Analysis of the Payment Choice

holder base. 5 The particular company sending the questionnaire was not identified to the consumer. Consequently, the consumers’ responses relate to their general use of gasoline credit cards and not to their behavior with respect to a specific company unless they owned only one gasoline card. Questionnaires were returned directly to the CRC. The overall response rate was 25.9 6451 total surveys. The sample size was reduced by 965, due to incomplete demographic and credit information. The sample was further reduced by 322 respondents who did not have both a gasoline credit card and a general purpose credit card, leaving a total of 5,164 useable responses. 6 Logit Estimation Model To analyze the respondent’s choice between debit and non-debit payment methods, we used a multinomial logit model [Greene 1990, Ch. 21]. To analyze the respondent’s choice of cash, general purpose card, and gasoline card we used the generalized extreme value GEV model also called the nested multinomial logit model. Although the multinomial logit model of choice is extremely robust, even when its underlying assump- tions are violated, critics state that the property of independence of irrelevant alternatives, also called the constant ratio rule, is too restrictive. This property implies that if a new option is added to a choice set, the shares of existing options decrease in direct proportion to original share size. For a gasoline station this new option may be allowing customers to use a general purpose card, where the choices had previously been limited to only using cash or the company’s own proprietary credit card. Based on the multinomial logit model, the proportion of customers who will choose to use the general purpose card will draw in proportion to the market share of those who previously used cash and those who previously used a gasoline card. The GEV model relaxes this assumption. Maddala 1984, Ch. 3 showed that the GEV model is superior to the multinomial logit model when a sequence of decisions can be analyzed. The use of the GEV model is a sequence of logit models. First, we analyzed the estimates for a model of choice within a given subset gasoline or general purpose credit card. Second, we used the sum of the utilities for all the items in the subset also called the inclusive value as an explanatory variable in a higher-level model of choice cash versus any credit card.

III. Analysis of the Payment Choice

Cash Versus Credit Decision and Gas Card Versus General Purpose Card Decision In the survey, we asked respondents the following question: “Please think about your gasoline purchases over the past year. Indicate the approximate percentage of time you used each of the four payment methods listed below for your purchase. If you never used 5 Several companies chose to divide their cardholders into two samples, active and inactive cardholders; from these samples the companies then chose a random sampling of respondents. The response rate from active cardholders was 26.5, and the response rate from inactive cardholders was 23.5. In all future analyses, tests were done to determine if the inclusion of active versus inactive cardholders significantly influenced the characteristics of the sample. When significant, these differences are discussed. 6 Exclusion of these 322 respondents did not significantly affect any of the results. Debit, Credit, or Cash 411 a particular method, write 0.” The four methods include cashcheck, debit card, gasoline company credit card, and other credit card. 7 We analyzed the cash versus credit decision through the use of a GEV model. 8 For each purchase, the respondent had the choice of using cash, a gasoline credit card, or a general purpose credit card. The GEV model requires an analysis of the gasoline card versus general card decision first Table 1 2 , Model 1. We incorporated the inclusive value from the gas versus general credit card decision into the logit model analyzing the cash versus credit decision Table 1, Model 2. In Model 1, the dependent variable is equal to 1 if the respondent used the general purpose card a larger percentage of the time than the gasoline card. We assigned all other respondents a value of zero. We omitted 178 respondents who only used cash during the previous year, leaving a sample of 4986 respondents. The average value for the dependent variable was 16.4, showing that 16.4 of respondents used their general purpose card more frequently than their gasoline card. Independent variables in Model 1 include demographic characteristics, credit characteristics, and the reasons given for using a particular type of credit card. The dependent variable in Model 2 is equal to 1 if the respondent used credit cards gasoline plus general purpose credit card usage a greater percentage of the time than cash cashcheck plus debit card usage. 