Merchants can dangle discounts or tack on surcharges, but it rarely changes how consumers pay. Consumers overwhelmingly stick with their preferred payment method, driven more by habit than by small financial incentives.
That’s one of the key findings in a new report from the Federal Reserve Bank of Atlanta, Merchant Steering of Consumer Payment Choice. Credit card surcharges are now legal in all but four states, and earlier studies have found that consumers strongly dislike them. But that hasn’t been enough to change their payment habits.
Discounts Have Little Effect
The Fed found that offering discounts for cash payments did not increase the likelihood that a customer who prefers to pay with a card would switch to cash. Cash discounts did not affect consumer behavior until transaction amounts exceeded $1,000. However, because most retailers offering cash discounts were restaurants, gas stations and convenience stores, transactions of that size were rare.
Consumers who favor credit cards are particularly consistent: nearly three-quarters of their transactions are made with a credit card. By contrast, just over half of the transactions by cash-oriented consumers are paid in cash. Debit users fall in between, using that method for 64.1% of their transactions.
“Merchants are shooting themselves in the foot trying to outsmart their customers,” said Don Apgar, Director of the Merchant Payments at Javelin Strategy. “Credit card users are going to use their card no matter what. These also tend to be the better customers who make larger purchases more frequently, so adding a fee to their credit card purchases just alienates their best customers.”
The Power of Inertia
The most effective way merchants can steer payment choices is by refusing to accept cards for purchases below a mount—or, in more extreme cases, by refusing card payments altogether. Anything short of that is unlikely to shift consumer aways from their preferred method.
Earlier Fed research found that most consumers prefer to use the same payment method for all or most of their transactions. The report cited several reasons for this inertia:
- Using a single payment method eliminates decision-making at the point of sale.
- It requires less forethought. For example, cash users can make a single ATM withdrawal to cover the day’s expenses.
- It simplifies record-keeping when all payments appear on a single statement.
These factors help explain why small financial incentives rarely alter how consumers pay, reinforcing that, at the point of sale, routine often trumps reason.
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