RDP 2009-04: Price Incentives and Consumer Payment Behaviour 6. Conclusion

Over the past decade, the payments landscape in Australia has undergone significant change. This is consistent with the international trend towards a greater use of electronic payment instruments. But it is also likely to reflect to some extent a series of reforms in Australia which have changed the relative prices consumers face when choosing between payment methods. This paper provides estimates of how important price incentives are for influencing consumer payment patterns. We find that participation in a loyalty program and access to an interest-free period both tend to increase credit card use.

The substitution patterns between credit cards, debit cards and cash found in this paper are intriguing. While interest-free periods induce substitution to credit cards from debit cards, loyalty programs induce substitution from cash. We find that for a base case consumer, with average characteristics, loyalty programs increase the probability of credit card use by 23 percentage points and reduce the probability of cash use by 14 percentage points. Debit card use is relatively unaffected by whether or not a consumer has a loyalty program. A revolver consumer is around 19 percentage points more likely to use their debit card (and 16 percentage points less likely to use their credit card) for a transaction than a transactor consumer.

Where there is no financial cost to accessing the line of credit because there is an interest-free period, consumers tend to use a credit card instead of a debit card; where there is a cost, in the form of interest charges, consumers are more likely to use a debit card. These estimates suggest that, even though in certain circumstances a revolver may need to use credit and cannot substitute to a debit card due to lack of funds, in many cases the two instruments would seem to have a reasonable degree of substitutability. The interest-free period, however, has little significant effect on cash use, possibly because cash tends to be most commonly used for small-value transactions. Nonetheless, consumer preferences between cash and credit cards appear to be significantly affected by relatively minor price changes, such as those provided by loyalty programs. For the probability of debit card use though, we find that the loyalty program price incentive has little effect.

We also find that the magnitude of these results can help to explain aggregate trends. The estimates suggest that the introduction of loyalty programs can account for at least some of the rapid growth in credit card use observed in the second half of the 1990s. Even with our conservative assumptions, the results suggest that debit cards would have remained the dominant payment instrument over the past decade in the absence of the price effects from loyalty programs.

Regardless of the precise numerical effect, the results of this paper suggest that price incentives, and loyalty programs in particular, can be influential when it comes to consumer decisions about which payment instrument to use. Therefore, it seems reasonable to attribute at least part of the changes in payment patterns over recent years to the changed price incentives consumers face as a result of the Reserve Bank reforms.