9 Of the respondents, 69.2 used credit more than cash. The independent variables in Model 2 are the inclusive value calculated in Model 1, demographic variables, and credit variables. Model 2 does not include responses about the importance of the general and gasoline card attributes, because these attributes primarily relate to the gas versus general purpose card decision. The demographic characteristics were generally insignificant exception: males were more likely to use general purpose cards. However, the greater the number of general purpose credit cards owned, the more likely the primary payment method was general purpose credit cards. Similarly, the greater the number of gasoline credit cards owned, the more likely gasoline credit cards were the primary payment method. Thus, respondents revealed their preferences for a particular type of card through their card ownership. Bank card revolvers were more likely to use a gasoline credit card as their primary payment method. This finding is consistent with credit-constrained individuals utilizing a wider variety of credit cards in order to keep the credit line on their general purpose cards open [Jappelli 1990]. Respondents also ranked their reasons for using proprietary cards and general purpose cards 1 5 “very important” to 4 5 “not a factor”. 10 The most important reasons for consumers to use their general purpose credit cards were shopping with fewer cards, and obtaining rebates and enhancements. However, general purpose card users placed less importance on lower monthly payments. This is consistent with general purpose card users being more concerned with the convenience of the card than its credit 7 Debit card users were not included in the nested logit analysis, as only 1 of respondents used debit as their primary payment vehicle. Thus, analysis of debit card users was made separately from the nested logit model. When the debit card users were added to the nested multinomial logit model, the results were inconclusive. 8 An ordered multinomial logistic model was also considered; however, no matter in which order the choices of gas card, bank card, and cash were placed, the test for the proportional odds assumption showed that assuming parallel lines was not consistent with the data. 9 The debit decision is not analyzed in this part of the paper, due to the infrequency of its use among respondents less than 1 of purchases. 10 Inclusion of the no-responses or exclusion did not impact the conclusions from Table 1. In Table 1, we report the results including consumers which did not respond as a 5. Inclusion as a value of 4 also did not impact the conclusions. 412 K. A. Carow and M. E. Staten function. 11 A separate record for gasoline purchases was the most important reason to use a gasoline credit card. 12 Other significant factors in the decision to use a gasoline card included keeping the account active to get sales notices, and not knowing whether a general purpose card would be accepted. 13 The slope coefficients give the change in the log of the odds ratio of choosing a general purpose credit card. The change in the predicted probability of choosing a general purpose credit card depends not only on the estimated coefficient, but also on the level of the predicted probability from which the change is measured. The change in predicted probability for a unit increase in variable X i is equal to B i 1 2 PP, where B i is the estimated coefficient, and P is the initial predicted probability. For our hypothetical respondent— 40 years of age, high school diploma, 40,000 income, single, female, renting, with three general purpose cards, three gasoline cards—who rated all the reasons for using a general purpose card with a 4, and who rated all the reasons for not using a general purpose card with a 3, the predicted probability of choosing a general purpose card, P, was 13.0. If the hypothetical respondent was a male, the predicted probability of using a general purpose card was 15.7, an increase of 2.7 [.241 2 .13.13]. Owning one more general purpose card increased the predicted probability of using a general purpose card by 1.4, but owning one more gasoline card decreased the predicted probability of using a general purpose card by 2.6. If the hypothetical respondent had considered the ease of shopping with one more card important enough to choose a 3 instead of a 4, the predicted probability of using a general purpose card would have increased by 5.9. Choosing a 2 instead of a 3 for record keeping would have decreased the predicted probability of using a general purpose card by 6.1. 