Consumer Homing on Payment Cards:
From Theory to Measurement
Christopher M. Snyder
Dartmouth College
Jonathan Zinman
Dartmouth College
1
Plan for Today
1. Overview of our project
 Bridge theory and empirics on card platforms
 More project than paper at this point!
2. Review of theory models
3. From Theory to Empirics: Measurement Issues
4. Review of existing empirical evidence
5.



How our work fits in:
New stylized facts
Bridge-building: questions and approaches we find interesting
Next steps
2
Payment cards as two-sided markets
 Payment card is a platform
intermediating transactions
between merchants and customers.
 “No Surcharge Rule”, externalities
on both sides mean that equilibrium
will depend on prices platform charges
to both sides (cardholder fee f, which
may be negative, and merchant
discount, m)
 Homing often crucial modeling issue
• Customers may carry (and use) one
or more credit cards
• Merchants may accept one
or more credit cards
Platform
Acquiring
Bank
pays p - a
Issuing
Bank
pays
p-m
pays
p+f
Customer
good sold
at price p
Merchant
 Policy questions
• Regulation of interchange fee a
• “No Surcharge Rule”
• “Honor All Cards Rule”
3
Homing in the theoretical literature
 General lessons:
• If consumers multihome (carry multiple cards) and merchants
singlehome (accept only one card), networks will try to steer
merchants toward their card, putting downward pressure on
interchange fee and merchant discount.
• Perhaps more realistically, if merchants multihome (accept all
cards), then the extent of consumer singlehoming will determine how
hard networks compete to steer consumers toward their card,
resulting in low with a high interchange fee and low cardholder fee
(bonus?).
4
Homing in the theoretical literature (con’t)
 Rochet and Tirole (2003 JEEA “Platform Competition”)
d  d  D2
singlehoming
1  1 2
index
d1
duopoly
equilibrium
fee structure
oB
f

m  S /
 Rochet and Tirole (2006 RNE “Card Payment Systems”)
• Cardholder multihoming increases merchant surplus
• Effect dampened larger fraction a of informed purchasers
(know merchant acceptance policy before shopping).
 Guthrie and Wright (2007 JIE “Competing Payment Systems”)
• Large set of equilibria. Homing behavior on and off equilibrium path
selects the equilibrium less favorable for multihoming side.
 Rochet and Tirole (2006 mimeo “Honor All Cards”)
• Assumes credit and debit separate markets
• One credit card
• Two debit cards; all debit cardholders multihome
• Shows “Honor All Cards” increases social welfare
• Extension in Section 5.4 to imperfect substitution. HAC may
lower welfare if credit a good enough substitute for debit.
5
Measurement Issues:
Categories of homing in payment cards
“We need to figure out empirically whether the case of single-homing
or multi-homing is more descriptive”
- (Rochet and Tirole 2006 RNE)
How define multihoming?
 Multihoming among credit cards
 Multihoming among debit cards
 Multihoming between credit and debit
 Multihoming according to holding vs. use
Whose multihoming matters?
 Multihoming across whole population or restricted to subpopulation
of cardholders?
• Who is marginal consumer?
6
Empirical literature
Rysman (2007 JIE “Payment Card Usage”)
Credit card multi-homing prevalent in membership but not in usage
Proprietary data (Visa PSPS)
Klee (2006 mimeo “…Decade of Change…”)
Prevalence of various types of payment multihoming
Correlations with household characteristics
Zinman (2007 mimeo “Debit or Credit?”)
Debit and credit substitutes, and increasingly strong ones
Oversights? Please let me know.
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Summary of Empirical literature
Accumulating stylized facts
Links to theory of card platforms? Weak so far.
Snyder and Zinman project:
 Start by adding to stylized facts
o Especially re: multi-homing on credit and debit
o Comparison between SCF and Visa PSPS
 Working on tightening links to theory.
o Just questions, no answers, so far
8
Some Facts to Focus on
Multihoming prevalence in Survey of Consumer Finances (SCF)
Strengths: Complements Visa PSPS (used in Rysman)
 SCF has non- payment card holders
 And is publicly available
 Nationally representative?
