Debit and credit card usage

Literature review
Credit cards were first issued in the USA in the early twentieth century. Since then, they have become a major system for exchange of transactions (or payments) that stimulates household and personal spending even in many developing countries of the world (Watkins, 2000). It is necessary to define and differentiate the characteristics of credit cards versus debit cards from a consumers perspective in order to understand the consumers behavior. The features (including credit limit) of a particular credit card or debit card issued through a bankcard association, however, are determined by the individual firm and not by the bankcard association. Some credit and debit cards are restricted in their usage to the issuers retail outlets (such as store credit cards) and are therefore, limited in their functionality. Credit cards are a mode of payment that allows a buyer to purchase a product or service immediately even if the buyer does not have the money at hand. The buyer is able to do this because a financial institution has extended credit to him/her. Upon use of the credit card, the buyer is obliged to pay back the amount used in full by a certain time (i.e. grace period) without interest or in smaller payment amounts over time with interest. Debit cards, on the other hand, are a form of payment that requires that the buyer has the funds (or a line of credit attached to the account) in his/her account before a purchase transaction is consummated. The chief advantage of using a debit card is that it is a cashless way of paying cash for a product or service. The immediate deduction of the payment amount from the account also ensures that the customer does not spend more than what he/she has in his/her account. However, a service fee may be levied by the financial institution processing the debit transaction. Studying payment methods is important because different modes have different effects on a consumers willingness to spend. For example, Hirschman (1979) found differences in consumer purchase behavior based on credit card characteristics. Feinberg (1986) demonstrated that credit cards can serve as a facilitating stimuli that encourages spending. Consumer research on credit and debit cards has been lopsided in favor of credit cards. Many of these studies focus on the descriptive nature of who uses credit cards (e.g. Mantel, 2000)

Customer satisfaction
Marketing managers are interested in continuous usage. However, repeated choice and usage of a particular payment mode is contingent upon the users satisfaction with that payment mode. Churchill and Suprenant (1982) defined customer satisfaction as a comparison of the rewards and costs associated with the use or purchase of a good or service in relation to the anticipated consequences of the use or purchase. They likened customer satisfaction to an attitude. In addition, they suggested that satisfaction is related to the size and direction of the

disconfirmation of expectations experience. Thus, in addition to the leading role of expectations (Prakash and Lounsbury, 1984), performance (Churchill and Suprenant, 1982) and desires (Spreng et al., 1996) are also determinants of customer satisfaction. Bitner and Hubert (1994) suggested that customer satisfaction of services consists of two elements: service encounter satisfaction and overall service satisfaction. They suggested that a cumulative positively satisfying service encounter creates a more global feeling of satisfaction.

Income
As far as demographic variables are concerned, income is found to be the single most important variable that influences the card usage rate. The number of credit cards possessed by an individual increased with greater income (Kaynak and Harcar, 2001). Kinsey (1981) observed that as income increases so does the number of credit card accounts. Families with higher incomes were found to be more likely to use credit cards than were lower income families. Furthermore, Barker and Sekerkaya (1992) reported that the credit card holders/users were more likely to earn higher incomes than their counterparts. Wasberg et al. (1992) also found a positive relationship between the amount of credit card debt and household net income. On the contrary, Choi and DeVaney (1995) reported that income does not have any significant effect on the use of credit cards. In contrast, Danes and Hira (1990) found that lower- and middle-income families tend to use credit cards more than higher-income families. These economically less privileged persons use credit cards as a mean of installment for credit as they are not able to borrow money from banks at a reasonable rate (Kaynak and Harcar, 2001). Matthews (1969, 1970), who discovered that social class affects consumer attitudes towards credit card usage within certain income categories. Research by Gan et al. (2006), Kinsey (1981), Barker and Sekerkaya (1992), Wasburg et al. (1992), Heck (1987), Arora (1987), Mandell (1972) also found a high income to be an important determinant for increasing the number of credit card accounts as well as increased credit card usage. However, Choi and DeVaney (1995) found income level to be insignificant in determining the use of credit cards while Danes and Hira (1990) showed that middle-income families actually used credit cards more than families of higher income.

