Paris - 26 Oct 2007Bounie, François and Kiser 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.

Paris - 26 Oct 2007Bounie, 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?

Paris - 26 Oct 2007Bounie, François and Kiser 3 Related Literature 1) Payment choice and behavioral motives – Ariely and Silva (2002) – Zinman (2006) – Fusaro (2007) – Soman (2003)

Paris - 26 Oct 2007Bounie, François and Kiser 4 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 2007Bounie, François and Kiser 5 Data French consumer survey, March - May 2005 – Nationally representative – Sponsor: Groupement des Cartes Bancaires Two modules 1. 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 2007Bounie, François and Kiser 6 Socioeconomic/Financial Survey Standard socioeconomic variables Week in which salary/pay is received – 1 st week of month, 2 nd week of month, etc. Payment card holdings Card type: deferred vs. immediate debit

Paris - 26 Oct 2007Bounie, 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

Paris - 26 Oct 2007Bounie, 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

Paris - 26 Oct 2007Bounie, 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?

Paris - 26 Oct 2007Bounie, 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

Paris - 26 Oct 2007Bounie, 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

Paris - 26 Oct 2007Bounie, François and Kiser 12 Consumption Patterns: Immediate vs. Deferred Debit Average value of daily purchases ( €) Average number of daily purchases No card Immediate debit Deferred debit

Paris - 26 Oct 2007Bounie, François and Kiser 13 Purchase Patterns We separately observe – Weeks to end of month – Weeks to next paycheck Different predictions for consumption

Paris - 26 Oct 2007Bounie, François and Kiser 14 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 responseNo response/NA Deferral is inadequate to smooth cons. ↓ consump. before/at end of month No response/NA Have immediate debitNo response

Paris - 26 Oct 2007Bounie, François and Kiser 15 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 responseNo response/NA Deferral is inadequate to smooth cons. ↓ consump. before/at end of month No response/NA Have immediate debitNo response Note: Cannot observe…

Paris - 26 Oct 2007Bounie, 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

Paris - 26 Oct 2007Bounie, François and Kiser 17 Predictions: Weeks to Next Payday Individual is liquidity constrained Individual is not liquidity constrained Have deferred debit: Deferral is adequate to smooth cons. No responseNo 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 2007Bounie, François and Kiser 18 Predictions: Weeks to Next Payday Individual is liquidity constrained Individual is not liquidity constrained Have deferred debit: Deferral is adequate to smooth cons. No responseNo 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 2007Bounie, 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

Paris - 26 Oct 2007Bounie, François and Kiser 20 Unconditional Consumption Patterns: Weeks to Month End, Purchase Count

Paris - 26 Oct 2007Bounie, François and Kiser 21 Unconditional Consumption Patterns: Weeks to Payday, Purchase Count

Paris - 26 Oct 2007Bounie, 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…

Paris - 26 Oct 2007Bounie, François and Kiser 23 Unconditional Consumption Patterns: Weeks to Month End, Purchase Value

Paris - 26 Oct 2007Bounie, François and Kiser 24 Unconditional Consumption Patterns: Weeks to Payday, Purchase Value

Paris - 26 Oct 2007Bounie, 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

Paris - 26 Oct 2007Bounie, François and Kiser 26 Ceteris Paribus? Do patterns remain, holding all else equal?

Paris - 26 Oct 2007Bounie, 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

Paris - 26 Oct 2007Bounie, 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

Paris - 26 Oct 2007Bounie, 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

Paris - 26 Oct 2007Bounie, 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

Paris - 26 Oct 2007Bounie, 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

Paris - 26 Oct 2007Bounie, François and Kiser 32 Regression Predictions: Weeks to End of Month

Paris - 26 Oct 2007Bounie, François and Kiser 33 Regression Predictions: Weeks to Next Payday

Paris - 26 Oct 2007Bounie, 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)

Paris - 26 Oct 2007Bounie, 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