Consumer Payment Choice for Bill Payments 
Using data from the 2017 Diary of Consumer Payment Choice (DCPC), a representative survey of US adults conducted by the Federal Reserve Banks, the authors examine the factors affecting consumers’ choices of payment instruments for bill payments. The DCPC data include details about each transaction that the participating consumers make as well as income and demographic information about those consumers. In addition, the data include information on consumers’ preferred payment instruments, allowing the authors to observe when consumers act according to their stated preferences and when they deviate from them. The analysis also uses banking status data obtained from the Survey of Consumer Payment Choice, which collects information from the same set of respondents as the DCPC.
Key Findings
- Low-income consumers pay their bills differently from other consumers. Even when they are fully banked, low-income consumers are more likely to pay in person, tend to use cash more frequently, and are less likely to set up automated bill payments or use online payment methods.
- Consumers with higher household incomes are more likely to pay their bills using automatic methods.
- More educated consumers are more likely to use credit cards, checks, and electronic payments to pay bills, and they are less likely to use debit cards.
- The dollar amount of a bill significantly affects the probability that particular instruments will be used to pay it. The larger the dollar value is, the lower the probability that cash will be used and the higher the probability that a check or electronic payment will be used, even when income and demographics are held constant.
- Consumers do not typically stay consistent with their stated preferences for bill payments, especially for bills paid automatically.
Exhibits
Implications
The authors find that the type of bill a consumer is paying and how they are paying are important factors in determining the payment method they choose. The dollar amount of the bill and the demographics and income characteristics of the individual consumer also come into play. In addition, the decision-making process can involve the payee, or merchant, which may limit the types of payment instruments that can be used. Indeed, when the authors compare consumers’ stated preferences for bill payments to their actual behavior and estimate what causes them to deviate, the results indicate that the preferences or acceptance practices of merchants have an important influence on the choice of payment instruments. This finding is in contrast to findings regarding purchases, which indicate that the preferences of payees do not significantly affect consumers’ choice of payment instrument.
Abstract
Why do US consumers pay their bills the way they do? Using data from a recent diary of consumer payment behavior, we find that the type of bill consumers are paying and how they are paying (online or automatically) are important factors in determining the payment method, in addition to the dollar value of the bill and the demographic and income profile of the individual who is paying. In contrast, dollar value and demographic attributes are found to be the most important factors determining the payment instrument chosen for purchases. Consumer choices for bill payments are somewhat constrained by requirements imposed by merchants, while the choice of payment instrument for purchases is not constrained by such requirements.
The convenience and speed provided by automatic and online payments are not benefitting all US consumers equally. Unbanked consumers lack access to most payment methods and, hence, use cash or prepaid cards to pay their bills. Low-income consumers pay their bills differently from the rest of the sample: They are more likely to pay in person, use significantly more cash, and are less likely to set up automated or online bill payments, regardless of whether they have a bank account.
Although consumers specify in the diary which methods they prefer to use to pay their bills, in practice they are not likely to act consistently with their stated preferences. We find that consumers who pay their bills online are less likely to deviate from their preferred payment method, while those who pay their bills automatically are more likely to deviate, after we control for income, demographic attributes, the dollar amount of the bill, and the merchant type. We find no evidence of the salience effect of automatic bill payments that Sexton (2015) finds for energy consumption. Rather, we find that consumers who pay their bills automatically have higher incomes and spend more on bills than lower-income consumers do, but that automatic bill payments are lower in value on average, which is the opposite of the finding by Sexton (2015).