paris - 26 oct 2007bounie, françois and kiser 1 debit card float and consumption patterns david...
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Paris - 26 Oct 2007 Bounie, François and Kiser1
Debit Card Float and Consumption Patterns
David BounieAbel FrançoisTélécom Paris
Elizabeth K. Kiser Federal Reserve Board
The views expressed here are thoseof the authors and not necessarily ofthe Federal Reserve Board or theFederal Reserve System.
Paris - 26 Oct 2007 Bounie, François and Kiser2
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?
Paris - 26 Oct 2007 Bounie, François and Kiser3
Related Literature
1) Payment choice and behavioral motives– Ariely and Silva (2002)– Zinman (2006)– Fusaro (2007)– Soman (2003)
Paris - 26 Oct 2007 Bounie, François and Kiser4
Related Literature, cont.
2) Consumption behavior and the permanent-income hypothesis
– Browning and Lusardi (1996)– Gross and Souleles (2002) – Stephens (2003)– Soman (2003)
Paris - 26 Oct 2007 Bounie, François and Kiser5
Data
French consumer survey, March - May 2005– Nationally representative– Sponsor: Groupement des Cartes Bancaires
Two modules1. Interview to collect demographic/financial
characteristics: 1447 individuals
2. 8-day purchase diary: Completed by 1392 of these individuals We restrict our analysis to these individuals
Paris - 26 Oct 2007 Bounie, François and Kiser6
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
Paris - 26 Oct 2007 Bounie, François and Kiser7
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
Paris - 26 Oct 2007 Bounie, François and Kiser8
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
Paris - 26 Oct 2007 Bounie, François and Kiser9
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?
Paris - 26 Oct 2007 Bounie, François and Kiser10
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
Paris - 26 Oct 2007 Bounie, François and Kiser11
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
Paris - 26 Oct 2007 Bounie, François and Kiser12
Consumption Patterns:Immediate vs. Deferred Debit
Average value of
daily purchases (€)
Average number of daily purchases
No card 27.2 1.2
Immediate debit
28.7 1.3
Deferred debit
35.7 1.3
Paris - 26 Oct 2007 Bounie, François and Kiser13
Purchase Patterns
We separately observe – Weeks to end of month– Weeks to next paycheck
Different predictions for consumption
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Predictions:Weeks to End of Month
Individual is liquidity constrained
Individual is not liquidity constrained
Have deferred debit:
Deferral is adequate to smooth cons.
No response No response/NA
Deferral is inadequate to smooth cons.
↓ consump. before/at end of month
No response/NA
Have immediate debit No response No response
Paris - 26 Oct 2007 Bounie, François and Kiser15
Predictions:Weeks to End of Month
Individual is liquidity constrained
Individual is not liquidity constrained
Have deferred debit:
Deferral is adequate to smooth cons.
No response No response/NA
Deferral is inadequate to smooth cons.
↓ consump. before/at end of month
No response/NA
Have immediate debit No response No response
Note: Cannot observe…
Paris - 26 Oct 2007 Bounie, François and Kiser16
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
Paris - 26 Oct 2007 Bounie, François and Kiser17
Predictions:Weeks to Next Payday
Individual is liquidity constrained
Individual is not liquidity constrained
Have deferred debit:
Deferral is adequate to smooth cons.
No response No response/NA
Deferral is inadequate to smooth cons.
↓ consump. before payday No response/NA
Have immediate debit↓ consump. before payday No response
Paris - 26 Oct 2007 Bounie, François and Kiser18
Predictions:Weeks to Next Payday
Individual is liquidity constrained
Individual is not liquidity constrained
Have deferred debit:
Deferral is adequate to smooth cons.
No response No response/NA
Deferral is inadequate to smooth cons.
↓ consump. before payday No response/NA
Have immediate debit↓ consump. before payday No response
Again: Cannot observe…
Paris - 26 Oct 2007 Bounie, François and Kiser19
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
Paris - 26 Oct 2007 Bounie, François and Kiser20
Unconditional Consumption Patterns:Weeks to Month End, Purchase Count
Mean Number of Daily Purchases: Weeks to End of Month
1.1
1.3
1.2
1.3 1.31.3
1.31.3
1.3
1.2
1.4
1.2
0.5
0.75
1
1.25
1.5
3 2 1 0
Weeks to end of month
Mean
nu
mb
er
per
day
No card
Immediate
Deferred
Paris - 26 Oct 2007 Bounie, François and Kiser21
Unconditional Consumption Patterns:Weeks to Payday, Purchase Count
Mean Number of Daily Purchases: Weeks to Next Payday
1.1
1.2
1.2
1.31.3 1.3
1.2
1.31.3 1.3 1.31.3
1
1.05
1.1
1.15
1.2
1.25
1.3
1.35
1.4
3 2 1 0
Weeks to next payday
Mean
nu
mb
er
per
day
No card
Immediate
Deferred
Paris - 26 Oct 2007 Bounie, François and Kiser22
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…
Paris - 26 Oct 2007 Bounie, François and Kiser23
Unconditional Consumption Patterns:Weeks to Month End, Purchase Value
Mean Value of Daily Purchases: Weeks to End of Month
29.8
32.5
26.2
22.6
30.8
26.5
28.7 29.1
35.837.1
38.7
30.3
15
20
25
30
35
40
3 2 1 0
Weeks to end of month
Mean
valu
e p
er
day (
€)
No card
Immediate
Deferred
Paris - 26 Oct 2007 Bounie, François and Kiser24
Unconditional Consumption Patterns:Weeks to Payday, Purchase Value
Mean Value of Daily Purchases: Weeks to Next Payday
26.5
21.1
26.7
34.7
29.0
25.9 26.6
33.3
37.9 37.7
32.931.0
15
20
25
30
35
40
3 2 1 0
Weeks to next payday
Mean
valu
e p
er
day (
€)
No card
Immediate
Deferred
Paris - 26 Oct 2007 Bounie, François and Kiser25
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
Paris - 26 Oct 2007 Bounie, François and Kiser26
Ceteris Paribus?
Do patterns remain, holding all else equal?
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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
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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
Paris - 26 Oct 2007 Bounie, François and Kiser29
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
Paris - 26 Oct 2007 Bounie, François and Kiser30
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
Paris - 26 Oct 2007 Bounie, François and Kiser31
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
Paris - 26 Oct 2007 Bounie, François and Kiser32
Regression Predictions:Weeks to End of Month
Predicted Value of Daily Purchases: Weeks to End of Month
30
2629 30
3236
33
39
0
5
10
15
20
25
30
35
40
45
3 2 1 0
Weeks to end of month
Mean
valu
e p
er
day (
€)
immediate deferred
Paris - 26 Oct 2007 Bounie, François and Kiser33
Regression Predictions:Weeks to Next Payday
Predicted Value of Daily Purchases: Weeks to Next Payday
3027 26
33
32
39 38
32
0
5
10
15
20
25
30
35
40
45
3 2 1 0
Weeks to next payday
Mean
valu
e p
er
day (
€)
immediate deferred
Paris - 26 Oct 2007 Bounie, François and Kiser34
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)
Paris - 26 Oct 2007 Bounie, François and Kiser35
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