Consumer payment choice: Merchant card acceptance versus pricing incentives |
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| Institution: | 1. Federal Reserve Board, 20th Street and Constitution, NW, 202-973-5047 (O), DC 20551, Washington;2. Federal Reserve Board, 20th Street and Constitution, NW, 202-721-4509 (O), DC 20551, Washington;3. Federal Reserve Board, 20th Street and Constitution, NW, 202-721-4517 (O), DC 20551, Washington;1. International Monetary Fund, United States;2. TNB USA Inc., United States;3. Research Department, Federal Reserve Bank of Richmond, P.O. Box 27622, Richmond, VA 23261, United States;1. Aalto University School of Business, Finland;2. EBS Business School, Germany;3. College of Management, University of Massachusetts Boston, 100 Morrissey Boulevard, Boston MA 02125, USA;4. Eindhoven University of Technology, Netherlands;5. OC & C Strategy Consultants, Germany |
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| Abstract: | Using transaction-level data from a three-day shopping diary, we estimate a model of consumer payment instrument choice that disentangles the effect of merchant card acceptance from credit card pricing incentives (rewards) at the point-of-sale. The lack of merchant card acceptance plays a large role in the use of cash, especially for low-value transactions (less than 25 dollars). Participation in a credit card rewards program induces a shift toward credit card usage at the expense of both debit cards and cash. In contrast, changes in the amount of rewards (ad valorem) has a small or inelastic effect on the probability of paying with credit cards. Our findings highlight the importance of the two-sided nature of retail payment systems and provide key insights into consumer and merchant behaviour. |
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| Keywords: | Cash Debit and credit cards Reward programs Retail payment systems |
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