Low-Income Consumers and Payment Choice

Oz Shy
Working Paper 2020-3a
February (revised October) 2020

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Abstract: Low-income consumers are not only constrained with spending, but also with the type and variety of payment methods available to them. Using a representative sample of the U.S. adult population, this short article analyzes the low possession (adoption) of credit and debit cards among low-income consumers who are also unbanked. Using a random utility model, I simulate the potential consumer welfare gains associated with policy options suggested in the literature to provide unsubsidized or subsidized debit cards, or subsidized prepaid cards to this consumer population. Simulation results show the relative improvement in consumer welfare among all three policy options.

JEL classification: D9, E42

Key words: consumer payment choice, household income, financial inclusion, unbanked consumers, random utility analysis

https://doi.org/10.29338/wp2020-03Off-site link

The author thanks Larry Wall for comments on an earlier draft. The views expressed here are those of the author and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the author's responsibility.

Please address questions regarding content to Oz Shy, Research Department, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309, oz.shy@atl.frb.org.

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