14 Model 2 of Table 4 provides the results from the GEV model concerning the cash versus credit decision. The inclusive value is the simple exponential average of the strict utility of credit card type. The coefficient of the credit card inclusive value term is significantly different from zero and lies in the interval [0, 1]. This shows that the GEV model is consistent with utility maximization [McFadden 1978]. 15 Demographic variables are highly significant in the cash versus credit decision. A U-shaped relationship for age is evident. Relative to consumers aged 35– 45, both younger and older people are more likely to use credit cards. This is consistent with older customers valuing the security of credit card usage and younger customers being budget- constrained. Consistent with the convenience of having a payment source which does not need replenishing, respondents with greater education and higher income use credit cards 11 Many gasoline cards do not permit fuel purchases to revolve, which means up to 100 minimum payment for many users, but bank cards typically require only 2–5 minimum payment. 12 It is interesting to note that the co-branded Shell Master Card, introduced subsequent to this survey, does separate out gasoline purchases from other purchases. 13 Exclusion of the demographic and credit characteristics provided very similar results for Model 1. For Model 1, keeping other credit lines open became positive and significant at the 5 level. 14 Unlike in linear programming, where the change in probability remains constant, the change in predicted probability is highly dependent on the starting value of P which is determined by the level of the other coefficients. Due to this variability, any transformation of these original estimates must be done with caution. Based on these concerns, we do not interpret the change in the predicted probability in the remaining logit models, but provide the probability, P, for our hypothetical respondent in this footnote and footnote 20. For Model 2, the probability for our hypothetical respondent was 31.69. Our hypothetical respondent is not the average respondent, but chosen to match with the omitted categories as stated in the footnotes to Table 1. 15 Omission of the inclusive value did not have a significant impact on the level or significance of the other variables included in Model 2; however, it did cause a significant reduction in the explanatory power of the model. Debit, Credit, or Cash 413 Table 1. Logit Model of Primary Payment Method Gasoline Survey a Model 1 Gas Card vs. General Card Model 2 Cash vs. Any Credit Card Parameter Estimate t Value Parameter Estimate t Value Constant 20.43 1.21 22.38 10.60 Inclusive value 0.22 8.44 Age of Respondent: b Younger than 25 0.25 0.74 1.04 4.20 25–34 0.01 0.05 0.33 2.97 45–54 0.17 1.23 0.26 2.59 55–64 0.23 1.54 0.22 2.03 65 or older 0.02 0.15 0.30 2.70 Highest Education Obtained: c 8th grade 0.64 1.41 20.19 0.52 9th–12th grade 0.23 0.74 0.12 0.52 Some college 20.02 0.12 0.08 0.83 College degree 0.07 0.54 0.33 3.42 Total Income in 1991: d Less than 20,000 20.25 1.37 20.19 1.55 20,000–29,999 0.13 0.93 20.05 0.54 50,000–74,999 20.11 0.83 0.14 1.47 75,000–99,999 20.04 0.23 0.12 0.85 Greater than 100,000 20.19 1.05 0.31 2.17 Marital Status: e Married 0.19 1.11 20.04 0.35 Divorced 0.06 0.31 20.15 1.06 Miscellaneous Demographics: e Male 0.24 2.23 0.04 0.56 Home owner 20.04 0.27 0.07 0.67 Card Ownership: f Number of general purpose cards 0.12 4.40 0.06 2.55 Number of travel and entertainment cards 20.07 0.75 0.09 1.23 Number of gas cards 20.23 7.40 0.28 11.25 Frequency of Paying Credit Card Balance: g Pay full amount 0.64 5.64 0.48 5.76 Hardly ever pay full amount 20.34 2.07 0.07 0.68 Cash vs. Credit Questions: Importance of cash discount h 0.52 17.49 Frequency of self-service i 20.03 0.68 Reasons for Using General Purpose Credit Cards: h Lower interest rates 20.07 1.25 Lower monthly payment 0.27 3.89 Rebatesenhancements 20.31 7.04 Ease of shopping with one card 20.52 13.92 Paid fee; use card 0.09 1.54 table continued on next page 414 K. A. Carow and M. E. Staten more frequently. Marital status, sex, and home ownership did not differentiate between credit and cash users. Not surprisingly, the number of credit cards owned was positively related to the use of credit. Convenience users were also more likely to use credit, while revolvers paid with cash more frequently. We also asked respondents to specify the importance of cash discount and self service 1 5 “very important” to 4 5 “not important”. As expected, cash users considered discounts to be more important. 