Consumer Homing on Payment Cards: From Theory to Measurement Christopher M. Snyder

1. Consumer Homing on Payment Cards: From Theory to Measurement Christopher M. Snyder Dartmouth College Jonathan Zinman Dartmouth College

2. Plan for Today • Overview of our project • Bridge theory and empirics on card platforms • More project than paper at this point! • Review of theory models • From Theory to Empirics: Measurement Issues • Review of existing empirical evidence • How our work fits in: • New stylized facts • Bridge-building: questions and approaches we find interesting • Next steps

3. Payment cards as two-sided markets Acquiring Bank Customer Merchant Issuing Bank • Payment card is a platform intermediating transactions between merchants and customers. • “No Surcharge Rule”, externalities on both sides mean that equilibrium will depend on prices platform charges to both sides (cardholder fee f, which may be negative, and merchant discount, m) • Homing often crucial modeling issue • Customers may carry (and use) one • or more credit cards • Merchants may accept one • or more credit cards • Policy questions • Regulation of interchange fee a • “No Surcharge Rule” • “Honor All Cards Rule” Platform pays p - a pays p - m pays p + f good sold at price p

4. Homing in the theoretical literature • General lessons: • If consumers multihome (carry multiple cards) and merchants singlehome (accept only one card), networks will try to steer merchants toward their card, putting downward pressure on interchange fee and merchant discount. • Perhaps more realistically, if merchants multihome (accept all • cards), then the extent of consumer singlehoming will determine how • hard networks compete to steer consumers toward their card, • resulting in low with a high interchange fee and low cardholder fee • (bonus?).

5. Homing in the theoretical literature (con’t) • Rochet and Tirole (2003 JEEA “Platform Competition”) • Rochet and Tirole (2006 RNE “Card Payment Systems”) • Cardholder multihoming increases merchant surplus • Effect dampened larger fraction a of informed purchasers • (know merchant acceptance policy before shopping). • Guthrie and Wright (2007 JIE “Competing Payment Systems”) • Large set of equilibria. Homing behavior on and off equilibrium path selects the equilibrium less favorable for multihoming side. • Rochet and Tirole (2006 mimeo “Honor All Cards”) • Assumes credit and debit separate markets • One credit card • Two debit cards; all debit cardholders multihome • Shows “Honor All Cards” increases social welfare • Extension in Section 5.4 to imperfect substitution. HAC may • lower welfare if credit a good enough substitute for debit. duopoly equilibrium fee structure singlehoming index

6. Measurement Issues: Categories of homing in payment cards • “We need to figure out empirically whether the case of single-homing or multi-homing is more descriptive” • - (Rochet and Tirole 2006 RNE) How define multihoming? • Multihoming among credit cards • Multihoming among debit cards • Multihoming between credit and debit • Multihoming according to holding vs. use Whose multihoming matters? • Multihoming across whole population or restricted to subpopulation of cardholders? • Who is marginal consumer?

7. Empirical literature Rysman (2007 JIE “Payment Card Usage”) • Credit card multi-homing prevalent in membership but not in usage • Proprietary data (Visa PSPS) Klee (2006 mimeo “…Decade of Change…”) • Prevalence of various types of payment multihoming • Correlations with household characteristics Zinman (2007 mimeo “Debit or Credit?”) • Debit and credit substitutes, and increasingly strong ones Oversights? Please let me know.

8. Summary of Empirical literature Accumulating stylized facts Links to theory of card platforms? Weak so far. Snyder and Zinman project: • Start by adding to stylized facts • Especially re: multi-homing on credit and debit • Comparison between SCF and Visa PSPS • Working on tightening links to theory. • Just questions, no answers, so far

9. Some Facts to Focus on Multihoming prevalence in Survey of Consumer Finances (SCF) Strengths: Complements Visa PSPS (used in Rysman) • SCF has non- payment card holders • And is publicly available • Nationally representative? • Can look at trends over relatively long timeframe Weaknesses: • Measures holding and use at level of card type (e.g. general purpose) • not at network- or card-level • No transaction-level data • Nothing on debit intensity

10. Results

11. Results (con’t)

12. Results (con’t)

13. Results (con’t)

14. Conclusions from Data so far re: Prevalence “We need to figure out empirically whether the case of single-homing or multi-homing is more descriptive” -(Rochet and Tirole 2006 RNE) Multihoming more descriptive. • e.g., 75% of payment card holders potential multihomers in 2004 Multihoming description becomes more apt: • In recent years (upward trend in most measures) • If count credit and debit as well as credit and credit • If focused on holding vs. usage • But multihoming in credit and debit prevalent in usage as well • e.g., 41% of payment card users in 2004 (up from 25% in 1998) Other findings: • In some large segments all consumers are (potential) multi-homers • Multihoming in credit card holding SCF << Visa PSPS

15. From Prevalence to Key Parameters from Theory? But can we use homing patterns to put magnitudes on theoretical patterns of interest? • (cross-)elasticity of platform demand in Rochet and Tirole Possibly. • multihomers in use: most substitutable? • multihomers in holding: moderate substitutability • singlehomers in holding: least substitutable • Some models focus explicitly on membership, not usage (RT 2006 RAND) • realistic if it’s the elasticities that really matter?

16. Next Steps (?) Theory that helps focus on empirically identifying substitutability parameters • move beyond description of homing patterns…. • to estimating elasticities Important to capture distinct features of debit platforms? • more platforms (regional networks) • fixed investment (terminals) • consumer substitutability between PIN and signature New data: • Large panel of linked checking and credit card account data • Transaction characteristics • Fixed and transaction costs • Borrowing and spending behavior • Does it matter if homing behavior is driven by neoclassical and/or • “behavioral” (e.g., mental accounting) motives? • perhaps, if behavioral patterns permit price discrimination • and/or dull price sensitivity