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Consumer Payment Behavior by Income and Demographics

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How do income, education, and demographics continue to shape consumer payment behavior despite the rise of innovative options like mobile apps, BNPL, and cryptocurrency?

The views expressed in this video are solely those of the author(s) and do not represent the views of the Federal Reserve Bank of Boston, the principals of the Board of Governors, or the Federal Reserve System.

Image courtesy of interviewee. October 17, 2024

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The speaker discusses the Federal Reserve's ongoing research into consumer payment behavior, focusing on the different payment instruments people use and how they transact. Surveys have evolved to include detailed diaries where participants record all transactions over three days, gathering insights into payment methods such as cash, checks, and cards. The research reveals significant patterns, such as higher credit card usage among wealthier individuals and a greater reliance on cash among lower-income and minority groups. The study also highlights issues of financial exclusion, with some consumers lacking access to banking services.

Recent findings indicate that new payment technologies, like 'buy now, pay later' options, are popular among lower-income consumers, but this can lead to increased debt. The Federal Reserve emphasizes the importance of financial education and access to financial products, particularly for underserved populations, to help them benefit from modern payment technologies. Overall, while payment methods are evolving, many underlying demographic patterns in payment behavior remain consistent over time.

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Here are five key points from the video regarding consumer payment behavior and the survey conducted by the Federal Reserve:

1. **Consumer Payment Survey Methodology**: The Federal Reserve conducts a detailed survey of consumer payment behavior, utilizing a diary format where respondents record every transaction over three consecutive days. This method aims to gather comprehensive data on the payment instruments consumers carry and how they use them.

2. **Demographic Patterns in Payment Behavior**: The study reveals persistent demographic patterns regarding payment methods. Higher-income individuals tend to use credit cards more, while lower-income individuals, particularly minorities, are more likely to rely on cash. This highlights the disparities in access to financial technologies and instruments.

3. **Cash and Checks Are Still Relevant**: Contrary to the narrative that society is going paperless, the survey indicates that cash and checks remain important payment instruments in the U.S., suggesting that a significant segment of the population is underserved by modern payment technologies.

4. **Impact of Technology on Payment Options**: The research assesses the influence of new payment technologies, including buy now, pay later services, and mobile payments. It has found that while adoption rates are high, there are concerns about consumer debt accumulation, particularly among those who are already financially vulnerable.

5. **Financial Education and Access**: The video underscores the need for improved financial education and accessible banking options for underserved populations. The goal is not to mandate bank accounts but to ensure that consumers are aware of their options and can participate in the economy securely and efficiently, whether through traditional banks or alternative financial technologies.

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Here are some key quotes from the video regarding consumer payment behavior:

1. **Focus on Payment Instruments**:
- "The way I treat or understand payment behavior is that I focus on consumer payment instruments, that, that people have sort of essentially what's in your wallet, and how you use those payment instruments."

2. **Survey Evolution**:
- "We at the Federal Reserve have been conducting a survey of consumer payment behavior for many years... We now ask people to fill out the very detailed diary of everything they do..."

3. **Transaction Types**:
- "We ask them how they conduct their transactions, which includes in-person purchases, online purchases, bill payment, person to person."

4. **Persistence of Payment Patterns**:
- "Some of the patterns are really persistent over time and also across countries."

5. **Checks and Cash Usage**:
- "In the US we still write checks and we use a lot of credit cards... people use cash."

6. **Income Correlation with Payment Methods**:
- "One is that credit card use is correlated with income. Higher income people are more likely to use credit cards."

7. **Underserved Consumers**:
- "We have a substantial group of consumers who are still underserved. A lot of people are excluded from either having a bank account or being able to afford the fees."

8. **Financial Education and Options**:
- "We just want to make sure that people who do wanna have a bank account have options."

9. **Rise of New Payment Methods**:
- "As the payment landscape evolves, we adjust our survey and ask about these new methods... we started asking about buy now pay later."

10. **Concerns Over Debt**:
- "I found that consumers who use buy now pay later are also much more likely to have credit card debt."

11. **Adoption of Technology**:
- "About three quarters of consumers have adopted some mobile payment instruments and mobile apps."