16 Respondents who used self-service were no more likely to use credit than respondents who used full-service. 16 Given that all respondents owned at least one gasoline card, this result suggests that dropping the discount for cash removed a major impediment to card usage. The elimination of virtually all national discount-for-cash programs since 1992 suggests that oil company issuers recognized this, too. See Barron et al. 1992. Table 1. continued Gasoline Survey a Model 1 Gas Card vs. General Card Model 2 Cash vs. Any Credit Card Parameter Estimate t Value Parameter Estimate t Value Reasons for Not Using General Purpose Credit Cards: h Record keeping 0.54 14.60 Keep account active to get sales notices 20.18 3.35 Keep other lines open 0.06 1.36 Not sure if general card is accepted 20.08 2.01 Sample size 4986 5164 Mean of dependent variable 16.4 69.2 22 Log L 3229 5505 x 2 1216 872 p Value 0.0001 0.0001 Concordant 84.4 74.6 Goodness-of-fit statistic p-value 0.1550 0.1834 a The samples are limited to those respondents with at least one general purpose credit card and one gasoline credit card. b Respondents in the 35–44 age group are the omitted category. c Respondents with a high school degree are the omitted category. d Respondents with 30,000–49,999 income are the omitted category. e Indicator variables are equal to 1 if the respondent has the characteristic, and 0 otherwise. f Equal to the number of the type of card owned by the respondent. Values are from 1 to 10; respondents who answered that they had more than 10 cards were given the value of 10. g Respondents who stated that they sometimes pay their balance in full are the omitted category. h Respondents ranked the importance of each reason as: 1 very important; 2 somewhat important; 3 not very important; 4 not a factor; and 5 no response. i Respondents ranked the frequency of full-service usage: 1 almost always use self-serve island; 2 use self-serve island more frequently than full-serve; 3 use self-serve and full-serve about equally, 4 use full-serve more than self-serve, and 5 almost always use full-serve islands. This table utilizes a nested multinomial logit model to analyze the general purpose credit card versus gas credit card decision in Model 1, and the cash versus any credit card decision in Model 2. In column 1, the dependent variable is equal to 1 if the respondent stated they used a general purpose card more than a gasoline credit card, and 0 otherwise. If credit was never used, the observations were omitted from Model 1, but used in Model 2. In column 2, the dependent variable is equal to 1 if the respondent stated that they used credit gasoline or general purpose cards more than cash, and 0 otherwise. Significant at the .05 level. Significant at the .01 level. Debit, Credit, or Cash 415 Preliminary Comparisons of the Characteristics of Debit Versus Non-Debit Users Debit card growth could significantly change consumer payment patterns. We provide an analysis of debit and potential debit users in Table 2. For each of the three categories, we examined differences in demographic characteristics, credit characteristics, attitudes to- ward credit card usage, and frequency of payment method. The first category is for the question “Have you ever used a debit card to make a purchase at a gasoline station, grocery store, or other retail store?” The second category is for respondents who stated that they have used a debit card for gasoline purchases. 