Effect of Consumer Characteristics on the Use of Payment Instruments

E ven though predictions about a cashless and checkless society have been made for many years, retail payment transactions made with electronic payment instruments still constitute only a small fraction of all payments made in the United States. 1 The rate of growth of electronic payments is estimated to exceed that of paper checks, but the number of checks written still increases each year, and the transition to electronic payments has been slower than forecasted (Bank for International Settlements 2000). The slow rate of adoption of electronic payment instruments could be caused by supply-related or demand-related factors. While the literature on the supply side of payment systems in the United States is extensive, relatively few empirical studies analyze the demand side. Several articles have examined the cost structure of individual payment instruments (see, a few others have compared the costs of various payment instruments. The evidence shows that electronic payments are less costly to process than are paper instruments. For example, previous studies have found that automated clearinghouse (ACH) items and electronic check presentments (ECP) cost less to process than do Yet despite the differences in cost and despite marketing and educational campaigns conducted by the Federal Reserve and other institutions , the volume of electronic payments constitutes a fraction of the number of check or cash transactions. One of the reasons the cost differences have little effect is that the differences in cost among payment instruments typically are not evident to consumers. For example, even though surveys show that retailers consider credit cards to be a more expensive form of payment than cash (Food Marketing Institute 1998), consumers are charged the same amount regardless of how they pay; even differentiated