – But re-examine your beliefs and model(s) • We can reach a deeper understanding of what drives consumer (payment) choice – Analytic framework in place – Just give me the data!
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