17 The third category is for the question “If a company offered you a debit card, at no cost to you, and charged the same price per gallon for debit card purchases as for cash purchases, would you be more likely to use the debit card or cash?” Each category has three columns. The first column is the mean value for respondents who stated they do not use debit or would not use debit. The second column is the mean value for respondents who stated that they do use debit or would use debit. The third column is a difference in means test. The results are consistent for each of the three categories. Debit and potential debit users are younger, have higher income, are more educated, are less likely to own their home, and are less likely to be married. For the credit characteristics, debit card users generally have more credit cards. Debit and potential debit users also consider the reasons to use a general purpose card to be more important than non-debit users. In general, debit card users are more likely to consider lower interest rates, lower monthly payments, rebates, shopping with one card, and using a card due to having paid a fee to be important. We did not find consistent differences between debit and non-debit users for responses to the reasons for using gasoline cards. The final section of Table 2, “Payment Frequency”, includes a summary of the percent of purchases made via each payment method. Generally, debit card users and potential debit card users made fewer cash purchases. This is consistent with the debit card serving as a cash substitute. More importantly, respondents who used debit to pay for gasoline purchases had significantly lower gasoline credit card usage than non-debit card users. However, debit card users used their cash and general purpose cards approximately the same percentage of the time as non-debit card users. Thus, for gasoline purchases, debit card usage is a substitute for gasoline card usage. This has important implications for the viability of proprietary card programs. Although there is some evidence of debit serving as a cash substitute, the results based on consumers who have already switched to debit card usage indicate that increased debit card usage will negatively impact gasoline credit card usage. Debit Versus Non-Debit Users Using logistic regression in Table 3, we present the results for the characteristics of debit versus non-debit users. In general, the results provide evidence consistent with debit users having characteristics more closely related to credit card users than cash users, and preliminary evidence that debit card users are more closely related to general purpose card 17 Gasoline purchases by debit were determined based on responses to question 4. If a respondent had ever used a debit card, they were considered a debit card user. One-hundred, eighty of the respondents stated they have used a debit card. Only 65 used a debit card as their primary method of payment. 416 K. A. Carow and M. E. Staten Table 2. Potential Debit versus Non-Debit Users Variable Have Used Debit Have Used Debit for Gasoline Potential Debit User No Q2 5 0 Yes Q2 5 1 No DEBIT 5 0 Yes DEBIT 5 1 No Q3 5 0 Yes Q3 5 1 Demographic Characteristics: Age of respondent 49.93 45.60 2 49.60 45.91 2 49.89 48.28 2 Income six categories 3.25 3.39 1 3.26 3.27 3.23 3.32 1 Education five categories 4.26 4.41 1 4.27 4.28 4.23 4.33 1 Male 0.67 0.62 2 0.66 0.67 0.67 0.65 Home owner 0.84 0.76 2 0.83 0.75 2 0.84 0.80 2 Married 0.73 0.66 2 0.72 0.66 0.74 0.69 2 Divorced 0.16 0.16 0.15 0.20 0.15 0.17 Credit Characteristics Number of general purpose cards 2.65 2.92 1 2.67 3.08 1 2.61 2.77 1 Number of gas cards 3.00 2.94 2.99 2.97 2.91 3.06 1 Number of travel and entertainment cards 0.30 0.39 1 0.30 0.36 0.29 0.32 Frequency of paying credit three categories 1.69 1.71 1.69 1.72 1.71 1.68 Cash versus Credit Questions 1 5 important, 5 5 not a factor: Importance of cash discount 2.39 2.22 2 2.38 2.10 2 2.33 2.42 1 Frequency of self serve 1.33 1.27 1.33 1.18 2 1.33 1.30 Reasons for Using General Purpose Cards 1 5 important, 5 5 not a factor: Lower interest rates 4.04 3.87 2 4.03 3.72 2 4.06 3.94 2 Lower monthly payments 4.21 4.04 2 4.21 3.87 2 4.22 4.14 2 Rebatesenhancements 4.11 3.86 2 4.10 3.69 2 4.15 3.98 2 Ease of shopping with one card 3.72 3.46 2 3.71 3.12 2 3.77 3.55 2 Paid fee; use card 4.26 4.11 2 4.25 3.98 2 4.27 4.19 2 Reasons for Using Gasoline Cards 1 5 important, 5 5 not a factor: Record keeping 2.51 2.49 2.50 2.68 2.56 2.42 1 Keep account active to get sales notices 3.73 3.67 3.73 3.68 3.75 3.66 1 Keep other lines open 3.38 3.32 3.37 3.33 3.41 3.30 2 Not sure if general card is accepted 3.66 3.55 2 3.65 3.45 2 3.69 3.54 2 Payment Frequency in percent: Cash 29.57 25.43 2 29.13 29.18 35.96 19.29 2 Debit 0.09 5.44 1 18.95 1 0.07 1.65 1 Gasoline card 60.34 60.02 60.95 42.31 2 55.31 67.44 1 General purpose 9.65 10.24 9.65 11.83 8.41 11.55 1 Total observations 4604 553 4984 180 3089 1909 This table provides the averages for each of the debit variables. To the right