PREFERRED PAYMENT METHODS FOR CONSUMERS
PREFERRED PAYMENT METHODS FOR CONSUMERS - CREDIT CARDS OR EFTPOS? Charmaine Liu Claire Matthews David Tripe Centre for Banking Studies Massey University Palmerston North Abstract: The retail payments system in New Zealand is distinctive for relatively high use of Electronic Funds Transfer at Point of Sale (EFTPOS). EFTPOS usage is much higher than use of credit cards, despite the loyalty and transactional pricing incentives given for cardholders to use their credit cards. This paper reports the results of a survey into factors that influence consumers in their choice of EFTPOS or credit cards as a means of payment. Major findings are that age, convenience, transaction size and the interest free period are key factors in consumers’ decisions.
1. Background and Introduction The New Zealand payments system is distinctive for having a relatively high volume of transactions going through it, relative to other countries. This is partly a reflection of the interbank payment system having been designed in such a way as to make transactions relatively simple to process, but we can also see indications of New Zealanders displaying a fondness for use of technology. Statistics on transactions through the New Zealand payments system have been published annually by the New Zealand Bankers’ Association, as the relative industry body, since 1993, and over the period from 1993 to 2003 we can note a particularly striking rate of growth.1 The trends, including a breakdown for different types of payments, are shown in Figure 1.
Millions
Figure 1: Transactions through the New Zealand payments system 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 1993
1994
1995
1996 MICR
1997
Electronic credits
1998 Direct debits
1999 Credit card
2000 ATM
2001
2002
2003
EFTPOS
The fastest growing transaction types are EFTPOS (Electronic Funds Transfer at Point of Sale) and credit cards, with EFTPOS having been the single most popular type of payment since 1998. Total EFTPOS transactions in 2003 were 669.5 million, equivalent to approximately 167 transactions per capita, while credit card transactions had increased to 296
1
Data are available at http://www.nzba.org.nz/public.htm. MICR (Magnetic Ink Character Recognition) refers to transactions initiated on paper (which will be comprised predominantly of cheques).
2
million. New Zealanders’ usage of EFTPOS is much higher than in other countries2, and it is also unusual in being higher than use of credit cards, despite credit card usage generally appearing to be a preferable option for consumers. This research sets out to look at consumers’ use of EFTPOS and credit cards in a range of retail situations, in an effort to try and understand the basis for choice. In the next section of this paper, we explain key features of the operation of EFTPOS and credit cards, insofar as they are likely to impact on consumer choice, while in Section 3 we look at prior research in this area. Section 4 outlines the method used for the research, while Section 5 reports on the data obtained, and discusses the findings. Section 6 concludes.
2. Retail Payment Systems in New Zealand 2.1 Credit Cards Although some travel and entertainment (T&E) cards had been issued previously, bank credit card issuance began in New Zealand when the Bank of New Zealand issued Visa cards in 1978. The National Bank of New Zealand followed with a Visa credit card in mid-1979, and 3 months later the three Australian-owned banks (ANZ Bank, Bank of New South Wales, and the Commercial Bank of Australia) launched an Australian card system, Bankcard. During the 1980s, the number of card-issuers steadily increased, with cards being offered by the Post Office Saving Bank, the trustee savings banks, and other financial institutions following their conversion to banks. MasterCard entered the New Zealand market, initially as an internationally branded alternative to Bankcard, but then for domestic use as well. By the 1990s, credit cards were well established and widely accepted in the New Zealand market. Credit card operation in New Zealand is essentially the same as everywhere else in the world. The banks’ income is derived predominantly from interest paid by cardholders, with other income sources including merchant fees, interchange and cardholder annual fees (which have long been part of the price of possessing a credit card in New Zealand).3 The larger banks
2 3
For example, see Matthews (2000). No transaction fees are payable by cardholders.
3
issue both Visa and MasterCard, although Visa remains the dominant brand.4 Growth in card usage over the last 15 years is shown in Figure 2. Figure 2: Trend in credit card monthly billings 2500
2000
$ Millions
1500
1000
500
1/04
07/03
7/02
01/03
1/02
7/01
1/01
7/00
1/00
7/99
1/99
7/98
1/98
7/97
1/97
7/96
1/96
7/95
1/95
7/94
1/94
7/93
1/93
7/92
1/92
7/91
1/91
7/90
1/90
7/89
1/89
7/88
1/88
7/87
1/87
0
There has been a particular increase in the turnover initiated on credit cards since 1999, with a major stimulus having been derived from the introduction of loyalty plans. These reward cardholders on a points per dollar spend basis for using their cards, with the rewards able to be redeemed through frequent flyer schemes or other benefits. The rationale for the introduction of these loyalty schemes has been to encourage card usage, with the cost of the loyalty schemes effectively being financed by the merchant service fee and interchange revenue. All the major card issuers in New Zealand offer loyalty plans, although recent changes in Australia to cap interchange fees may impact on the New Zealand market.
2.2 EFTPOS EFTPOS was introduced in New Zealand in the mid-1980s, initially with two separate networks. The operation of rival systems (Cashline and Quick Smart) was always an inferior outcome, as it obliged retailers to have two separate terminals, or make a choice, and the use of EFTPOS remained very limited for a number of years. By September 1988, two of the 4
An extensive description of credit card operations is beyond the scope of this paper. For more detail in this area see Chapter 17 of Koch & MacDonald (2003), or Tripe & Scott (2001).
4
banks in the Quick Smart consortium, ANZ and BNZ, decided to withdraw from further involvement in EFTPOS, posing something of a crisis. In response to this crisis, the two networks established a company through which they could operate a single EFTPOS network. This was ETSL (Electronic Transaction Services Limited), and was jointly owned by Westpac Banking Corporation, ASB Bank, The National Bank of New Zealand and Trust Bank New Zealand. After an initial settling down phase to unify operations, this company got into a position to establish a more robust and reliable network, and set out on a more thoroughgoing development of EFTPOS as a payments product. Since the early 1990s, use of EFTPOS has grown at a very substantial rate, so that almost every retailer and other outlet collecting payments from the public in the country is now equipped. This is in turn reflected in New Zealand having what is probably the highest number of EFTPOS terminals per head of population of any country in the world5. The success achieved by the ETSL group meant that in due course the ANZ and BNZ resumed participation in the EFTPOS business. The original reason for banks’ enthusiasm for EFTPOS, in New Zealand and elsewhere, was to try and reduce the volume of cheques (which are expensive to process) being used for faceto-face payments. EFTPOS transactions, being electronic, would be much cheaper, and it was then over to banks to find a way of making EFTPOS attractive to both payers and payees. Retailers soon found EFTPOS transactions to be attractive as payment was effectively guaranteed (and thus without the uncertainties that might exist with cheques), while there were no transaction charges imposed by the banks and the costs of cash could be avoided. The payment guarantee was possible because EFTPOS is a purely on-line payment channel in New Zealand, although procedures are in place to enable transactions in the event that the online connection is lost temporarily. The advantages to cardholders mainly related to the greater simplicity of EFTPOS payments relative to cheques, and retailers’ greater willingness to accept EFTPOS (because of the advantages of EFTPOS to retailers).6 Banks also encouraged cardholders to use EFTPOS by making it relatively cheaper (in terms of transaction charges), with retailers’ costs being only for the telephone call to connect them to the network. 5
At 31/12/2003 there was 1 terminal for approximately every 40 people in New Zealand. As EFTPOS acceptance has become more widespread, retailers have become increasingly reluctant to accept cheques, particularly for people they don’t know. 6
5
The rationale for the banks’ support for EFTPOS has come from the much lower cost of transactions relative to cheques. With payments to retailers being guaranteed, retailers have been willing to provide cash to cardholders, and that has in turn become an additional channel for bank customers to be able to obtain cash. The enthusiasm with which cardholders have adopted EFTPOS, however, means that significant numbers of cardholders treat EFTPOS as an alternative to cash. This has tended to undermine the benefits that banks were looking for in their original support for EFTPOS. The much larger number of transactions means that the cost reductions are not as great as had been hoped for, and banks have therefore sought to charge customers fees for using EFTPOS at a level aimed at achieving cost recovery for them.
