Examining changes in individual payment choice behavior: A descriptive and causal credit card surcharge policy analysis using the first longitudinal Diary of Consumer Payment Choice dataset (2015-2022)

Abstract

This paper conducts the largest and newest diary-based longitudinal consumer payment choice study based on public data. In particular, we create and analyze the first longitudinal consumer payment choice dataset that uses the Federal Reserve’s annual Diary of Consumer Payment Choice (DCPC). By using more accurate diary-based panel data from 2015 to 2022 and controlling for unobserved individual heterogeneity, we study within-individual changes in consumer payment instrument adoption, preferences, and usage for credit cards, debit cards, and cash. While payment instrument adoption is relatively stable, preferences and usage respectively change 32% and 60% of the time between observations. Our multivariate analysis is split into two main parts: (1) a descriptive analysis on transaction- and individual-year-level factors (2) a causal analysis of credit card surcharge policy. For our descriptive analysis, we use a novel two-stage Heckman selection fixed effect model and find mostly similar results to cross-sectional consumer payment choice literature. In particular, we find that increases in income, emergency saving, and credit card cost rating are associated with within-individual increases in credit card usage. For our causal analysis, we conduct the first event study on state-level unbannings of credit card surcharges. We find that unbanning credit card surcharges has no statistically significant impact on credit card cost ratings and preferences, but it has a statistically significant 15+ percentage point decrease on credit card usage in the fourth and fifth years of the policy change. This suggests that surcharges are only salient to individuals at the transaction-level and not in general. These results also imply that merchants are implementing surcharges and consumers are responding to them, which rejects past hypotheses by Federal Reserve researchers that such policies would have no effect. Our new data, methods, and results provide a foundation for future descriptive and causal longitudinal studies on consumer payment choice behavior.