Debit%20Card%20Float%20and%20Consumption%20Patterns

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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.
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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?

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Related Literature

• Payment choice and behavioral motives
• Ariely and Silva (2002)
• Zinman (2006)
• Fusaro (2007)
• Soman (2003)

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Related Literature, cont.

• Consumption behavior and the permanent-income
  hypothesis
• Browning and Lusardi (1996)
• Gross and Souleles (2002)
• Stephens (2003)
• Soman (2003)

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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

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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

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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

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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

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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?

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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

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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

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Consumption PatternsImmediate 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
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Purchase Patterns

• We separately observe
• Weeks to end of month
• Weeks to next paycheck
• Different predictions for consumption

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PredictionsWeeks 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
Have deferred debit Deferral is inadequate to smooth cons. ? consump. before/at end of month No response/NA
Have immediate debit Have immediate debit No response No response
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PredictionsWeeks to End of Month
Note Cannot observe
Individual is liquidity constrained Individual is not liquidity constrained
Have deferred debit Deferral is adequate to smooth cons. No response No response/NA
Have deferred debit Deferral is inadequate to smooth cons. ? consump. before/at end of month No response/NA
Have immediate debit Have immediate debit No response No response
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InferenceWeeks 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

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PredictionsWeeks 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
Have deferred debit Deferral is inadequate to smooth cons. ? consump. before payday No response/NA
Have immediate debit Have immediate debit ? consump. before payday No response
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PredictionsWeeks to Next Payday
Again Cannot observe
Individual is liquidity constrained Individual is not liquidity constrained
Have deferred debit Deferral is adequate to smooth cons. No response No response/NA
Have deferred debit Deferral is inadequate to smooth cons. ? consump. before payday No response/NA
Have immediate debit Have immediate debit ? consump. before payday No response
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InferenceWeeks 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

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Unconditional Consumption PatternsWeeks to
Month End, Purchase Count
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Unconditional Consumption PatternsWeeks to
Payday, Purchase Count
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Unconditional Consumption PatternsPurchase
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

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Unconditional Consumption PatternsWeeks to
Month End, Purchase Value
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Unconditional Consumption PatternsWeeks to
Payday, Purchase Value
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Unconditional Consumption PatternsPurchase
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

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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

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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

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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

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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

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Regression PredictionsWeeks to End of Month
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Regression PredictionsWeeks to Next Payday
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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)

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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