2.3 A comparison between credit card and EFTPOS usage For this paper, it is important to appreciate the way in which credit card and EFTPOS usage provide alternatives for cardholders in terms of their spending. Key considerations would be expected to be in respect of where and how consumers can undertake transactions using credit cards or EFTPOS, the costs for them of doing so, and any benefits that may arise from their choice. In general, there is a great deal of similarity in the locations in which credit cards and EFTPOS are able to be used. The EFTPOS transaction processing system is also used for the authorisation and capture of credit card transactions, and there is therefore no particular technological barrier. Differences do arise, however, in that EFTPOS transactions require a card to be present and for the cardholder to be able to enter their PIN to complete the transaction, whereas credit card transactions are still possible in a “card not present” situation (i.e. for mail order, telephone or internet transactions). On the other hand, there will be some retailers (or other outlets) who are able to accept EFTPOS transactions but who do not have arrangements with a bank for credit card transactions. This will typically be where the retailer does not see themselves in a position of being able to afford merchant service charges: this was the position with supermarkets until 1998/99. Cardholder costs also differ between credit cards and EFTPOS. Credit card transactions do not in general carry any transaction fee, whereas, depending on the cardholder’s account pricing arrangements with the bank that issued the card, there will often be a per-transaction
6
charge for EFTPOS, at a rate between 15 and 50 cents. There are, however, large numbers of consumers with fixed price banking facilities who do not pay any specific transaction charges, and for whom such fees would not therefore apply. There will also be cases where it is costly for consumers to use credit cards. These will be where cardholders are carrying a balance forward from a previous charging period, and where all new purchase transactions therefore carry interest from the date of the transaction until such time as the relevant balance is repaid. Anecdotal evidence related to other research (Chandran et al, 2003) would suggest that cardholders might not always be aware of this potential cost. The most obvious consumer benefits in relation to the choice between credit cards and EFTPOS are in respect of the free credit period (but this is only a benefit if no balances are carried forward), and in respect of the loyalty schemes attached to many credit card programmes. No such loyalty benefits apply to the use of EFTPOS. The benefit of EFTPOS (although not strictly in conformity with economic rationality) is that cardholders can have their accounts debited immediately, so that they can better monitor their financial position, and avoid building up credit card debt, which they might have concerns as to their ability to repay in the future. It is against this background that we can now review prior research undertaken in this area.
3. Previous research In a study concentrated on the change of consumer attitudes towards usage of credit cards for the period 1970 to 2000. Durkin found that overall opinions about credit cards were somewhat more negative and polarized in 2000 than a generation previously, especially among holders of bank-type credit cards. Among the general population, opinion that credit card use was “good” registered higher at 33% in 2000 (1970: 28%) while among bank-type credit card holders, it was slightly reduced to 42% (1970: 45%). On the other hand, the view that credit card use was “bad” was also up from 43% to 51% in 2000 among the general population, and the same was much stronger 7
among bank-type credit card holders at 42% in 2000 against 20% in 1970. However, the views of bank-type credit card holders were still more favourable than the population in general. Consumers’ opinions about credit cards also varied depending on their use of and experience with cards. Those who had fewer cards, had no or a low outstanding balance, generally paid more than the minimum, or had not received a collection call had more favourable views. Demographic measures also appeared to be related to attitudes towards credit cards but the relationship was not as strong as that associated with the aforesaid variables. Durkin also found that negative views might have arisen in part from an individual’s perceptions of other consumers’ difficulties rather than from their own experience. The study by Ho and Ng (1994) compared the usage of credit card and EFTPOS in Hong Kong and tried to explain the low usage of EFTPOS in Hong Kong in the early 1990s in terms of a higher perceived level of risk than with credit cards. In respect of the demographic characteristics of EFTPOS users in Hong Kong, EFTPOS adopters tended to be younger, better educated and with higher income. According to a report by the Consumer Council of Hong Kong regarding the ‘Easy Pay System’ (an equivalent system of EFTPOS), the lower popularity of EFTPOS in Hong Kong was possibly related to the less competitive pressure in pricing EFTPOS than credit card.
4. Data and methodology Data was collected using a mail survey which was sent to a sample of 1,000 individuals selected at random from the 1999 New Zealand electoral roll. The questionnaire contained 22 questions, in four sections.
The first section gathered
information about credit card usage, including the number of credit cards held, amount of purchases, number of transactions, and payments. Respondents were also asked about the advantages and disadvantages of using credit cards. Similar information about EFTPOS usage was gathered in Section 2. Section 3 had just one question asking respondents to
8
provide a ‘Juster Score’ representing the likelihood of using a particular payment method in seven different retail outlets. The final section collected demographic data. A follow-up mailing was sent approximately six weeks after the first to non-respondents, which lifted the response rate from 25.8% in the first mailing to 36.6% overall.
5. Findings and discussion 5.1 Channel usage Bank-type debit cards that could be used for EFTPOS were widespread with 92% of respondents holding at least one such card, while 78% of respondents held at least one personal credit card. The acceptance of these cards was reflected in 70% of respondents having at least one of each type of card, and just 1% having neither. Table 1: Relative spending levels
EFTPOS Credit Card (weekly) (monthly) None 18% 12% $50 or less 13% 6% $51-$100 15% 6% $101-$250 33% 11% $251-$500 17% 14% $501-$1000 4% 14% $1001 or more 37% Respondents were asked to indicate the amount spent using credit cards (according to their last monthly credit card statement) or EFTPOS (in the week previous to completing the survey). The results are shown in Table 1. While the results are not directly comparable, it is interesting to note that few respondents had used neither EFTPOS nor a credit card in the relevant period. Low credit card users were defined as having 0-5 transactions per month, moderate users had 6-15 transactions per month, and high users had 16 or more transactions per month. For EFTPOS a low user had 0-3 transactions per week, moderate users had 4-10 and high users had 11 or more transactions per week.
9
Figure 3: Credit card usage - By age
We find age groups at both extremes had a distinct pattern of either high or low monthly credit card purchases, as shown in Figure 3. The majority (60%) of the youngest age group were low credit card users while another significant portion was at the other end of the spectrum (30%).
However, the small sample size in this age group limits further
interpretation. The scenario was clearer for the elderly group, with 73% low users and few high users. This may reflect older people’s lower levels of disposable income, which was supported by the finding that 58% of the elderly respondents had annual income of less than $20,000, compared with the 31% of the whole sample population. For the working age group 26 – 65, credit card usage was relatively evenly distributed across the three categories, with respondents appearing to choose payment methods according to their own experience and attitudes. As such, no apparent distinction in the pattern of credit purchases was found in. The patterns of EFTPOS usage by age are shown in Figure 4.