Gender
Where gender is concerned, Kinsey (1981), and Slocum and Matthews (1970) found gender and marital status to be significant determinants of credit card usage. White (1975), and Adcock et al. (1977), suggested that single males were more likely to use credit cards than females. Contradicting this, both Kinsey (1981) and Arora (1987) found females used their credit cards more frequently, while Hayhoe et al.(1999) and Armstrong and Craven (1993) found that females tended to have a higher average number of credit cards than males. Ingram and Pugh (1981) concluded that the least number of credit cards were owned by single member households, young married couples, retirees, and sole survivors.

The youth market has been recognized as a lucrative target segment for credit card marketing (Kara et al., 1994). Youth are more easily lured by the modern lifestyle, shopping and special packages (including free gifts) offered by credit card firms (Bianco and Bosco, 2002). They also have longer-term earnings and spending potential. Credit card firms often leverage on these lifestyle drivers to build long-term brand loyalty. Their need for short-term self-gratification without a good grounding on the consequences of excess debt may lead to high interest burdens, default and ultimately bankruptcy. Students often do not spend enough time researching credit card terms and are not aware of the applicable interest rates (Warwick and Mansfield, 2000). High debt levels of freshman have been found to contribute to lower grades and higher dropouts (Cummins et al., 2005).

Transaction size
Extant analytical models and empirical evidence show that the value of a retail transaction significantly influences consumers decision to use alternative payment modes at retail point of purchase. Analytical models that include transaction size as a key determining factor in retail payment choice include the works of Klee (2008). In an earlier empirical study, Handelsman and Munson (1989) find that at relatively low transaction values (product prices in their study), consumers require a larger percentage discount to switch from credit card to cash payment than at high transaction values. Mot and Cramer (1992) find that a 10 per cent increase in transaction size can lead to as much as 1.3-2.3 per cent reduction in the incidence of paying cash. Similarly, Jonker (2007) finds that Dutch consumers are more likely to pay with cash in situations involving small purchase amounts and to pay with debit cards for purchases involving higher transaction values. More recently, Klee (2008) has estimated that a $10 increase in the value of a retail sale decreases the probability of using cash by about 8 per cent.

Psychographic variables
There were number of psychographic variables that influence an attitude formation among consumers. The first, which is more of an economic variable, has often referred to as time consciousness. The timing factor can affect many stages of decision-making and consumption.. Consumers who are short of time want to obtain product quickly and with minimal effort. A consumers experience of waiting can radically influence his perceptions of service quality. Feldman and Hornik (1990) mentioned that individuals priorities determine their time style. Furthermore, one additional variable of reference is the lifestyle of a consumer. Prasad (1975) and Rich and Jain (1968) identified a pattern of consumption reflecting how people live, how they spend their money and time. Customers define their lifestyles by the consumption choices they make in a variety of product categories. There was a difference between the consumption style of rich and poor people, with the rich tending to shop not simply out of necessity but also for pleasure. Furthermore, the middle and upper-class consumers tend to engage in more information search before they make a purchase, which is in contrast to lower-class consumers; who opt to rely more on in-store display rather than advice of sales persons.

