Realizing the gains from electronic payments: Costs, pricing, and payment choice

The growth of electronic payments can substantially reduce the social cost of a country's payment system. We provide an estimate of the potential savings in social cost and determine the responsiveness of payment users when relative prices are used to speed up the substitution of electronic for paper-based payments. While some countries (Norway, Japan) have encouraged their banking systems to establish explicit prices to promote electronic payments, others (the United States) have not. For the first time ever, survey data are available to permit estimation of a model of payment choice from which own price, cross price, and payment substitution elasticities are derived. The data, which are semiannual panel data, concern the use of three methods for making retail payments in Norway: cash withdrawals at ATMs, writing a check, or using a debit card at the point of sale. Our finding that payment users are quite sensitive to relative prices that reflect the relatively lower cost of electronic payments is generalizable. Both production techniques and consumer needs for payment instruments are very similar across developed countries, even though instrument usage differs.