These quotes encapsulate the core themes of the video, such as the focus on understanding consumer payment behavior, the evolution of payment methods, and the implications of these behaviors for different demographic groups.

X-TIMESTAMP-MAP=LOCAL:00:00:00.000,MPEGTS:90000

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Way I, treat

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or understand payment behavior is that I focus on,

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consumer payment instrument, that, that people have sort

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of essentially what's in your wallet,

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and how you use those payment instruments.

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So we at the Federal Reserve, have been conducting a survey

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of consumer payment behavior for many years.

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Um, the questions have evolved over time

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and we switched somewhat the format of the survey.

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We now ask people to fill out the very detailed diary

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of everything they do, but essentially the subject

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of the survey remains the same, which is that we ask people

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what they have in terms of payment instrument

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and how they use it.

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We ask them how they conduct their transactions,

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which includes in-person purchases, online purchases,

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bill payment, person to person.

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Um, and we've, over the years, we've learned a lot

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of fascinating things about

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how consumers conduct their payments From a researcher's

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perspective, I think it's interesting to first

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of all understand what people use.

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So it's important for, you know, fo

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for policy makers, for central banks.

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You know, for example, the Federal Reserve,

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processes, checks.

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We still write checks in the United States,

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and it's important to understand who, hold paper checks,

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who uses paper checks, people use cash.

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So, you know, there's a lot of, sort of alarming,

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I would say, media, and not just media,

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but industry, stories that say, you know,

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we're going paperless, cash is dead.

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So one of the purposes of our study

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and repeating it over the years for many years is

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that we want to see if people really are changing their

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behavior and to what, to what extent, for example,

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the effect of technologies affect what people are doing.

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I have, you know, myself conducted a lot of studies

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that are related to this over the years,

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either on my own or with co-authors,

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but there are also others.

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And what's interesting is that there are people

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who do similar work in other countries.

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So other central banks in Europe

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and in Canada, in Australia have been conducting diaries.

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And they, also ask consumers

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to record their payment transactions.

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And there's certainly important

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and significant differences across countries.

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You know, like one, I just mentioned

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that in the US we still write checks

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and we use a lot of credit cards

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and, you know, Europeans are more likely to use debit cards,

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but some of the patterns are really persistent over time

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and also across countries.

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So some of the, demographic and

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and income, effect that I find in my study

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have persisted in the US over time,

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and they're also found in other countries.

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So I think that's interesting.

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First of all, we outsource it.

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So we at the Federal Reserve are not

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actually administering the survey.

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We use experts who know how to do it.

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Uh, but we have conducted surveys

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of consumer premium behavior for many years.

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The original one started in 2008,

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and starting in 2015 we switched to this diary format where,

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like I mentioned, we asked people

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to record every detailed transactions that they do

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For a period of three consecutive days.

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Uh, so it's a very careful, we have statisticians on board,

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we have survey methodologies on board,

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and we outsource it to, most, most recently the USC

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and their experts who know how to conduct, surveys.

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It's a representative survey of US adults,

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so everybody's 18 and up.

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Um, but it's carefully designed so

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that we only survey a few thousand respondents.

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Uh, but it's designed in a way

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that we target all demographic

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and income cohorts as well as all geographic areas.

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'cause they're also geographic differences

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across, you know, this large country.

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That's sort of the methodology is that the detailed diary

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of every transactions that's conducted across the country.

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The diary is conducted in October every year

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and has been done that way for many years.

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And we just picked October in order to avoid, you know,

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seasonal variation due to Christmas or summer.

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Um, but the important thing is to be consistent

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because there are always some seasonal variations,

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obviously, but as long as we're consistent year to year,

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and the months is divided into three overlapping,

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three day overlapping periods,

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and, respondents are assigned very specific dates.

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So they're, you know, we're actually,

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the server is in the field right now.

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It's October. So let's say I'm one of the respondents

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and I'm told to write down on October 10, 11,

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and 12 every single transaction that I conduct.

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And it includes, starting the night

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before what's in your wallet,

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how much money you have in the bank.

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'cause we also ask that, how much cash you have on hand.

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Um, and then starting

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and very early in the morning on my first assigned date,

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so let's say it's October 10, I write down every cup

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of coffee, every newspaper I buy lunch, ATM withdrawal.

