The Economics of Payment - Essays on the Impact of Payment Innovations on Individual Payment Behavior

This thesis examines the impact of payment innovations such as contactless and mobile payment on individual payment behavior. It consists of three empirical studies in the field of payment economics that fill the gap in this relatively new field. Unique data sets on consumer payment choice provided by the Federal Reserve Bank of Boston are analyzed. In addition, the introductory chapter offers a comprehensive overview of the various strands of research on the factors driving consumer payment behavior. It also extends literature by providing a theoretical model of individual payment behavior that draws together the reviewed literature.

In the first study, the effect of contactless payment on the transaction ratio for different transaction types at the stationary point-of-sale (POS) is estimated. The specific devices that are investigated are debit and credit cards, to which the feature is embedded. Using propensity score matching to control for selection, the estimation shows that the contactless feature yields a statistically significant increase in the transaction ratio at the POS for both payment methods. The average treatment effect on the treated for credit and debit cards is roughly 8% and 10%, respectively. These findings indicate that the private industry can benefit from the innovation with respect to additional revenue streams.

The second study explores the impact of contactless payment on cash usage in terms of value spending and transaction frequency at the POS. The specific devices that are investigated are debit and credit cards, to which the feature is embedded. Employing cross-sectional estimation methods, the estimation shows that contactless payment leads to a statistically significant reduction in average cash usage at the POS in terms of value and volume. The negative effect of contactless credit and debit cards on cash volume is 5% and 6%, respectively. The negative impact of contactless credit cards on cash value is estimated between 12% and 16%, but no effect is found for contactless debit cards. Using the fixed-effects model, however, results in a negative effect of 3% for contactless debit cards and a statistically insignificant effect for contactless credit cards on cash volume. The results obtained on cash value are unaffected.

The third study focuses on the effect of mobile payment on the adoption and usage patterns of traditional payment instruments such as cash, checks, credit, debit, and prepaid cards used at the POS. Using discrete-choice random utility models to simulate consumer behavior, the estimation provides two major findings. First, pertaining to the adoption stage, mobile payment does not replace physical payment cards, but is likely to substitute paperbased payment methods such as cash and checks. Second, mobile payment does not statistically significantly influence the choice of payment means at the POS in terms of usage. However, there is suggestive evidence that it is complementary to card payments and a substitute for paper-based payment instruments. The findings highlight the potential social welfare gains of mobile payment.