10
Figure 4: EFTPOS usage – By age
Similar to credit cards, the older age group had a high proportion (69%) of low EFTPOS users. The youngest age group was again split between the two extremes with 52% low users and 29% high users. The two central age groups were mainly low and moderate users. A weak negative correlation of 0.2 is found between age and the number of EFTPOS transactions, suggesting EFTPOS may be more popular among the younger respondents than credit cards. Education also appears to have some effect on credit card usage. Figure 5 shows that bettereducated people tend to make more purchases by credit card, with a correlation between education and the number of credit card transactions of 0.25. Figure 5: Credit card usage – By education level
The pattern of EFTPOS usage across different education levels was similar to that for credit card usage, i.e. people who had a higher education level tended to be more frequent users of
11
EFTPOS. As with credit cards, this can be reasonably explained by the availability of disposable income and ability to spend, although the correlation was not significant. Income is another factor that might influence credit card usage. People with lower income had fewer credit transactions than those on higher incomes. Only 9% of respondents with annual income of more than $80,000 were low users while 55% were high users. The pattern of credit card usage by household income is similar to that for personal income, with both appearing sensitive to credit card usage. Correlation coefficients of more than 0.35 are found in both cases. This finding presumably relates to the availability of disposable income and the ability to spend. Figure 6: Credit card usage – By personal income level
Again, the pattern of EFTPOS usage across different income levels was similar to credit card usage, and respondents with higher incomes tended to be more frequent users of EFTPOS. However, the correlation coefficient was not significant. In respect of marital status, single respondents and those married or in de facto relationships had very similar patterns of credit card usage. By contrast, people who were widowed and separated/divorced were slightly more polarized, with the former being the lowest users. The low usage may be due to the older age of widowed respondents (more than 50% are above 65) and lower income level. EFTPOS usage by marital status is less polarized than credit card usage. Singles and people in a marriage or de facto relationship were heavier users than widowed and separated/divorced. In contrast with credit card usage, single people were relatively higher users overall.
12
5.2 Factors which influence payment channel use Respondents were also asked why payment by credit card or EFTPOS was beneficial, and were provided with a list of possible benefits as well as an option of Other.
For both credit
cards and EFTPOS the top benefit was identified as Convenience, chosen by 87% and 86% of respondents respectively. The results are shown in Table 2 below. Table 2: Channel benefits Credit Card Convenience Interest-free period
87% 56%
Secure, no need to take cash Credit facility Able to keep record Less transaction cost Others
47% 41% 30% 29% 17%
EFTPOS Convenience Widely acceptable Alternative to withdraw cash Secure, no need to take cash Immediate deduction Short processing time Low cost Others
86% 68% 67% 61% 37% 26% 19% 5%
Similarly, respondents were asked about the factors that discouraged them from using EFTPOS and credit cards, from a list of possible factors including an option of Other. Cost issues were the highest ranked factor for both, with 66% identifying the high interest rate as an issue for credit cards, while 61% found high transaction costs an issue with EFTPOS. The results are shown in Table 3. Table 3: Channel disadvantages Credit Card High credit interest rate Refusal by merchants Temptation to over-spend Security issues Undesirable lump sum payment Low credit limit
66% 34% 40% 32% 14% 13%
Longer processing time when 11% making payment Others
6%
EFTPOS High transaction cost Refusal by merchants Temptation to over-spend Security issues Unable to keep record of transactions Need to maintain credit balance with bank Long processing time when making payment Immediate deduction from bank account Others
61% 28% 21% 19% 18% 14% 13% 11% 3%
Exploring the factors which could make credit card use beneficial, we find that, as Figure 7 shows, higher users placed greater emphasis on all factors.
13
Figure 7: Beneficial Factors for Credit Cards by Usage Levels
Convenience was the most popular benefit of paying by credit cards at all usage levels. The Interest-free period showed a significant change, with only 26% of cardholders making no credit transactions considering it beneficial, which increased to 83% for those having more than 20 credit transactions per month. Less transaction cost and Able to keep record of transactions shared a similar change increasing from the 7% for non-users to 60% and 50% respectively for high users. While higher EFTPOS use levels generally meant that greater emphasis was placed on the beneficial factors, this was less clear cut than for credit card holders. The general trend indicates the positive opinion towards the benefits increases as EFTPOS usage increased, as shown in Figure 8.
14
Figure 8: Beneficial factors for EFTPOS - By usage levels
As with credit cards, Convenience was the most beneficial factor at all usage levels. The next three most beneficial factors at all usage levels are Alternative to withdraw cash, Widely acceptable and Secure, no need to take cash, although their relative rankings change at different usage levels. Respondents’ opinion on the remaining factors was relatively static. Perhaps not surprisingly, respondents’ views on which factors discouraged credit card usage generally weakened as credit card usage levels increased. The one exception was Refusal by merchant, which became more of a deterrent as usage levels increased. Security issues were also of slightly more concern to higher users than lower users. The factors discouraging credit card usage which showed the greatest change were High credit interest rate and Temptation to over-spend. People with low credit card usage were most concerned over high interest rates, and this was the most discouraging factor for all but the highest credit card users. As card usage increased, the negative view on interest rates reduced from 81% for non-users to 35% for the highest usage group. High users were less concerned over high interest rates, perhaps because they tend to make full payment of their balances, therefore incurring no interest.
15
A similar explanation may explain the trend of Temptation to over-spend. Apart from inactive cardholders, more than half of low users worried about over-spending. The fear of overspending then reduced to about a quarter as card usage increased. It is possible that high users have better control on their financial matters so that the credit card is merely a payment tool instead of a financial burden. For the remaining factors the usage levels have little impact. Figure 9: Discouraging factors for credit card use - By usage levels
The factor that most strongly discouraged EFTPOS use was High transaction cost, which was substantially more important at all usage levels. This factor increased in importance as usage increased, but reduced for the two highest usage groups. This easing of negative opinion combined with the small increase in positive opinion of Low cost as a benefit in high EFTPOS usage groups may be the result of the packages offered by some banks to specific customer groups, which carry fixed fee levels. Refusal by merchants is also an important factor discouraging EFTPOS use, ranking second for all groups except non-users. The importance of Temptation to overspend fluctuates across the different usage groups and there is no obvious effect of different EFTPOS usage on this.