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So it's extremely detailed.

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Plus we have a lot of demographic

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and income, information.

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We find a lot of patterns that are, interesting

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but also persistent over the years.

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Uh, so, you know, there are a few things

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that I would sort of emphasize.

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One is that credit card use is correlated with income.

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And we found that over the years that hasn't changed.

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So, you know, higher income people are

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more likely to use credit cards.

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On the other end of the spectrum, we find that lower income,

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less educated, people

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and minorities in particular,

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black consumers are much more likely to use cash.

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So we have, you know, it's a continuum of,

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of payment behavior.

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Uh, but you know, on the one end of the spectrum,

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we have people who are sort of underserved.

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So they might or might not have a bank account.

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The majority of people in the US do have a bank account,

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but they really operate in the sort of cash economy.

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So they're really excluded from the all the

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technological advantages.

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And, you know, other perks that we get, for example,

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credit cards in the US carry rewards, we get money back.

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Consumers who use cash are excluded from that.

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They don't benefit from a lot of the, advantages

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of technology and, you know, speed and,

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and all kinds of other things that are, you know,

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coming into the market and

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Venmo, PayPal, many other ways.

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So I think it's, it's one of the policy of implications is

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that we have a substantial group of consumers

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who are still underserved.

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A lot of people are excluded from,

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either having a bank account

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or being able to afford the fees,

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because if you don't keep enough money in the bank, you have

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to pay, fees.

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Uh, credit cards can be expensive if you don't pay back your

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balance at the end of every month.

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So I think that, you know, there's several groups,

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and I'm very involved in several other groups,

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besides this, this research

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and the Federal Reserve, we try to figure out how

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to inform those people.

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We definitely don't want to mandate, you know,

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that everybody has to have a bank account

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or everybody has a, to have a credit card.

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But having more financial education and awareness

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and maybe trying to work with financial institutions

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to provide, sort of venues

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or possibilities for those consumers

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who can't afford the standard bank account

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to still being able to, to access

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and benefit from the technology and, and other perks.

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And we, we ask in our survey, one

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of the questions we ask if we ask if pe you know, everybody,

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whether they have a bank account,

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and if they don't, we ask them why.

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And the most frequent responses, I don't like banks.

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Well, if you don't like banks, you know, we shouldn't want

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to force you to open a bank account.

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We just want to make sure that people

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who do wanna have a bank account have have options.

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And you know, obviously banks are private

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and they're profit maximizing

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and you know, they can, they, they're allowed to refuse,

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consumers from opening a bank account.

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We just want to make sure the consumers understand

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what their options are and have the ability, to,

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to have means of conducting transactions, whether

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or not it's through a traditional bank or not.

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So for example, with the new technology

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and FinTech companies, there might be some options

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for those consumers who don't want to have a bank account

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or who can't afford one to still have ways

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of conducting transactions other than cash.

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Uh, cash is just very inconvenient and not very secure.

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So hopefully there will be other ways for those people to

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participate in the economy.

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One of the things we serve of the bread

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and butter of our work is we produce a paper every year.

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Uh, in addition to this, which summarizes sort

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of the high level results, we also try to look into

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to income and demographics,

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but there is a lot of follow up work.

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So just to give you an example, as the payment,

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technology evolves

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and we are introducing new payment methods

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and there are sort of various ways of, for consumers

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to conduct transactions, we, adjust our survey

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and ask about these new methods.

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So for example, we started asking about buy now pay later,

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which has become very popular in the US

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and I did a separate research paper on

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who uses buy now, pay later.

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And I found that it's, a lot of, a lot of the consumers

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who are lower income, women are more likely

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to use it than men.

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So there is a concern sort of

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Among policy makers

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and not just at, at the Federal Reserve,

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but outside of Federal Reserve,

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whether those consumers are not

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leveraging themselves too much.

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For example, I found that consumers

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who use buy now pay later, also much more likely

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to have credit card debt.

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About three quarters of them carry

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debt on their credit card.

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So they're piling up debt on top of that.

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So that's something to be concerned about.

