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Debit Card Float and Consumption Patterns

Debit Card Float and Consumption Patterns. David Bounie Abel Fran ç ois Télécom Paris Elizabeth K. Kiser Federal Reserve Board. The views expressed here are those of the authors and not necessarily of the Federal Reserve Board or the Federal Reserve System. Motivation.

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Debit Card Float and Consumption Patterns

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  1. Debit Card Float and Consumption Patterns David Bounie Abel François Télécom Paris Elizabeth K. Kiser Federal Reserve Board The views expressed here are those of the authors and not necessarily of the Federal Reserve Board or the Federal Reserve System. Bounie, François and Kiser

  2. Motivation • Rapid growth in card payment systems, especially debit cards • Displacing cash, checks • Float may affect ability to smooth consumption, if liquidity constrained • Payment cards as source of short-term credit • How do payment methods affect consumption behavior? Bounie, François and Kiser

  3. Related Literature • Payment choice and behavioral motives • Ariely and Silva (2002) • Zinman (2006) • Fusaro (2007) • Soman (2003) Bounie, François and Kiser

  4. Related Literature, cont. • Consumption behavior and the permanent-income hypothesis • Browning and Lusardi (1996) • Gross and Souleles (2002) • Stephens (2003) • Soman (2003) Bounie, François and Kiser

  5. Data • French consumer survey, March - May 2005 • Nationally representative • Sponsor: Groupement des Cartes Bancaires • Two modules • Interview to collect demographic/financial characteristics: 1447 individuals • 8-day purchase diary: Completed by 1392 of these individuals • We restrict our analysis to these individuals Bounie, François and Kiser

  6. Socioeconomic/Financial Survey • Standard socioeconomic variables • Week in which salary/pay is received • 1st week of month, 2nd week of month, etc. • Payment card holdings • Card type: deferred vs. immediate debit Bounie, François and Kiser

  7. Socioeconomic/Financial Survey, cont. • Deferred debit: • Debit card purchase values remain in the account until the first day of the following month • Like a charge card • 24% of “primary” debit cards are deferred debit Bounie, François and Kiser

  8. Purchase Diaries • Covers period of 8 days per individual • Dates vary within the sample • Information on • Value of purchase • Type of good/service • Store type • Payment method used Bounie, François and Kiser

  9. Research Questions • Deferred debit cards as a source of short-term credit: • Do consumption patterns differ between consumers with immediate vs. deferred cards? • If so, is this difference due to the availability of short-term credit? Or to socioeconomic factors? • What do the differences, if any, mean for consumption behavior? Bounie, François and Kiser

  10. Empirical Approach • Retail purchases only (“discretionary”) • Descriptive charts on purchase behavior • Tests for simultaneity of purchase decision and debit card type • Regressions of purchase behavior as a function of card type and socioeconomic factors Bounie, François and Kiser

  11. Debit Card Holdings and Use • 99% of individuals have a bank account • Of bank account holders, 81% hold at least one debit card • Of debit card holders, • 76% conduct debit transactions • 24% hold deferred debit cards Bounie, François and Kiser

  12. Consumption Patterns:Immediate vs. Deferred Debit Bounie, François and Kiser

  13. Purchase Patterns • We separately observe • Weeks to end of month • Weeks to next paycheck • Different predictions for consumption Bounie, François and Kiser

  14. Predictions:Weeks to End of Month Bounie, François and Kiser

  15. Note: Cannot observe… Predictions:Weeks to End of Month Bounie, François and Kiser

  16. Inference:Weeks to End of Month • If we observe no response to “weeks to end of month” for those with deferred debit, we know either • People are liquidity constrained but deferral amount is adequate to smooth consumption, or • People are not liquidity constrained • If we observe lower consumption around month end for those with deferred debit, we infer people are liquidity constrained and deferral is inadequate to smooth consumption • We expect to find no response to “weeks to end of month” for individuals with immediate debit card Bounie, François and Kiser