of each average is a test statistic. A 1 sign indicates that the debit user had a significantly higher average value for this characteristic than the average potential non-debit user at the 5 level of significance. A 2 sign indicates that the value was significantly lower at the 5 level. Neither a 1 or 2 sign indicates no significant difference between the two values, based on a difference in means test. See the footnotes to Table 1 for a description of each variable. Debit, Credit, or Cash 417 Table 3. Logit Model of Debit Card Users Using Demographic and Credit Characteristics Have Used Debit Have Used Debit for Gasoline Potential Debit User Parameter Estimate t Value Parameter Estimate t Value Parameter Estimate t Value Constant 21.86 7.00 20.52 2.94 23.29 7.50 Age of Respondent: a Younger than 25 20.24 0.76 0.42 1.99 0.14 0.27 25–34 0.20 1.38 0.20 1.98 0.11 0.46 45–54 20.01 0.05 20.06 0.65 20.08 0.34 55–64 20.28 1.76 20.03 0.29 20.31 1.21 65 or older 20.44 2.68 0.00 0.03 20.69 2.47 Highest Education Obtained: b 8th grade 0.16 0.21 0.23 0.64 221.51 0.00 9th–12th grade 0.56 1.66 0.02 0.08 0.74 1.66 Some college 0.35 2.16 0.12 1.29 20.01 0.06 College degree 0.39 2.51 0.19 2.06 20.09 0.36 Total Income in 1991: c Less than 20,000 20.15 0.80 20.30 2.60 20.20 0.66 20,000–29,999 20.10 0.68 20.37 4.02 0.06 0.26 50,000–74,999 0.26 2.06 0.01 0.13 0.09 0.42 75,000–99,999 0.27 1.56 0.12 1.01 0.33 1.16 Greater than 100,000 0.23 1.26 20.04 0.36 20.25 0.73 Marital Status: d Married 20.32 2.07 20.25 2.35 0.05 0.20 Divorced 20.15 0.83 0.00 0.01 0.48 1.60 Miscellaneous Demographics: d Male 20.19 1.86 20.19 1.40 0.16 0.95 Home owner 20.35 2.58 20.14 1.55 20.41 1.86 Card Ownership: e Number of general purpose cards 0.07 2.45 0.04 2.26 0.12 2.81 Number of travel and entertainment cards 0.18 2.18 0.01 0.18 0.04 0.31 Number of gas cards 20.04 1.51 0.04 2.38 20.03 0.65 418 K. A. Carow and M. E. Staten Table 3. continued Have Used Debit Have Used Debit for Gasoline Potential Debit User Parameter Estimate t Value Parameter Estimate t Value Parameter Estimate t Value Frequency of Paying Credit Card Balance: f Pay full amount 20.04 0.40 0.15 2.06 0.00 0.00 Hardly ever pay full amount 20.22 1.64 0.03 0.32 20.25 1.13 Sample size 5157 4998 5164 Mean of dependent variable 10.7 38.2 3.5 22 Log L 3414 6560 1523 x 2 100 88 39 p value 0.0001 0.0001 0.0185 Concordant 62.3 57.3 61.4 Goodness-of-fit statistic p value 0.7989 0.3235 0.3391 a Respondents in the 35–44 age group are the omitted category. b Respondents with a high school degree are the omitted category. c Respondents with 30,000–49,999 income are the omitted category. d Indicator variables are equal to 1 if the respondent had the characteristic, and 0 otherwise. e Equal to the number of the type of card owned by the respondent. Values are from 1 to 10; respondents who answered that they had more than 10 cards were given the value of 10. f Respondents who stated that they sometimes pay their balance in full are the omitted category. This table utilizes a logit model to analyze the characteristics of debit card users compared to non-debit card users. In the first model, the dependent variable is equal to 1 if the respondent stated that they have used a debit card in any type of purchase, and 0 otherwise. In the second model, the dependent variable is equal to 1 if the respondent stated that they used the debit card in a gasoline purchase, and 0 otherwise. In the third model, the dependent variable is equal to 1 if the respondent stated that they might use the debit card in the future, and 0 otherwise. Only observable characteristics are used in this table. Significant at the .05 level. Significant at the .01 level. Debit, Credit, or Cash 419 users than gasoline card users. The respondents’ demographic characteristics show that debit card users are younger, more educated, less likely to be married, and less likely to own their own home. The credit characteristics show that debit card users have more general purpose credit cards; however, payment patterns do not provide any differentiation between debit and non-debit card users. The debit card characteristics of having higher income and having more education are similar to the characteristics of credit card users. The fact that debit card users placed the greatest importance on the reasons for using a general purpose card, and owned more general purpose cards provides evidence that debit card users share similar characteristics with general credit card users. 18

IV. Conclusions