Successful technological innovations and the regulatory reforms of past decades have brought payment media to the forefront of business, social and political interest. More extensive use of debit and credit cards and, arguably, decreasing use of cash suggest a thoroughgoing change in methods of payment for goods and services. Innovation has generated new payment instruments, such as smart cards and those embedded in mobile phones, which are entering commercial use and making money more digital and less tangible. The new payment media also seem to be spreading to all sections of society and hold the promise of enhancing the access of the poorest to basic financial services. This feature of the new payment channels is especially visible in emerging economies.
However, these specific trends in financial innovation have raised new concerns, particularly among regulatory authorities and central banks. As money has become less tangible, consumer protection authorities are becoming increasingly concerned that people are spending and borrowing too much, while for central banks there is the concern that conventional instruments of monetary policy may become less effective and that fundamental changes in the transmission of monetary policy are taking place. There is also some evidence that the increased concentration in the payment card industry has not gone unnoticed by the competition authorities, who have begun to scrutinize practices in respect of card platforms.
As far as the potential benefits and concerns regarding the digitalization of money are concerned, the diffusion of new payment technologies will critically affect both the ways in which and the likelihood that these will materialize in practice. We have examples from monetary history to show that new payment media do not necessarily gain popularity among users overnight, but can in fact take off only slowly, or not at all.
Research has provided new ideas and models, but we still do not fully understand what hampers the adoption of these financial innovations. One fundamental problem has been, and to some extent still is, the lack of systematic (quantitative) evidence. This does not mean that there is no evidence, only that more often than not the evidence is qualitative and selective and, hence, not fully systematic. It can be particularly difficult to obtain consumer-level data on early birds, ie those consumers who are first in line to adopt emerging payment media.
In their paper 'Consumer awareness and the use of payment media: Evidence from young Finnish consumers', published as Bank of Finland Discussion Paper 2/2008, Ari Hyytinen and Tuomas Takalo approach the issue of the diffusion of new payment technologies by taking advantage of a special feature of the payment media market, namely that some consumers use only one payment channel, while others are active users of several at once. As the authors rightly point out, such payment behaviour essentially reflects the diffusion of new payment media, because even the most recent innovations are used alongside previously established media, a feature that well characterizes the history of these technologies.
Hyytinen and Takalo focus on the role of consumer awareness in the use of multiple payment media. Existing research indicates that demographic and financial characteristics of consumers such as age, education, income and home-ownership status as well as localized feedback loops between consumers and merchants significantly affect the rate of adoption of new payment methods. On the other hand, if consumer characteristics and merchant acceptance are held constant, pricing and information provision are the main instruments that policy-makers and issuers can adopt to boost consumer use of modern payment media.
A growing body of evidence suggests that consumers react strongly to the placing of an explicit price tag on paying, whereas we are much less informed on the quantitative importance of consumer awareness in the market for payment media. We are almost equally uninformed about how sensitive consumers' payment behaviour is to information provision about new payment channels. One weak point in the available evidence on the importance of consumer awareness in the market for payment media is that it is either indirect or qualitative.
Some economists argue that awareness is needed for widespread acceptance of stored value cards. Others conjecture that eg Visa's massive advertising campaigns to foster consumer awareness of its debit products in the 1990s have contributed to the rise of signature debit in the United States. Marketing and industrial economics literature suggests that providing information on any new product should foster its diffusion, especially if the adoption is held back by non-monetary costs, such as the costs arising from imperfect consumer information, and learning and searching costs. However, there is virtually no quantitative evidence on the effects of information provision on the adoption of new payment media prior to the study by Hyytinen and Takalo.
As the authors note, there is a link from their study to various strands of the literature focusing on the market for payment media, eg multihoming and determinants of the discrete choice of one payment medium over another at point of sale, as well as the literature addressing the question of the family's use of multiple payment media. The distinguishing feature of Hyytinen and Takalo's analysis is their focus on the underlying determinants of the number of different payment methods used and on the dependence of this payment behaviour on consumer awareness.
In studying the relationship, if any, between the use of multiple payment channels and consumer awareness in the market for payment media, Hyytinen and Takalo use survey data on young Finnish consumers gathered by the Finnish Bankers' Association between 21 February and 5 March 2002. This data incorporates information on the consumption habits of young Finns and their views on banking as well as financial products and services. A random sample of 1,004 young adults aged 15 to 28 is drawn from the underlying age group, which amounts to about 0.1% of the entire target population.
As the authors argue, the data have some unique features that they are able to exploit in their study. More specifically, by concentrating on young consumers they catch the most likely early adopters of new payment media. On the other hand, the data contain direct measurements of the point-of-sale payment habits of individual consumers. These allow the authors to generate a dependent variable at the level of individual consumers that distinguishes point-of-sale payment from settling invoices and actual use of payment media from having passive access to them.
As Hyytinen and Takalo observe, consumer awareness is an elusive concept in financial services. To enable the authors to quantify it, the data include a series of questions designed to capture consumers' exposure to the provision of information about financial services and payment media. The data provides the authors with access to instruments to control for the potential endogeneity of consumer awareness.
Finally, the consumer-level data contains extensive demographic and socio-economic information and is rich in detail on consumers' banking relationships. Consequently, a long list of consumer characteristics is available to the authors, which, in terms of available control variables, puts them in a good position relative to most previous studies in this field.
Hyytinen and Takalo derive some very interesting results from their estimation exercise. First of all, they discover that more than half the young Finnish customers in the sample use more than one payment medium when paying at point of sale, and that this use of multiple payment media is closely related to the decision to use the debit card in addition to cash. However, while an informed consumer is more likely to use multiple payment channels, the causal link from awareness to debit use turns out to be subtle. Those who use only one payment method use cash regardless of their awareness. On the other hand, while awareness induces a shift towards multiple payment methods, the shift materializes as one where some choose to use debit as their primary payment channel, whereas others begin to use it as their secondary method. The quantitative effect of awareness on the probability of using multiple payment media is large, especially if the potential endogeneity of consumer awareness is controlled for.
Hyytinen and Takalo also show that their estimation results on the effects of consumer awareness on use of multiple payment media are statistically robust. These are very interesting and important results and provide strong support for the view that the line of research pursued by the authors should be continued. Robust policy conclusions still require more research, and it will be interesting to see how the nature of the market for payment media as an example of a two-sided market will shape these policy conclusions, particularly those concerning optimal regulation of this market. |