  17. Predictions:Weeks to Next Payday Bounie, François and Kiser

  18. Again: Cannot observe… Predictions:Weeks to Next Payday Bounie, François and Kiser

  19. Inference:Weeks to Next Payday • If we observe no response to “weeks to payday” for those with deferred debit, we know either • People are liquidity constrained but deferral amount is adequate to smooth consumption, or • People are not liquidity constrained • If we observe lower consumption before next payday for those with deferred debit, we infer people are liquidity constrained and deferral is inadequate to smooth consumption • If we observe lower consumption before next payday for those with immediate debit, we infer people are liquidity constrained Bounie, François and Kiser

  20. Unconditional Consumption Patterns:Weeks to Month End, Purchase Count Bounie, François and Kiser

  21. Unconditional Consumption Patterns:Weeks to Payday, Purchase Count Bounie, François and Kiser

  22. Unconditional Consumption Patterns:Purchase Count Findings • No substantial differences across groups in weeks to end of month • Non-cardholders show modest (18% max) increases over weeks to payday • Look next at purchase values… Bounie, François and Kiser

  23. Unconditional Consumption Patterns:Weeks to Month End, Purchase Value Bounie, François and Kiser

  24. Unconditional Consumption Patterns:Weeks to Payday, Purchase Value Bounie, François and Kiser

  25. Unconditional Consumption Patterns:Purchase Value Findings • Across weeks to end of month: • Non-cardholders – decreasing over month • Immediate cardholders – flat • Deferred cardholders – increasing over month • Across weeks to payday: • Non-cardholders – lower before payday • Immediate cardholders – lower before payday • Deferred cardholders – higher before payday Bounie, François and Kiser

  26. Ceteris Paribus? • Do patterns remain, holding all else equal? Bounie, François and Kiser

  27. Regressions • Predict value of purchases per day • Condition on socioeconomic variables • Allow response to weeks to end of month and weeks to payday to vary with whether individual holds deferred debit Bounie, François and Kiser

  28. Testing for Consumption Effects • First, test for simultaneity • Do unobserved factors that affect consumption also affect whether the consumer holds a deferred debit card? • Durbin-Wu-Hausman test • We cannot reject the hypothesis that the prediction errors are mean-independent Bounie, François and Kiser

  29. Regression to Test for Consumption Effects • Level of observation is week segment • Each individual appears in two segments • Include only individuals with debit cards • Regressed mean value of purchases per day on • Income, household size, education, age, gender, city size, employment status, housing type • Dummies for days of week in segment • Weeks to end of month, weeks to next payday variables Bounie, François and Kiser

  30. Interactions: Deferred Debit and Time Variables • Interacted “weeks to end of month” and “weeks to next paycheck” with indicator for having deferred debit • Time effect may vary by subgroup • Allows us to test our predictions Bounie, François and Kiser

  31. Results • “Weeks to end of month” not significantly different between deferred and immediate debit cardholders • If liquidity constraints are present for deferred debit holders, deferred debit amount is adequate to smooth consumption • Even after controlling for socioeconomic variables, “weeks to payday” differs significantly between types of cardholders • If liquidity constraints are present for deferred debit holders, deferral amount is adequate to smooth consumption • Liquidity constraints are present for immediate debit holders Bounie, François and Kiser

  32. Regression Predictions:Weeks to End of Month Bounie, François and Kiser

  33. Regression Predictions:Weeks to Next Payday Bounie, François and Kiser

  34. Conclusions • Results suggest that deferred debit may allow cardholders to smooth consumption over short periods • Charge card float may have real impact on consumption patterns • Similar products in economies where deferral is unavailable could improve consumer welfare • U.S.: Many low- and moderate-income households use “payday loans” with extremely high finance charges • Low-value, short-term loans • Caveat – These may not be the customers to whom banks would want to offer such a card (risk) Bounie, François and Kiser

  35. Next Steps • Try to proxy for liquidity constraints • Spending relative to income • See whether spending patterns differ for durables vs. nondurables • Expect large, lumpy expenditures to be more strongly affected by liquidity constraints Bounie, François and Kiser

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