Payment Discounts and Surcharges: Role of Consumer Preferences

Transcription

1 Payment Discounts and Surcharges: Role of Consumer Preferences Joanna Stavins and Emily Wu Federal Reserve Bank of Boston International Industrial Organization Conference April 9, 2017 * The views are those of the author and do not reflect the views of the Federal Reserve Bank of Boston or the Federal Reserve System DCPC data are preliminary.

2 Summary Are price discounts and surcharges based on payment methods effective tools for merchants? Discounts and surcharges are allowed, but rare Consumers stick to their preferred methods If they deviate, typically NOT because of discounts or surcharges BUT: consumers who prefer other methods have a 11.7% probability of switching to cash for a discount 2

3 Motivation Merchants were recently allowed to differentiate prices by payment method Credit card surcharges allowed since January 2013 But have to notify consumers at register, on receipts Merchants and consumer prefer cash discounts Consumer payment preferences are strong Are price incentives sufficient to shift consumer behavior? 3

4 Literature review Rewards or loyalty programs: Ching and Hayashi (2010); Agarwal, Chakravorti and Lunn (2010); Simon, Smith and West (2010); Arango, Hyunh and Sabetti (2015) Bank-imposed fees: Humphrey, Kim and Vale (2001); Borzekowski, Kiser, and Ahmed (2008) Merchant surcharges: Barron, Staten and Umbeck (1992); Amromin, Jankowski and Porter (2007); Bolt, Jonker and Renselear (2010); Briglevics and Shy (2014) Transaction-level data with amount, payment method: Klee (2008); Shy and Stavins (2015) Merchant discounts and surcharges: Shy and Stavins (2015) Preferences matter: Cohen, Rysman, Wozniak (2016) This paper: more detailed data on transactions AND consumers strong role of preferences in consumer decisions 4

5 Data 2015 Survey of Consumer Payment Choice (SCPC) and Diary of Consumer Payment Choice (DCPC) Survey adoption and use, demographics, income, assessment of payment characteristics, balances Diary transaction-level data over 3 days for each SCPC respondent, preferences, discount/surcharge questions DCPC 6,823 non-bill transactions with discount/surcharge info 1,242 unique diarists 1,623 diaries (381 repeat diarists) 5

6 Data For cash transactions: Question: Did you receive a discount from the merchant specifically for using cash? [Yes/No] For debit card transactions: Question: Did you receive a discount from the merchant specifically for using this debit card? [Yes/No] For credit card transactions: Question: Did you pay an extra charge, surcharge, or convenience fee to the merchant specifically for using this credit card? [Yes/No] 6

7 Discounts and surcharges are rare but occurrence rises with transaction size Source: 2015 Diary of Consumer Payment Choice. Non-bill transactions only. $50 includes all transactions greater than $50. 7

8 Discounts and surcharges: higher $ transactions, auto sector Cash Discount Debit Discount Credit Surcharge Percent Median Amount Percent Median Amount Percent Median Amount Yes Yes No Yes Yes No Yes Yes No Total 1.9 $20.00 $ $32.24 $ $40.00 $28.01 Auto and Vehicle Related 8.2 $20.00 $ $37.00 $ $43.00 $25.66 Source: 2015 Diary of Consumer Payment Choice Note: Non-bill transactions only. Percent columns indicate % of transactions with a discount or a surcharge. Median Amount columns refer to the amount of the transaction. 8

9 Model: Payment preferences Pr CCCCCCCCCCCCCCCC ii = ff XX ii, CCCCCCCCCCCCCCCC ii Pr CCCCCCCCCCCC ii = ff XX ii, CCCCCCCCCCCC ii where: 1 if consumer ii prefers cash over credit and debit cards CCCCCCCCCCCCCCCC ii = 0 if consumer ii prefers credit and debit cards over cash CCCCCCCCCCCC ii = 1 if consumer ii prefers credit cards over debit cards 0 if consumer ii prefers debit cards over credit cards 9

10 Payment preferences correlated with demographics, income, employment Categories Variables Cash Preference Credit Preference Age Age Age * Age Less than High School *** *** Education High School *** *** [College omitted] Some College *** Graduate Degree *** *** Ethnicity Latino * *** Race White Gender Male ** ** < $25, ** Income $25,000-$49, [$40K-$75K omitted] $75,000-$99, ** * >= $100, * *** Employment Status Employed * *** Number of Observations Cash Preference = 1 if prefer cash over credit or debit cards for non-bill purchases Credit Preference = 1 if prefer credit cards over debit cards for non-bill purchases * p<0.10 ** p < 0.05 *** p < 0.01 Source: Authors calculations based on the 2015 Diary of Consumer Payment Choice. 10

