RDP 2015-03: The Value of Payment Instruments: Estimating Willingness to Pay and Consumer Surplus 7. Conclusion

We apply a novel approach to quantify the demand for card payments and the value individuals attach to making a payment using a card instead of cash. Our results suggest that using DCE techniques to elicit willingness to pay for card payments can provide hitherto unavailable information about how much consumers value card payments or particular features.

Several results are relevant for understanding the use of cash, debit cards and credit cards. The responses to the DCE indicate that cash continues to provide similar (or higher) utility to a debit card payment for around 60 per cent of people for payments of $50. However, the Survey responses indicate that some individuals have a significant preference for using a card to make payments. On average, respondents have a higher willingness to pay for credit cards than debit cards, reflecting the fact that these cards often offer rewards, interest-free periods and access to credit. However, the results suggest that consumers may not necessarily value credit card reward points at their full redemption value.

A key advantage of our approach for evaluating policy options is that the value individuals place on using different payment instruments can be combined with cost data to measure consumer surplus. In the absence of price signals to consumers, who decide which payment method to use, our model suggests there will be inefficient over-use of higher-cost payment instruments, which feeds into higher general prices. We find that when merchants' costs of accepting payments are passed on to consumers through differential surcharges, the changing mix of payments results in a net gain to consumers compared to a scenario where there are no surcharges on payments. Further, given the average cost of each payment method, price signals in general provide a more efficient mix of payment methods than if merchants cease to accept higher-cost instruments.