Debit Card Incentives and Consumer Behavior: Evidence Using Natural Experiment Methods
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Debit Card Incentives and Consumer Behavior: Evidence Using Natural Experiment Methods Nicholas Clerkin 1 & Andrew Hanson 2 Received: 8 March 2018 / Revised: 1 June 2020 / Accepted: 13 August 2020 # Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract
We estimate the effects of a debit card incentive program on consumer behavior using bank-recorded transaction micro data and a natural experiment design. Using geographic and eligibility features of a generous pilot program offered by a Midwestern regional bank, we estimate both difference in difference and regression discontinuity models, allowing us to identify changes in debit and cash usage resulting from the program. Our primary results show that the program increases the number of debit transactions per customer by between 18.8 and 20.4%. We also estimate that cash usage declines, although these estimates are not statistically significant. Keywords Payment methods . Debit card . Rewards programs . Natural experiment JEL G20 . M31
1 Introduction The number of non-prepaid debit card payments by U.S. consumers increased at an 8% annual growth rate between 2012 and 2015, tied with credit cards for the fastest annual growth among
* Nicholas Clerkin [email protected] Andrew Hanson [email protected]
1
Department of Economics, Marquette University, P.O. Box 1881, Milwaukee, WI 53201, USA
2
Department of Finance (Real Estate), University of Illinois at Chicago, Chicago, IL 60607, USA
Journal of Financial Services Research
non-cash payment forms (Federal Reserve System 2016). Over the same time period, the value of non-prepaid debit card transactions increased at a 7% annual growth rate, the second fastest annual growth rate among non-cash payments (Federal Reserve System 2016).1 Most U.S. consumers already have debit cards, however, and growth in the number of debit card holders has stagnated during the same time period,2 indicating that financial institutions are unlikely to be able to rely on new debit card users as a means for growth. With the total number of debit card users unlikely to expand substantially, card issuers are competing for the same set of customers, often through rewards programs (Ching and Hayashi 2010).3 Understanding how card use rewards programs in general can change consumer behavior is important for several reasons.4 Card rewards programs may increase profits to merchants and card issuers if they cause a net increase in transactions and/or the value of transactions (Ching and Hayashi 2010). However, if rewards programs move consumers towards cards and away from costlier forms of transacting payment (or between cards with more favorable consumer terms), this may increase total consumer income (Humphrey et al. (2003), Carbó-Valverde et al. (2003)). Previous evidence suggests a link between increased card usage and rewards programs (Arango et al. (2015), Ching and Hayashi (2010), Simon et al. (2010), CarbóValverde and Linares-Zegarra (2011)).5 There are two primary weaknesses in the previous literature that ca
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