Nov 11 2008

Debit vs. Credit: How People Chose to Pay


For financial service providers the relative costs and benefits of debt and credit transactions can be very different. Understanding payment choices is critical for financial service providers. 

Victor Stango, PhD
University of California, Davis
Jonathan Zinman, PhD
Dartmouth College
Report Number 172

Executive Summary

A new, emerging branch of economics called behavioral economics attempts to take the messy concepts of psychology and behavior into consideration to develop new models of how people make economic decisions. This report examines one such
decision that is especially germane to credit unions: debit or credit? We believe understanding “how people pay” has implications for financial institution strategy,  economic theory, and public policy considerations.

What is the research about?

Victor Stango, PhD, of the University of California, Davis, and Jonathan Zinman, PhD, of Dartmouth College—explore behavioral economics using a new dataset that tracks transaction-level choices consumers make between debit and credit, as well as detailed information on consumer characteristics such as income and creditworthiness. Stango and Zinman also explore whether psychological models of mental accounting are useful descriptions of consumer behavior and whether mental accounting benefits those using it.

What are the credit union implications?

Credit unions looking for ways to better understand member behavior will find this report extremely useful. Findings from this unique data set give credit unions a lot to think about in terms of segmentation, member behavior, product development, and the whole concept of consumers’ “irrational” behaviors. Perhaps most useful is the finding that across demographic segments, many consumers tend to rely on only one payment choice type. This finding creates an opportunity for credit unions to broaden their thinking about how to segment their membership.