16
Figure 10: Discouraging factors for EFTPOS – By usage levels
Looking at why credit card users were discouraged from using EFTPOS, we find that like EFTPOS users, High transaction cost was most important for high credit card users. In contrast, credit card users were more concerned about the Immediate deduction with EFTPOS than EFTPOS users themselves, which is not really surprising. On the other hand EFTPOS usage did not appear to have any real impact on attitudes to credit cards, although negativity towards Undesirable lump sum payment and Temptation to overspend was greater for higher EFTPOS usage levels. 5.4 Transaction size and payment channel choice Respondents were asked to provide a Juster score in terms of the probability of using different payment methods in their next purchase at seven specified different retail outlets, at which the average transaction size would be expected to differ. Payment methods were divided into three groups: Credit card; EFTPOS; and Cash, cheque and other methods. Juster scores of 0 – 10 were provided by respondents. The scores were explained in the questionnaire, with 0 representing ‘almost no chance’ and a probability of 1/100 and 10 representing ‘almost certain’ and a probability of 99/100. 17
The remaining scores had a
probability of X/10 (where X was the assigned Juster score) and had an assigned description. The total of the scores of the three payment methods should be 10 for each retail outlet. If not, the Juster scores for the three payment methods were adjusted to give a total of 10 using the weighting provided by the respondent. Any unclear cases would be excluded. The score variability for payment methods at retail outlets was high, as opinions could be polarized at the extremes of 0 and 10, ‘almost no chance’ and ‘almost certain’ respectively. Nevertheless, mean scores were used to estimate the probabilities of consumers’ choice of payment methods in different outlets as shown in Figure 11 below. Figure 11: Choice of payment methods
é
The probability of choosing any single payment method was less than 50%, which indicates that no one payment method dominates in any specific type of retail outlet. However, it appears that people have a preference for credit cards for more expensive transactions such as at Furniture/electrical appliances store and Holiday/travel centre, while preferring EFTPOS for lower value transactions at Supermarket and Gas station. At Fast food/café, people prefer to use Cash, cheque and other payment methods. In outlets where transactions sizes are more likely to vary, such as Restaurant and Department store, the preferences for credit cards and EFTPOS were very similar.
18
Figure 12: Amount of credit card purchase per transaction
Figure 12 examines the purchase patterns of credit card users and we find that more than 90% of high users have an average purchase size of between $31 and $60. As use declined, average transaction size increased. A similar inverted relationship was found between EFTPOS usage and purchase amount, as shown in Figure 13. Frequent EFTPOS users tended to make smaller purchases than low users. The average transaction amount for low users was up to $66 and for high users as low as $19. In general, the average amount of spending per EFTPOS transaction was nearly half of that of credit purchases. Figure 13: Amount of purchase per EFTPOS transaction
Compared with other countries like the U.K. at £57, the U.S. at $69 and Canada at C$93 in 1999, and Australia at A$99 in 1998, the average purchase per credit card transaction of $64
19
in New Zealand was low.7 Interestingly, while the amount per credit card transaction is generally reducing in New Zealand, the trends in other countries were increasing. If credit card usage is inversely related to transaction amount, it could be expected in a mature credit card market that the transaction amount would decrease across time until a transition or saturation stage was reached. The upward movement of amount per credit card transaction, especially in Canada and the U.S. which both have a longer history of credit cards, may give some indication as to the stage of the local credit card market. The opposite trend in New Zealand may suggest that the credit card market in New Zealand is at a different stage of development from the other major markets reviewed. The question of whether the credit card market in New Zealand is still at a developing stage is not addressed in this study, but represents an issue for future investigation. As Figure 14 shows, high credit card users had a higher probability than other groups of making payment by credit cards at all retail outlets. Other than at a Café where the majority might use cash, the probability of using credit cards by high users was stable at around 70% across all other retail outlets. The choice of making payment by credit cards by high users was relatively insensitive to transaction value.
7 Amount of credit card transactions divided by volume of transactions from Committee on Payment & Settlement Systems, BIS: Statistics on Payment Systems in the Group of Ten Countries: Figures for 1999; and Payment Systems in Australia: Figures for 1998.
20
Figure 14: Probability of making payment by credit card – By credit card usage 0.8
0.6
0.4
0.2
0 Café
Supermarket
Gas station
Restaurant
Department store
Furniture / Holiday / travel electrical centre appliance store
At the outlets where lower value transactions were likely, low credit card users had a low likelihood of using a credit card. The probability of using credit cards by low users steadily increased with the value of the purchase, and over half of low users would pay by credit card at a Holiday/travel centre, where the purchase was occasional and the value much higher. The choice of making credit card payments by low users was more elastic and sensitive to transaction value. Moderate users followed a similar pattern and elasticity as low users but had a higher overall probability of using credit cards. The greatest difference in attitude to using credit cards was at the Supermarket and Gas station. At Supermarkets, there was a six times greater likelihood of using credit cards by high users than low users, and a similar situation existed with Gas station purchases. There was a clear preference of low users to use other payment methods at the Supermarket and Gas station, reflected in the fact that 54% and 49% of low credit card users preferred EFTPOS at these outlets respectively. In contrast to credit card usage, the probability of using EFTPOS generally decreased as the transaction value increased from a Café purchase to one at a Holiday/travel centre. This pattern was applicable to all user types. Generally, EFTPOS was more favoured among debit card holders at lower transaction value venues. About 60% of moderate or high EFTPOS users would use EFTPOS in their next purchase at a Café. The especially low use by low EFTPOS users at Café was due to the significant preference for other payment methods, used by 60%. 21
Figure 16: Probability of making payment by EFTPOS – By EFTPOS usage 0.8
0.6
0.4
0.2
0 Café
Supermarket
Gas station
Restaurant
Department store
Furniture / electrical appliance store
Holiday / travel centre
Support for EFTPOS declines as transaction amounts increase, and even keen EFTPOS users may turn to other payment methods. For big item purchases, about half the debit card holders would prefer to pay by credit card. Apart from the expensive items and at Café, most moderate and high EFTPOS users are loyal users of EFTPOS. Interestingly, low EFTPOS users are relatively favourable to credit cards for all medium to large purchases (from Gas station to Holiday / travel centre). 6. Conclusion In New Zealand both EFTPOS and credit card transactions have enjoyed reasonable growth in volume, although EFTPOS transactions are unusually higher. This study sought to explore some reasons for this. Based on this study the highest users of credit cards are in their working years (25-65), with higher education and income levels. The highest users of EFTPOS share similar characteristics having higher education and income levels, but are younger and likely to be single. The “typical” EFTPOS user has the same demographic characteristics as identified in the Hong Kong market by Ho and Ng (1994).
22
Convenience was ranked as the primary beneficial factor for both credit cards and EFTPOS, so it is necessary to look beyond that for the factors which differentiate usage levels. The interest-free period was important for credit card use, while credit card users were more concerned about the immediate deduction associated with EFTPOS, suggesting it is the opportunity to defer payment without cost that causes people to prefer credit cards over EFTPOS.
With EFTPOS, it would appear that it is its substitutability for cash that is
important. This is reflected in a high rating for Alternative to withdraw cash as a beneficial factor and Temptation to overspend as a discouraging factor, as well as EFTPOS users’ higher concerns about the Temptation to overspend with credit cards. Both options are seen as convenient, and this would appear to be a driving force in the growth that both payment options have enjoyed. Further investigation of attitudes towards the factors, which encourage and discourage use, particularly in terms of demographic characteristics would be useful. The influence of loyalty schemes is also worthy of further investigation, as is the decision making process that purchasers use in determining what payment method to use for a specific transaction. References: Chandran, C. M. L.; Matthews, C. D. & Tripe, D. W. L. (2003). Competition in the New Zealand credit card market from the consumer perspective. Paper presented at the 16th Australasian Finance and Banking Conference, Sydney. Available at Durkin, T. A. (2000). Credit Cards: Use and Consumer Attitudes, 1970-2000. Federal Reserve Bulletin, September, p. 623 – 634. Ho, S. S. M. and Ng, V. T. F. (1994). Customers’ Risk Perceptions of Electronic Payment Systems. International Journal of Bank Marketing. 12 (8). 26 - 38. Koch, T. W. & MacDonald, S. S. (2003). Bank Management. (Fifth Edition). Mason, Ohio: Thomson South-Western Matthews, C.D. (2000). Fallen Branches. Is New Zealand over-branched? comparison of branch numbers. Wellington: Finsec
A true
Tripe, D. & Scott, S. (2001). Credit cards. Chapter 21 in Electronic Business and Technology Law. Wellington: Butterworths of New Zealand.