Convenience
Use of credit cards for convenience and protection purposes vs uses for economic and promotional reasons can be found as early as Slocum and Matthews (1969), who found that people in the lower socio-economic classes used their credit cards more for installment financing while people in the higher socio-economic groups used credit cards for convenience. Supporting this and going further, Canner and Cyrnak (1986) showed that the major reason for credit card use was convenience, and this factor was positively correlated with income, age, and relative financial liquidity. In contrast, a liberal attitude toward borrowing is related to the use of revolving credit (Canner and Cyrnak, 1986). Kinsey (1981) found that the ease of payment and the risk of carrying cash were major reasons for using a credit card. Kaynak and Harcar (2001) attributed consumers perceptions of the ease of credit card use to the evolution of it. Social acceptability and easy access to cash were also seen as push factors for the use of credit cards. Durkin (2000) observed that cardholders favored not only the convenience of open-ended credit lines associated with cards, but they also used credit cards as a source of revolving credit. Lee and Hogarthe (2000) distinguished between card users for convenience and those distinguished as credit revolving cardholders. They observed that convenience users utilized credit cards as a mode of payment and typically paid their balances in full, but revolvers used their card as a mode of financing, and chose to pay the interest charges on the unpaid balance. At least one study (Moschis, 1990) has shown that the convenience users were more likely to be highincome, older adults, who were more inclined to pay their credit card balances in full. Lee and Hogarthe (2000) further concluded that convenience users preferred to have a card with no annual fee and other enhancements, such as frequent flyer miles, than a low interest rate, which the majority of revolvers would prefer most. DeVaney,2009;DAstousandMiquelon,1991).

Household debt
An alternative explanation for the relationship between debit card usage and household debt is that consumers who desire to avoid debt accumulation may intentionally choose debit cards over credit cards for their household purchases. Prelec and Loewenstein (1998) provided an explanation for why consumers use debit cards based on the double-entry mental accounting theory. Noting the psychological burden associated with paying later or carrying debt, Prelec and Loewenstein posited that the thought of post-payment (e.g., in credit card installment purchases) significantly lowers the net utility of the household purchases. They then suggested that consumers use debit cards because of the prepayment property, which enables consumers to enjoy consumption without worrying that they will have to pay for the goods or services at a later date. Under the mental accounting theory (Kahneman & Tversky, 1979), Prelec and Lowenstein (1998) differentiated the pain of payment associated with two payment mediums, that is, debit and credit cards. When a debit card is used, the pain of payment occurs at the purchase stage. At this stage, a consumer may evaluate the possibility of overdraft charges and remaining balance in his or her bank account(s). On the other hand, when a credit card is used, the pain of payment is separated from the time of purchase and deferred until a consumer

receives the statement and needs to make a credit card payment. If a consumer does not pay off the full amount of his or her credit card charges each month, this pain of payment is spread out throughout the lifetime of the debt, negatively influencing the net utility of the consumption over time. Prelec and Lowenstein attributed the overspending associated with credit card usage to this separation of the pain of payment from the actual purchase.

Promotional offers
Mantel (2000) proposed a theory of obstacles, incentives, and opportunities to explain why consumers use different electronic payment methods (e.g., debit cards, credit cards, smart cards, etc.) based on the literature review, a qualitative electronic banking survey, and 35 in-depth interviews with a sample of consumers in Chicago. In his theory, obstacles are those limits on consumers ability to obtain certain payment tools; for example, to obtain a debit card, consumers need to have sufficient funds to open and maintain a bank account. Therefore, those without financial assets cannot obtain or use debit cards. Incentives are the promotional offers used to achieve adoption of a specific payment tool, and opportunities are certain innovative ways of using payment instruments in particular circumstances, times, or occasions. For example, credit card banks offer incentives, such as cash-back bonuses, discounts, and other promotional offers to attract consumers, whereas consumers may use gasoline cards and store cards (e.g., Sears and Wal-Mart) as an opportunity to budget and keep a record of their purchases. Although Mantels theory (2000) focused more on the monetary gains of using credit cards, Prelec and Lowenstein (1998) incorporated the mental account proponent (Thaler, 1980) in explaining the latent cost of credit card usage. Even if consumers use credit cards for convenience, there are other unseen costs involved, such as the mental cost of having to keep track of spending and understanding credit card related issues, such as daily interest calculations, card limits, late payments, over limit fees, and so forth. These issues become even more complicated if consumers use more than one credit card. In addition, credit card usage may offer consumers the pretense of having more money than they actually do, allowing them to consume based on expected increased income and wealth that may not ever be realized. With debit card usage, consumers may reduce unnecessary spending by spending only from the funds that are immediately available to them as opposed to what they expect to have at a later date. Thus, we hypothesize here that consumers who want to avoid debt accumulation intentionally choose to use debit cards.

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