Payment Card Rewards Programs and Consumer Payment Choice

52 Pages Posted: 30 Mar 2008 Last revised: 6 Mar 2013

See all articles by Andrew T. Ching

Andrew T. Ching

Johns Hopkins University - Carey Business School

Fumiko Hayashi

Federal Reserve Bank of Kansas City

Date Written: May 13, 2008

Abstract

By using a unique data set that contains detailed information on consumer perceived attributes of payment methods and consumer perceived acceptance of payment methods by merchants, we estimate the direct effects of rewards card programs on consumer payment choice for in-store transactions. Our estimation approach, which follows Harris and Keane (1999), allows us to alleviate the endogeneity problem of rewards. To shed light on the public policy debate about whether to allow interchange fees to cover the costs of rewards, we conduct counterfactual experiments to examine the effects of removing rewards from credit and/or debit cards, and find that: (i) a small percentage of consumers would switch from electronic to paper-based payment methods, (ii) the effect of removing credit card rewards is greater than that of removing debit card rewards, and consequently, (iii) removing rewards from both credit and debit cards would reduce credit card transactions, but increase debit card transactions, and (iv) removing rewards could reduce consumer credit card debt. We also discuss implications on how removing rewards may influence card issuer profitability and consumer welfare.

Keywords: Consumer Choice, Payment Methods, Rewards Programs, Interchange fees

JEL Classification: C35, D12, M31

Suggested Citation

Ching, Andrew T. and Hayashi, Fumiko, Payment Card Rewards Programs and Consumer Payment Choice (May 13, 2008). Available at SSRN: https://ssrn.com/abstract=1114247 or http://dx.doi.org/10.2139/ssrn.1114247

Andrew T. Ching (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Fumiko Hayashi

Federal Reserve Bank of Kansas City ( email )

1 Memorial Dr.
Kansas City, MO 64198
United States

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