23
1. Background and Introduction The New Zealand payments system is distinctive for having a relatively high volume of transactions going through it, relative to other countries. This is partly a reflection of the interbank payment system having been designed in such a way as to make transactions relatively simple to process, but we can also see indications of New Zealanders displaying a fondness for use of technology. Statistics on transactions through the New Zealand payments system have been published annually by the New Zealand Bankers’ Association, as the relative industry body, since 1993, and over the period from 1993 to 2003 we can note a particularly striking rate of growth.1 The trends, including a breakdown for different types of payments, are shown in Figure 1.
Millions
Figure 1: Transactions through the New Zealand payments system 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 1993
1994
1995
1996 MICR
1997
Electronic credits
1998 Direct debits
1999 Credit card
2000 ATM
2001
2002
2003
EFTPOS
The fastest growing transaction types are EFTPOS (Electronic Funds Transfer at Point of Sale) and credit cards, with EFTPOS having been the single most popular type of payment since 1998. Total EFTPOS transactions in 2003 were 669.5 million, equivalent to approximately 167 transactions per capita, while credit card transactions had increased to 296
1
Data are available at http://www.nzba.org.nz/public.htm. MICR (Magnetic Ink Character Recognition) refers to transactions initiated on paper (which will be comprised predominantly of cheques).
2
million. New Zealanders’ usage of EFTPOS is much higher than in other countries2, and it is also unusual in being higher than use of credit cards, despite credit card usage generally appearing to be a preferable option for consumers. This research sets out to look at consumers’ use of EFTPOS and credit cards in a range of retail situations, in an effort to try and understand the basis for choice. In the next section of this paper, we explain key features of the operation of EFTPOS and credit cards, insofar as they are likely to impact on consumer choice, while in Section 3 we look at prior research in this area. Section 4 outlines the method used for the research, while Section 5 reports on the data obtained, and discusses the findings. Section 6 concludes.
2. Retail Payment Systems in New Zealand 2.1 Credit Cards Although some travel and entertainment (T&E) cards had been issued previously, bank credit card issuance began in New Zealand when the Bank of New Zealand issued Visa cards in 1978. The National Bank of New Zealand followed with a Visa credit card in mid-1979, and 3 months later the three Australian-owned banks (ANZ Bank, Bank of New South Wales, and the Commercial Bank of Australia) launched an Australian card system, Bankcard. During the 1980s, the number of card-issuers steadily increased, with cards being offered by the Post Office Saving Bank, the trustee savings banks, and other financial institutions following their conversion to banks. MasterCard entered the New Zealand market, initially as an internationally branded alternative to Bankcard, but then for domestic use as well. By the 1990s, credit cards were well established and widely accepted in the New Zealand market. Credit card operation in New Zealand is essentially the same as everywhere else in the world. The banks’ income is derived predominantly from interest paid by cardholders, with other income sources including merchant fees, interchange and cardholder annual fees (which have long been part of the price of possessing a credit card in New Zealand).3 The larger banks
2 3
For example, see Matthews (2000). No transaction fees are payable by cardholders.
3
issue both Visa and MasterCard, although Visa remains the dominant brand.4 Growth in card usage over the last 15 years is shown in Figure 2. Figure 2: Trend in credit card monthly billings 2500
2000
$ Millions
1500
1000
500
1/04
07/03
7/02
01/03
1/02
7/01
1/01
7/00
1/00
7/99
1/99
7/98
1/98
7/97
1/97
7/96
1/96
7/95
1/95
7/94
1/94
7/93
1/93
7/92
1/92
7/91
1/91
7/90
1/90
7/89
1/89
7/88
1/88
7/87
1/87
0
There has been a particular increase in the turnover initiated on credit cards since 1999, with a major stimulus having been derived from the introduction of loyalty plans. These reward cardholders on a points per dollar spend basis for using their cards, with the rewards able to be redeemed through frequent flyer schemes or other benefits. The rationale for the introduction of these loyalty schemes has been to encourage card usage, with the cost of the loyalty schemes effectively being financed by the merchant service fee and interchange revenue. All the major card issuers in New Zealand offer loyalty plans, although recent changes in Australia to cap interchange fees may impact on the New Zealand market.
2.2 EFTPOS EFTPOS was introduced in New Zealand in the mid-1980s, initially with two separate networks. The operation of rival systems (Cashline and Quick Smart) was always an inferior outcome, as it obliged retailers to have two separate terminals, or make a choice, and the use of EFTPOS remained very limited for a number of years. By September 1988, two of the 4
An extensive description of credit card operations is beyond the scope of this paper. For more detail in this area see Chapter 17 of Koch & MacDonald (2003), or Tripe & Scott (2001).
4
banks in the Quick Smart consortium, ANZ and BNZ, decided to withdraw from further involvement in EFTPOS, posing something of a crisis. In response to this crisis, the two networks established a company through which they could operate a single EFTPOS network. This was ETSL (Electronic Transaction Services Limited), and was jointly owned by Westpac Banking Corporation, ASB Bank, The National Bank of New Zealand and Trust Bank New Zealand. After an initial settling down phase to unify operations, this company got into a position to establish a more robust and reliable network, and set out on a more thoroughgoing development of EFTPOS as a payments product. Since the early 1990s, use of EFTPOS has grown at a very substantial rate, so that almost every retailer and other outlet collecting payments from the public in the country is now equipped. This is in turn reflected in New Zealand having what is probably the highest number of EFTPOS terminals per head of population of any country in the world5. The success achieved by the ETSL group meant that in due course the ANZ and BNZ resumed participation in the EFTPOS business. The original reason for banks’ enthusiasm for EFTPOS, in New Zealand and elsewhere, was to try and reduce the volume of cheques (which are expensive to process) being used for faceto-face payments. EFTPOS transactions, being electronic, would be much cheaper, and it was then over to banks to find a way of making EFTPOS attractive to both payers and payees. Retailers soon found EFTPOS transactions to be attractive as payment was effectively guaranteed (and thus without the uncertainties that might exist with cheques), while there were no transaction charges imposed by the banks and the costs of cash could be avoided. The payment guarantee was possible because EFTPOS is a purely on-line payment channel in New Zealand, although procedures are in place to enable transactions in the event that the online connection is lost temporarily. The advantages to cardholders mainly related to the greater simplicity of EFTPOS payments relative to cheques, and retailers’ greater willingness to accept EFTPOS (because of the advantages of EFTPOS to retailers).6 Banks also encouraged cardholders to use EFTPOS by making it relatively cheaper (in terms of transaction charges), with retailers’ costs being only for the telephone call to connect them to the network. 5
At 31/12/2003 there was 1 terminal for approximately every 40 people in New Zealand. As EFTPOS acceptance has become more widespread, retailers have become increasingly reluctant to accept cheques, particularly for people they don’t know. 6
5
The rationale for the banks’ support for EFTPOS has come from the much lower cost of transactions relative to cheques. With payments to retailers being guaranteed, retailers have been willing to provide cash to cardholders, and that has in turn become an additional channel for bank customers to be able to obtain cash. The enthusiasm with which cardholders have adopted EFTPOS, however, means that significant numbers of cardholders treat EFTPOS as an alternative to cash. This has tended to undermine the benefits that banks were looking for in their original support for EFTPOS. The much larger number of transactions means that the cost reductions are not as great as had been hoped for, and banks have therefore sought to charge customers fees for using EFTPOS at a level aimed at achieving cost recovery for them.