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And again, it doesn't necessarily mean that we have to,

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you know, prohibit or regulate anything,

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but just being informed of who might be at risk

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and maybe, you know, trying

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to educate those consumers might be helpful.

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Despite the fact of my previous study on the similar topic

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was 10 years ago, 2013.

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And, you know, we've had, like I mentioned,

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a lot of new developments.

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We have mobile payments now we have cryptocurrency

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and you know, the people are excited about it.

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And, one of the findings is that about three quarters

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of consumers have adopted some mobile payment instruments

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and, and mobile apps.

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Uh, but still the same patterns are still in place

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that I found 10 years ago.

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So it's still income and education and race and gender

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and those things are all very significant in

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explaining payment behavior.

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So some things change, but some things stay the same.

Understanding Consumer Payment Behavior

00:00:00 - Way I, treat or understand payment behavior is that I focus on, consumer payment instrument, that, that people have sort of essentially what's in your wallet, and how you use those payment instruments. So we at the Federal Reserve, have been conducting a survey of consumer payment behavior for many years. the questions have evolved over time and we switched somewhat the format of the survey. We now ask people to fill out the very detailed diary of everything they do, but essentially the subject

00:00:34 - what they have in terms of payment instrument and how they use it. We ask them how they conduct their transactions, which includes in-person purchases, online purchases, bill payment, person to person. and we've, over the years, we've learned a lot of fascinating things about how consumers conduct their payments From a researcher's perspective, I think it's interesting to first of all understand what people use. So it's important for, you know, fo

00:01:04 - You know, for example, the Federal Reserve, processes, checks. We still write checks in the United States, and it's important to understand who, hold paper checks, who uses paper checks, people use cash. So, you know, there's a lot of, sort of alarming, I would say, media, and not just media, but industry, stories that say, you know, we're going paperless, cash is dead. So one of the purposes of our study and repeating it over the years for many years is

Exploring Consumer Payment Behavior Across Countries

00:01:37 - behavior and to what, to what extent, for example, the effect of technologies affect what people are doing. I have, you know, myself conducted a lot of studies that are related to this over the years, either on my own or with co-authors, but there are also others. And what's interesting is that there are people who do similar work in other countries. So other central banks in Europe and in Canada, in Australia have been conducting diaries. And they, also ask consumers

00:02:06 - And there's certainly important and significant differences across countries. You know, like one, I just mentioned that in the US we still write checks and we use a lot of credit cards and, you know, Europeans are more likely to use debit cards, but some of the patterns are really persistent over time and also across countries. So some of the, demographic and and income, effect that I find in my study have persisted in the US over time, and they're also found in other countries. So I think that's interesting.

00:02:37 - So we at the Federal Reserve are not actually administering the survey. We use experts who know how to do it. but we have conducted surveys of consumer premium behavior for many years. The original one started in 2008, and starting in 2015 we switched to this diary format where, like I mentioned, we asked people to record every detailed transactions that they do For a period of three consecutive days. so it's a very careful, we have statisticians on board, we have survey methodologies on board,

Methodology of Consumer Payment Behavior Survey

00:03:11 - and their experts who know how to conduct, surveys. It's a representative survey of US adults, so everybody's 18 and up. but it's carefully designed so that we only survey a few thousand respondents. but it's designed in a way that we target all demographic and income cohorts as well as all geographic areas. 'cause they're also geographic differences across, you know, this large country.

00:03:40 - of every transactions that's conducted across the country. The diary is conducted in October every year and has been done that way for many years. And we just picked October in order to avoid, you know, seasonal variation due to Christmas or summer. but the important thing is to be consistent because there are always some seasonal variations, obviously, but as long as we're consistent year to year, and the months is divided into three overlapping, three day overlapping periods, and, respondents are assigned very specific dates.

00:04:11 - the server is in the field right now. It's October. So let's say I'm one of the respondents and I'm told to write down on October 10, 11, and 12 every single transaction that I conduct. And it includes, starting the night before what's in your wallet, how much money you have in the bank. 'cause we also ask that, how much cash you have on hand. and then starting and very early in the morning on my first assigned date, so let's say it's October 10, I write down every cup of coffee, every newspaper I buy lunch, ATM withdrawal.