11 Payment use changes with $ value, but preferences dominate Source: 2015 Diary of Consumer Payment Choice. Non-bill transactions only. Note: Darker lines indicate estimated probabilities, and lighter lines indicate the 95% confidence interval bands for these estimates. 11

12 Preferred method used for about 2/3 transactions deviate because not enough cash or low $ value Payment Instrument (PI) Cash Debit Credit % who prefer PI 21.7% 45.8% 29.2% % who used preferred PI 65.4% 57.9% 59.8% % who deviated from preferred PI 34.6% 42.1% 40.2% Top reasons for deviating Transaction size 17.1% 30.1% 32.4% Merchant type 15.9% 19.9% 17.5% PI not on hand 31.4% 4.3% 4.5% Speed of payment 10.8% 12.6% 15.9% Source: 2015 Diary of Consumer Payment Choice. Non-bill transactions only. 12

13 Discounts and surcharges NOT reasons for switching Why deviate from cash? 100% 90% 80% 70% 60% 50% 40% Other reason Merchant type Transaction size Avoided surcharge by switching Received discount for switching Security of transaction Why deviate from credit? 100% 90% 80% 70% 60% 50% 40% 30% Speed of payment 30% 20% 10% 0% <$10 $10-20 $20-30 $30-40 $40-50 $50+ Did not have preferred payment on hand Preferred payment not accepted 20% 10% 0% <$10 $10-20 $20-30 $30-40 $40-50 $50+ Source: 2015 Diary of Consumer Payment Choice. Non-bill transactions only. 13

14 Model: Deviating from preferred payment ( FROM CASHij ) = f ( AMOUNTj MERCHANTj AMTMERCH j CASHij X i ) Pr _,,,, ( FROM DEBITij ) = f ( AMOUNTj MERCHANTj AMTMERCH j DCi X i ) Pr _,,,, ( FROM CREDITij ) = f ( AMOUNTj MERCHANTj AMTMERCH j CCi X i ) Pr _,,,, where: FROM FROM _ CASH ij _ DEBIT ij 1 if consumer i prefers cash and uses not cash for transaction j = 0 if consumer i prefers cash and uses cash for transaction j 1 if consumer i prefers debit and uses not debit for transaction j = 0 if consumer i prefers debit and uses debit for transaction j FROM _ CREDIT ij 1 if consumer i prefers credit and uses not credit for transaction j = 0 if consumer i prefers credit and uses credit for transaction j 14

15 Transaction value, merchant type, having enough cash all affect switching from preferred PI Categories Variables From Cash From Debit From Credit Amount Amount ** *** *** Amount * Amount *** *** *** Food ** Merchant Auto *** ** General *** *** Food * Amount *** *** Merchant * Amount Auto * Amount ** *** General * Amount Location In person Cash *** Payment Adoption Debit Card *** Credit Card *** Number of Transactions * p < 0.10 ** p < 0.05 ** p < 0.01 Not shown: Demographic attributes and income Source: Authors calculations based on the 2015 Diary of Consumer Payment Choice 15

16 Model: Deviating to non-preferred payment ( TOCASHij ) = f ( DISCOUNTkj AMOUNTj MERCHANTj AMTMERCH j X i ) Pr,,,, ( TODEBITij ) = f ( DISCOUNTkj AMOUNTj MERCHANTj AMTMERCH j X i ) Pr,,,, where: TOCASH TODEBIT ij ij 1 if consumer i uses cash for transaction j, and he prefers not cash = 0 if consumer i uses cash for transaction j, and he prefers cash 1 if consumer i uses debit for transaction j, and he prefers not debit = 0 if consumer i uses debit for transaction j, and he prefers debit 16

17 Marginal probability of deviating to PI from preferred Categories Variables To Cash To Debit Discounts Cash Discount * Debit Discount Amount Amount Amount * Amount * Food Merchant Auto * ** General Food * Amount ** Merchant * Amount Auto * Amount ** General * Amount Location In person Demographics included? YES YES Income included? YES YES Number of Transactions * p < 0.10 ** p < 0.05 *** p < 0.01 Source: Authors calculations based on the 2015 Diary of Consumer Payment Choice 17

18 Conclusions Discounts and surcharges are rare Transaction value and merchant type matter, but consumers loyal to their preferred PI Evidence that consumers switch to cash for discount Are merchants reluctant to offer discounts and surcharges or are consumers resistant to accept them? 18