2.3 A comparison between credit card and EFTPOS usage For this paper, it is important to appreciate the way in which credit card and EFTPOS usage provide alternatives for cardholders in terms of their spending. Key considerations would be expected to be in respect of where and how consumers can undertake transactions using credit cards or EFTPOS, the costs for them of doing so, and any benefits that may arise from their choice. In general, there is a great deal of similarity in the locations in which credit cards and EFTPOS are able to be used. The EFTPOS transaction processing system is also used for the authorisation and capture of credit card transactions, and there is therefore no particular technological barrier. Differences do arise, however, in that EFTPOS transactions require a card to be present and for the cardholder to be able to enter their PIN to complete the transaction, whereas credit card transactions are still possible in a “card not present” situation (i.e. for mail order, telephone or internet transactions). On the other hand, there will be some retailers (or other outlets) who are able to accept EFTPOS transactions but who do not have arrangements with a bank for credit card transactions. This will typically be where the retailer does not see themselves in a position of being able to afford merchant service charges: this was the position with supermarkets until 1998/99. Cardholder costs also differ between credit cards and EFTPOS. Credit card transactions do not in general carry any transaction fee, whereas, depending on the cardholder’s account pricing arrangements with the bank that issued the card, there will often be a per-transaction
6
charge for EFTPOS, at a rate between 15 and 50 cents. There are, however, large numbers of consumers with fixed price banking facilities who do not pay any specific transaction charges, and for whom such fees would not therefore apply. There will also be cases where it is costly for consumers to use credit cards. These will be where cardholders are carrying a balance forward from a previous charging period, and where all new purchase transactions therefore carry interest from the date of the transaction until such time as the relevant balance is repaid. Anecdotal evidence related to other research (Chandran et al, 2003) would suggest that cardholders might not always be aware of this potential cost. The most obvious consumer benefits in relation to the choice between credit cards and EFTPOS are in respect of the free credit period (but this is only a benefit if no balances are carried forward), and in respect of the loyalty schemes attached to many credit card programmes. No such loyalty benefits apply to the use of EFTPOS. The benefit of EFTPOS (although not strictly in conformity with economic rationality) is that cardholders can have their accounts debited immediately, so that they can better monitor their financial position, and avoid building up credit card debt, which they might have concerns as to their ability to repay in the future. It is against this background that we can now review prior research undertaken in this area.
3. Previous research In a study concentrated on the change of consumer attitudes towards usage of credit cards for the period 1970 to 2000. Durkin found that overall opinions about credit cards were somewhat more negative and polarized in 2000 than a generation previously, especially among holders of bank-type credit cards. Among the general population, opinion that credit card use was “good” registered higher at 33% in 2000 (1970: 28%) while among bank-type credit card holders, it was slightly reduced to 42% (1970: 45%). On the other hand, the view that credit card use was “bad” was also up from 43% to 51% in 2000 among the general population, and the same was much stronger 7
among bank-type credit card holders at 42% in 2000 against 20% in 1970. However, the views of bank-type credit card holders were still more favourable than the population in general. Consumers’ opinions about credit cards also varied depending on their use of and experience with cards. Those who had fewer cards, had no or a low outstanding balance, generally paid more than the minimum, or had not received a collection call had more favourable views. Demographic measures also appeared to be related to attitudes towards credit cards but the relationship was not as strong as that associated with the aforesaid variables. Durkin also found that negative views might have arisen in part from an individual’s perceptions of other consumers’ difficulties rather than from their own experience. The study by Ho and Ng (1994) compared the usage of credit card and EFTPOS in Hong Kong and tried to explain the low usage of EFTPOS in Hong Kong in the early 1990s in terms of a higher perceived level of risk than with credit cards. In respect of the demographic characteristics of EFTPOS users in Hong Kong, EFTPOS adopters tended to be younger, better educated and with higher income. According to a report by the Consumer Council of Hong Kong regarding the ‘Easy Pay System’ (an equivalent system of EFTPOS), the lower popularity of EFTPOS in Hong Kong was possibly related to the less competitive pressure in pricing EFTPOS than credit card.
4. Data and methodology Data was collected using a mail survey which was sent to a sample of 1,000 individuals selected at random from the 1999 New Zealand electoral roll. The questionnaire contained 22 questions, in four sections.
The first section gathered
information about credit card usage, including the number of credit cards held, amount of purchases, number of transactions, and payments. Respondents were also asked about the advantages and disadvantages of using credit cards. Similar information about EFTPOS usage was gathered in Section 2. Section 3 had just one question asking respondents to
8
provide a ‘Juster Score’ representing the likelihood of using a particular payment method in seven different retail outlets. The final section collected demographic data. A follow-up mailing was sent approximately six weeks after the first to non-respondents, which lifted the response rate from 25.8% in the first mailing to 36.6% overall.
5. Findings and discussion 5.1 Channel usage Bank-type debit cards that could be used for EFTPOS were widespread with 92% of respondents holding at least one such card, while 78% of respondents held at least one personal credit card. The acceptance of these cards was reflected in 70% of respondents having at least one of each type of card, and just 1% having neither. Table 1: Relative spending levels
EFTPOS Credit Card (weekly) (monthly) None 18% 12% $50 or less 13% 6% $51-$100 15% 6% $101-$250 33% 11% $251-$500 17% 14% $501-$1000 4% 14% $1001 or more 37% Respondents were asked to indicate the amount spent using credit cards (according to their last monthly credit card statement) or EFTPOS (in the week previous to completing the survey). The results are shown in Table 1. While the results are not directly comparable, it is interesting to note that few respondents had used neither EFTPOS nor a credit card in the relevant period. Low credit card users were defined as having 0-5 transactions per month, moderate users had 6-15 transactions per month, and high users had 16 or more transactions per month. For EFTPOS a low user had 0-3 transactions per week, moderate users had 4-10 and high users had 11 or more transactions per week.
9
Figure 3: Credit card usage - By age
We find age groups at both extremes had a distinct pattern of either high or low monthly credit card purchases, as shown in Figure 3. The majority (60%) of the youngest age group were low credit card users while another significant portion was at the other end of the spectrum (30%).
However, the small sample size in this age group limits further
interpretation. The scenario was clearer for the elderly group, with 73% low users and few high users. This may reflect older people’s lower levels of disposable income, which was supported by the finding that 58% of the elderly respondents had annual income of less than $20,000, compared with the 31% of the whole sample population. For the working age group 26 – 65, credit card usage was relatively evenly distributed across the three categories, with respondents appearing to choose payment methods according to their own experience and attitudes. As such, no apparent distinction in the pattern of credit purchases was found in. The patterns of EFTPOS usage by age are shown in Figure 4.
