The Effect of Demographics on Payment Behavior: Panel Data with Sample Selection
Today's consumer has access to more payment instruments than consumers of just a few years ago, as newer electronic payments are penetrating an established payments market, while older methods, such as cash and checks, remain important payment alternatives. As the number of available payment methods increases, so does the need to understand why consumers adopt certain payment instruments, how consumers choose to pay for purchases, which consumers make certain payments, and who is most affected by changes in the payment system.
Connolly and Stavins (2015) showed that income and demographic attributes are correlated with payment behavior, based on the 2009–2013 data from the Survey of Consumer Payment Choice. In this paper, the author applies a panel data model with sample selection based on Wooldridge (1995) to test whether socio-demographic attributes affect payment behavior even when all the other observable characteristics are controlled for.
Key Findings
- Age, education, income, and race are significant in explaining payment behavior even after controlling for all the other attributes of consumers and for payment instrument characteristics.
- Most notably, the lowest-income, lowest-education, and minority consumers adopt a very limited set of payment instruments compared with their counterparts even when education and age are controlled for. These consumers also have a significantly different pattern of payment use conditional on adoption: they rely significantly more on cash and less on credit cards for their transactions.
- Women use significantly less cash than men, but use more debit cards, checks, and online banking bill pay, even when we control for the degree of bill-paying responsibility they have for their households. Single people use more cash, while married people use more checks.
- People living in the Northeast and Mid-Atlantic regions used more cash as a share of total transactions than people living in other regions of the nation.
- Most of the results are consistent throughout the five-year sample.
Implications
Although characteristics of payment instruments, such as cost, convenience, and security, significantly affect payment behavior, consumers' socio-demographic attributes explain most of the variation. Separating the effects of consumers' age from the effects of birth cohorts indicates that in most cases age and birth-cohort trends move together.