Income Disparities in Payment Behavior

00:04:44 - Plus we have a lot of demographic and income, information. We find a lot of patterns that are, interesting but also persistent over the years. so, you know, there are a few things that I would sort of emphasize. One is that credit card use is correlated with income. And we found that over the years that hasn't changed. So, you know, higher income people are more likely to use credit cards. On the other end of the spectrum, we find that lower income, less educated, people and minorities in particular, black consumers are much more likely to use cash.

00:05:18 - of payment behavior. but you know, on the one end of the spectrum, we have people who are sort of underserved. So they might or might not have a bank account. The majority of people in the US do have a bank account, but they really operate in the sort of cash economy. So they're really excluded from the all the technological advantages. And, you know, other perks that we get, for example, credit cards in the US carry rewards, we get money back. Consumers who use cash are excluded from that.

00:05:49 - of technology and, you know, speed and, and all kinds of other things that are, you know, coming into the market and Venmo, PayPal, many other ways. So I think it's, it's one of the policy of implications is that we have a substantial group of consumers who are still underserved. A lot of people are excluded from, either having a bank account or being able to afford the fees, because if you don't keep enough money in the bank, you have to pay, fees.

Empowering Consumers Through Financial Education and Access

00:06:21 - balance at the end of every month. So I think that, you know, there's several groups, and I'm very involved in several other groups, besides this, this research and the Federal Reserve, we try to figure out how to inform those people. We definitely don't want to mandate, you know, that everybody has to have a bank account or everybody has a, to have a credit card. But having more financial education and awareness and maybe trying to work with financial institutions to provide, sort of venues

00:06:53 - who can't afford the standard bank account to still being able to, to access and benefit from the technology and, and other perks. And we, we ask in our survey, one of the questions we ask if we ask if pe you know, everybody, whether they have a bank account, and if they don't, we ask them why. And the most frequent responses, I don't like banks. Well, if you don't like banks, you know, we shouldn't want to force you to open a bank account. We just want to make sure that people who do wanna have a bank account have have options.

00:07:23 - and they're profit maximizing and you know, they can, they, they're allowed to refuse, consumers from opening a bank account. We just want to make sure the consumers understand what their options are and have the ability, to, to have means of conducting transactions, whether or not it's through a traditional bank or not. So for example, with the new technology and FinTech companies, there might be some options for those consumers who don't want to have a bank account or who can't afford one to still have ways

Evaluating Payment Methods: Cash, Buy Now Pay Later, and Consumer Debt Concerns

00:07:54 - cash is just very inconvenient and not very secure. So hopefully there will be other ways for those people to participate in the economy. One of the things we serve of the bread and butter of our work is we produce a paper every year. in addition to this, which summarizes sort of the high level results, we also try to look into to income and demographics, but there is a lot of follow up work. So just to give you an example, as the payment,

00:08:23 - and we are introducing new payment methods and there are sort of various ways of, for consumers to conduct transactions, we, adjust our survey and ask about these new methods. So for example, we started asking about buy now pay later, which has become very popular in the US and I did a separate research paper on who uses buy now, pay later. And I found that it's, a lot of, a lot of the consumers who are lower income, women are more likely to use it than men.

00:08:54 - Among policy makers and not just at, at the Federal Reserve, but outside of Federal Reserve, whether those consumers are not leveraging themselves too much. For example, I found that consumers who use buy now pay later, also much more likely to have credit card debt. About three quarters of them carry debt on their credit card. So they're piling up debt on top of that. So that's something to be concerned about. And again, it doesn't necessarily mean that we have to, you know, prohibit or regulate anything, but just being informed of who might be at risk

Evolution and Consistency in Consumer Payment Behavior

00:09:25 - to educate those consumers might be helpful. Despite the fact of my previous study on the similar topic was 10 years ago, 2013. And, you know, we've had, like I mentioned, a lot of new developments. We have mobile payments now we have cryptocurrency and you know, the people are excited about it. And, one of the findings is that about three quarters of consumers have adopted some mobile payment instruments and, and mobile apps. but still the same patterns are still in place that I found 10 years ago.

00:10:02 - and those things are all very significant in explaining payment behavior. So some things change, but some things stay the same.

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