10
Figure 4: EFTPOS usage – By age
Similar to credit cards, the older age group had a high proportion (69%) of low EFTPOS users. The youngest age group was again split between the two extremes with 52% low users and 29% high users. The two central age groups were mainly low and moderate users. A weak negative correlation of 0.2 is found between age and the number of EFTPOS transactions, suggesting EFTPOS may be more popular among the younger respondents than credit cards. Education also appears to have some effect on credit card usage. Figure 5 shows that bettereducated people tend to make more purchases by credit card, with a correlation between education and the number of credit card transactions of 0.25. Figure 5: Credit card usage – By education level
The pattern of EFTPOS usage across different education levels was similar to that for credit card usage, i.e. people who had a higher education level tended to be more frequent users of
11
EFTPOS. As with credit cards, this can be reasonably explained by the availability of disposable income and ability to spend, although the correlation was not significant. Income is another factor that might influence credit card usage. People with lower income had fewer credit transactions than those on higher incomes. Only 9% of respondents with annual income of more than $80,000 were low users while 55% were high users. The pattern of credit card usage by household income is similar to that for personal income, with both appearing sensitive to credit card usage. Correlation coefficients of more than 0.35 are found in both cases. This finding presumably relates to the availability of disposable income and the ability to spend. Figure 6: Credit card usage – By personal income level
Again, the pattern of EFTPOS usage across different income levels was similar to credit card usage, and respondents with higher incomes tended to be more frequent users of EFTPOS. However, the correlation coefficient was not significant. In respect of marital status, single respondents and those married or in de facto relationships had very similar patterns of credit card usage. By contrast, people who were widowed and separated/divorced were slightly more polarized, with the former being the lowest users. The low usage may be due to the older age of widowed respondents (more than 50% are above 65) and lower income level. EFTPOS usage by marital status is less polarized than credit card usage. Singles and people in a marriage or de facto relationship were heavier users than widowed and separated/divorced. In contrast with credit card usage, single people were relatively higher users overall.
12
5.2 Factors which influence payment channel use Respondents were also asked why payment by credit card or EFTPOS was beneficial, and were provided with a list of possible benefits as well as an option of Other.
For both credit
cards and EFTPOS the top benefit was identified as Convenience, chosen by 87% and 86% of respondents respectively. The results are shown in Table 2 below. Table 2: Channel benefits Credit Card Convenience Interest-free period
87% 56%
Secure, no need to take cash Credit facility Able to keep record Less transaction cost Others
47% 41% 30% 29% 17%
EFTPOS Convenience Widely acceptable Alternative to withdraw cash Secure, no need to take cash Immediate deduction Short processing time Low cost Others
86% 68% 67% 61% 37% 26% 19% 5%
Similarly, respondents were asked about the factors that discouraged them from using EFTPOS and credit cards, from a list of possible factors including an option of Other. Cost issues were the highest ranked factor for both, with 66% identifying the high interest rate as an issue for credit cards, while 61% found high transaction costs an issue with EFTPOS. The results are shown in Table 3. Table 3: Channel disadvantages Credit Card High credit interest rate Refusal by merchants Temptation to over-spend Security issues Undesirable lump sum payment Low credit limit
66% 34% 40% 32% 14% 13%
Longer processing time when 11% making payment Others
6%
EFTPOS High transaction cost Refusal by merchants Temptation to over-spend Security issues Unable to keep record of transactions Need to maintain credit balance with bank Long processing time when making payment Immediate deduction from bank account Others
61% 28% 21% 19% 18% 14% 13% 11% 3%
Exploring the factors which could make credit card use beneficial, we find that, as Figure 7 shows, higher users placed greater emphasis on all factors.
13
Figure 7: Beneficial Factors for Credit Cards by Usage Levels
Convenience was the most popular benefit of paying by credit cards at all usage levels. The Interest-free period showed a significant change, with only 26% of cardholders making no credit transactions considering it beneficial, which increased to 83% for those having more than 20 credit transactions per month. Less transaction cost and Able to keep record of transactions shared a similar change increasing from the 7% for non-users to 60% and 50% respectively for high users. While higher EFTPOS use levels generally meant that greater emphasis was placed on the beneficial factors, this was less clear cut than for credit card holders. The general trend indicates the positive opinion towards the benefits increases as EFTPOS usage increased, as shown in Figure 8.
14
Figure 8: Beneficial factors for EFTPOS - By usage levels
As with credit cards, Convenience was the most beneficial factor at all usage levels. The next three most beneficial factors at all usage levels are Alternative to withdraw cash, Widely acceptable and Secure, no need to take cash, although their relative rankings change at different usage levels. Respondents’ opinion on the remaining factors was relatively static. Perhaps not surprisingly, respondents’ views on which factors discouraged credit card usage generally weakened as credit card usage levels increased. The one exception was Refusal by merchant, which became more of a deterrent as usage levels increased. Security issues were also of slightly more concern to higher users than lower users. The factors discouraging credit card usage which showed the greatest change were High credit interest rate and Temptation to over-spend. People with low credit card usage were most concerned over high interest rates, and this was the most discouraging factor for all but the highest credit card users. As card usage increased, the negative view on interest rates reduced from 81% for non-users to 35% for the highest usage group. High users were less concerned over high interest rates, perhaps because they tend to make full payment of their balances, therefore incurring no interest.
15
A similar explanation may explain the trend of Temptation to over-spend. Apart from inactive cardholders, more than half of low users worried about over-spending. The fear of overspending then reduced to about a quarter as card usage increased. It is possible that high users have better control on their financial matters so that the credit card is merely a payment tool instead of a financial burden. For the remaining factors the usage levels have little impact. Figure 9: Discouraging factors for credit card use - By usage levels
The factor that most strongly discouraged EFTPOS use was High transaction cost, which was substantially more important at all usage levels. This factor increased in importance as usage increased, but reduced for the two highest usage groups. This easing of negative opinion combined with the small increase in positive opinion of Low cost as a benefit in high EFTPOS usage groups may be the result of the packages offered by some banks to specific customer groups, which carry fixed fee levels. Refusal by merchants is also an important factor discouraging EFTPOS use, ranking second for all groups except non-users. The importance of Temptation to overspend fluctuates across the different usage groups and there is no obvious effect of different EFTPOS usage on this.
16
Figure 10: Discouraging factors for EFTPOS – By usage levels
Looking at why credit card users were discouraged from using EFTPOS, we find that like EFTPOS users, High transaction cost was most important for high credit card users. In contrast, credit card users were more concerned about the Immediate deduction with EFTPOS than EFTPOS users themselves, which is not really surprising. On the other hand EFTPOS usage did not appear to have any real impact on attitudes to credit cards, although negativity towards Undesirable lump sum payment and Temptation to overspend was greater for higher EFTPOS usage levels. 5.4 Transaction size and payment channel choice Respondents were asked to provide a Juster score in terms of the probability of using different payment methods in their next purchase at seven specified different retail outlets, at which the average transaction size would be expected to differ. Payment methods were divided into three groups: Credit card; EFTPOS; and Cash, cheque and other methods. Juster scores of 0 – 10 were provided by respondents. The scores were explained in the questionnaire, with 0 representing ‘almost no chance’ and a probability of 1/100 and 10 representing ‘almost certain’ and a probability of 99/100. 17
The remaining scores had a
probability of X/10 (where X was the assigned Juster score) and had an assigned description. The total of the scores of the three payment methods should be 10 for each retail outlet. If not, the Juster scores for the three payment methods were adjusted to give a total of 10 using the weighting provided by the respondent. Any unclear cases would be excluded. The score variability for payment methods at retail outlets was high, as opinions could be polarized at the extremes of 0 and 10, ‘almost no chance’ and ‘almost certain’ respectively. Nevertheless, mean scores were used to estimate the probabilities of consumers’ choice of payment methods in different outlets as shown in Figure 11 below. Figure 11: Choice of payment methods
é
The probability of choosing any single payment method was less than 50%, which indicates that no one payment method dominates in any specific type of retail outlet. However, it appears that people have a preference for credit cards for more expensive transactions such as at Furniture/electrical appliances store and Holiday/travel centre, while preferring EFTPOS for lower value transactions at Supermarket and Gas station. At Fast food/café, people prefer to use Cash, cheque and other payment methods. In outlets where transactions sizes are more likely to vary, such as Restaurant and Department store, the preferences for credit cards and EFTPOS were very similar.