 Can look at trends over relatively long timeframe
Weaknesses:
 Measures holding and use at level of card type (e.g. general
purpose)
o not at network- or card-level
 No transaction-level data
 Nothing on debit intensity
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Results
Table 1. Multihoming in Holding: Credit Cards
1992
1998
2004
U.S. Pop %
MH %
U.S. Pop %
MH %
U.S. Pop %
MH %
U. S. population
100
39
100
45
100
48
Has checking or payment card
88
44
92
49
94
51
Has payment card
79
49
86
53
90
54
Has credit/charge card
63
61
68
66
72
67
Uses payment card
—
—
67
62
81
57
Uses credit/charge card
48
66
54
69
59
70
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Results (con’t)
Table 2A. Multihoming in Holding: Between Credit and Debit Cards
1992
1998
2004
U.S. Pop %
MH %
U.S. Pop %
MH %
U.S. Pop %
MH %
U. S. population
100
43
100
52
100
58
Has checking or payment card
88
48
92
56
94
62
Has payment card
79
54
86
60
90
65
Has credit/charge and ATM card
43
100
52
100
58
100
Uses payment card
—
—
67
71
81
70
Uses credit/charge card
48
71
54
77
59
81
Uses debit card
—
—
34
78
59
77
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Results (con’t)
Table 2B. Multihoming in Use: Between Credit and Debit Cards
1992
1998
2004
U.S. Pop %
MH %
U.S. Pop %
MH %
U.S. Pop %
MH %
U. S. population
100
—
100
21
100
37
Has checking or payment card
88
—
92
23
94
39
Has payment card
79
—
86
25
90
41
Has credit/charge and ATM card
43
—
52
43
58
62
Uses payment card
—
—
67
32
81
45
Uses credit/charge card
48
—
54
39
59
63
Uses debit card
—
—
34
63
59
62
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Results (con’t)
Table 3. Multihoming in Holding: Any Type of Payment Card
1992
1998
2004
U.S. Pop %
MH %
U.S. Pop %
MH %
U.S. Pop %
MH %
U. S. population
100
53
100
61
100
66
Has checking or payment card
88
60
92
66
94
70
Has payment card
79
67
86
71
90
75
Has credit/charge and ATM card
43
100
52
100
58
100
Uses payment card
—
—
67
82
81
78
Uses credit/charge card
48
—
54
91
59
92
Uses debit card
—
—
34
79
59
78
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Conclusions from Data so far re: Prevalence
“We need to figure out empirically whether the case of single-homing or
multi-homing is more descriptive”
-(Rochet and Tirole 2006 RNE)
Multihoming more descriptive.
 e.g., 75% of payment card holders potential multihomers in 2004
Multihoming description becomes more apt:
 In recent years (upward trend in most measures)
 If count credit and debit as well as credit and credit
 If focused on holding vs. usage
o But multihoming in credit and debit prevalent in usage as well
o e.g., 41% of payment card users in 2004 (up from 25% in 1998)
Other findings:
 In some large segments all consumers are (potential) multi-homers
 Multihoming in credit card holding SCF << Visa PSPS
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From Prevalence to Key Parameters from Theory?
But can we use homing patterns to put magnitudes on theoretical
patterns of interest?
 (cross-)elasticity of platform demand in Rochet and Tirole
Possibly.
• multihomers in use: most substitutable?
• multihomers in holding: moderate substitutability
• singlehomers in holding: least substitutable
Some models focus explicitly on membership, not usage (RT 2006
RAND)
• realistic if it’s the elasticities that really matter?
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Next Steps (?)
Theory that helps focus on empirically identifying substitutability parameters
 move beyond description of homing patterns….
 to estimating elasticities
Important to capture distinct features of debit platforms?
 more platforms (regional networks)
 fixed investment (terminals)
 consumer substitutability between PIN and signature
New data:
 Large panel of linked checking and credit card account data
o Transaction characteristics
o Fixed and transaction costs
o Borrowing and spending behavior
Does it matter if homing behavior is driven by neoclassical and/or
“behavioral” (e.g., mental accounting) motives?
 perhaps, if behavioral patterns permit price discrimination
 and/or dull price sensitivity
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