Price Incentives and Consumer Payment Behaviour

John Simon, Kylie Smith and Tim West
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Kylie Smith: Reserve Bank of Australia
Tim West: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: In this paper we estimate the effect of particular price incentives on consumer payment patterns using transaction-level data. We find that participation in a loyalty program and access to an interest-free period, both of which lower the price of credit card use, tend to increase credit card use at the expense of alternative payment methods, such as debit cards and cash. Specifically, we find that a loyalty program increases the probability of credit card use by 23 percentage points and access to the interest-free period increases the probability by 16 percentage points. Interestingly, the pattern of substitution from cash and debit cards is different in each of these cases. A loyalty program reduces the probability of cash use by 14 percentage points and has little effect on debit card use, while access to the interest-free period has little effect on cash use but reduces the probability of debit card use by 19 percentage points. We find these effects to be economically significant and large enough that they can help to explain observed aggregate payments patterns. An implication is that the Reserve Bank reforms of the Australian payments system are likely to have influenced observed payment patterns.

Keywords: consumer choice; retail payment systems; price incentives; loyalty programs (search for similar items in EconPapers)
JEL-codes: C35 D12 G20 (search for similar items in EconPapers)
Date: 2009-06
New Economics Papers: this item is included in nep-mkt
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Citations: View citations in EconPapers (7)

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Journal Article: Price incentives and consumer payment behaviour (2010)
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