18
Figure 12: Amount of credit card purchase per transaction
Figure 12 examines the purchase patterns of credit card users and we find that more than 90% of high users have an average purchase size of between $31 and $60. As use declined, average transaction size increased. A similar inverted relationship was found between EFTPOS usage and purchase amount, as shown in Figure 13. Frequent EFTPOS users tended to make smaller purchases than low users. The average transaction amount for low users was up to $66 and for high users as low as $19. In general, the average amount of spending per EFTPOS transaction was nearly half of that of credit purchases. Figure 13: Amount of purchase per EFTPOS transaction
Compared with other countries like the U.K. at £57, the U.S. at $69 and Canada at C$93 in 1999, and Australia at A$99 in 1998, the average purchase per credit card transaction of $64
19
in New Zealand was low.7 Interestingly, while the amount per credit card transaction is generally reducing in New Zealand, the trends in other countries were increasing. If credit card usage is inversely related to transaction amount, it could be expected in a mature credit card market that the transaction amount would decrease across time until a transition or saturation stage was reached. The upward movement of amount per credit card transaction, especially in Canada and the U.S. which both have a longer history of credit cards, may give some indication as to the stage of the local credit card market. The opposite trend in New Zealand may suggest that the credit card market in New Zealand is at a different stage of development from the other major markets reviewed. The question of whether the credit card market in New Zealand is still at a developing stage is not addressed in this study, but represents an issue for future investigation. As Figure 14 shows, high credit card users had a higher probability than other groups of making payment by credit cards at all retail outlets. Other than at a Café where the majority might use cash, the probability of using credit cards by high users was stable at around 70% across all other retail outlets. The choice of making payment by credit cards by high users was relatively insensitive to transaction value.
7 Amount of credit card transactions divided by volume of transactions from Committee on Payment & Settlement Systems, BIS: Statistics on Payment Systems in the Group of Ten Countries: Figures for 1999; and Payment Systems in Australia: Figures for 1998.
20
Figure 14: Probability of making payment by credit card – By credit card usage 0.8
0.6
0.4
0.2
0 Café
Supermarket
Gas station
Restaurant
Department store
Furniture / Holiday / travel electrical centre appliance store
At the outlets where lower value transactions were likely, low credit card users had a low likelihood of using a credit card. The probability of using credit cards by low users steadily increased with the value of the purchase, and over half of low users would pay by credit card at a Holiday/travel centre, where the purchase was occasional and the value much higher. The choice of making credit card payments by low users was more elastic and sensitive to transaction value. Moderate users followed a similar pattern and elasticity as low users but had a higher overall probability of using credit cards. The greatest difference in attitude to using credit cards was at the Supermarket and Gas station. At Supermarkets, there was a six times greater likelihood of using credit cards by high users than low users, and a similar situation existed with Gas station purchases. There was a clear preference of low users to use other payment methods at the Supermarket and Gas station, reflected in the fact that 54% and 49% of low credit card users preferred EFTPOS at these outlets respectively. In contrast to credit card usage, the probability of using EFTPOS generally decreased as the transaction value increased from a Café purchase to one at a Holiday/travel centre. This pattern was applicable to all user types. Generally, EFTPOS was more favoured among debit card holders at lower transaction value venues. About 60% of moderate or high EFTPOS users would use EFTPOS in their next purchase at a Café. The especially low use by low EFTPOS users at Café was due to the significant preference for other payment methods, used by 60%. 21
Figure 16: Probability of making payment by EFTPOS – By EFTPOS usage 0.8
0.6
0.4
0.2
0 Café
Supermarket
Gas station
Restaurant
Department store
Furniture / electrical appliance store
Holiday / travel centre
Support for EFTPOS declines as transaction amounts increase, and even keen EFTPOS users may turn to other payment methods. For big item purchases, about half the debit card holders would prefer to pay by credit card. Apart from the expensive items and at Café, most moderate and high EFTPOS users are loyal users of EFTPOS. Interestingly, low EFTPOS users are relatively favourable to credit cards for all medium to large purchases (from Gas station to Holiday / travel centre). 6. Conclusion In New Zealand both EFTPOS and credit card transactions have enjoyed reasonable growth in volume, although EFTPOS transactions are unusually higher. This study sought to explore some reasons for this. Based on this study the highest users of credit cards are in their working years (25-65), with higher education and income levels. The highest users of EFTPOS share similar characteristics having higher education and income levels, but are younger and likely to be single. The “typical” EFTPOS user has the same demographic characteristics as identified in the Hong Kong market by Ho and Ng (1994).
22
Convenience was ranked as the primary beneficial factor for both credit cards and EFTPOS, so it is necessary to look beyond that for the factors which differentiate usage levels. The interest-free period was important for credit card use, while credit card users were more concerned about the immediate deduction associated with EFTPOS, suggesting it is the opportunity to defer payment without cost that causes people to prefer credit cards over EFTPOS.
With EFTPOS, it would appear that it is its substitutability for cash that is
important. This is reflected in a high rating for Alternative to withdraw cash as a beneficial factor and Temptation to overspend as a discouraging factor, as well as EFTPOS users’ higher concerns about the Temptation to overspend with credit cards. Both options are seen as convenient, and this would appear to be a driving force in the growth that both payment options have enjoyed. Further investigation of attitudes towards the factors, which encourage and discourage use, particularly in terms of demographic characteristics would be useful. The influence of loyalty schemes is also worthy of further investigation, as is the decision making process that purchasers use in determining what payment method to use for a specific transaction. References: Chandran, C. M. L.; Matthews, C. D. & Tripe, D. W. L. (2003). Competition in the New Zealand credit card market from the consumer perspective. Paper presented at the 16th Australasian Finance and Banking Conference, Sydney. Available at Durkin, T. A. (2000). Credit Cards: Use and Consumer Attitudes, 1970-2000. Federal Reserve Bulletin, September, p. 623 – 634. Ho, S. S. M. and Ng, V. T. F. (1994). Customers’ Risk Perceptions of Electronic Payment Systems. International Journal of Bank Marketing. 12 (8). 26 - 38. Koch, T. W. & MacDonald, S. S. (2003). Bank Management. (Fifth Edition). Mason, Ohio: Thomson South-Western Matthews, C.D. (2000). Fallen Branches. Is New Zealand over-branched? comparison of branch numbers. Wellington: Finsec
A true
Tripe, D. & Scott, S. (2001). Credit cards. Chapter 21 in Electronic Business and Technology Law. Wellington: Butterworths of New Zealand.
23
