Working Paper Multihoming in the market for payment media: Evidence from young Finnish consumers

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1 econstor Der Open-Access-Publkatonsserver der ZBW Lebnz-Informatonszentrum Wrtschaft The Open Access Publcaton Server of the ZBW Lebnz Informaton Centre for Economcs Hyytnen, Ar; Takalo, Tuomas Workng Paper Multhomng n the market for payment meda: Evdence from young Fnnsh consumers ETLA Dscusson Papers, The Research Insttute of the Fnnsh Economy (ETLA), No. 893 Provded n Cooperaton wth: Research Insttute of the Fnnsh Economy (ETLA), Helsnk Suggested Ctaton: Hyytnen, Ar; Takalo, Tuomas (2004) : Multhomng n the market for payment meda: Evdence from young Fnnsh consumers, ETLA Dscusson Papers, The Research Insttute of the Fnnsh Economy (ETLA), No. 893 Ths Verson s avalable at: Nutzungsbedngungen: De ZBW räumt Ihnen als Nutzern/Nutzer das unentgeltlche, räumlch unbeschränkte und zetlch auf de Dauer des Schutzrechts beschränkte enfache Recht en, das ausgewählte Werk m Rahmen der unter nachzulesenden vollständgen Nutzungsbedngungen zu vervelfältgen, mt denen de Nutzern/der Nutzer sch durch de erste Nutzung enverstanden erklärt. Terms of use: The ZBW grants you, the user, the non-exclusve rght to use the selected work free of charge, terrtorally unrestrcted and wthn the tme lmt of the term of the property rghts accordng to the terms specfed at By the frst use of the selected work the user agrees and declares to comply wth these terms of use. zbw Lebnz-Informatonszentrum Wrtschaft Lebnz Informaton Centre for Economcs

2 ETLA ELINKEINOELÄMÄN TUTKIMUSLAITOS THE RESEARCH INSTITUTE OF THE FINNISH ECONOMY Lönnrotnkatu 4 B Helsnk Fnland Tel Telefax World Wde Web: Keskusteluaheta Dscusson papers No. 893 Ar Hyytnen Tuomas Takalo MULTIHOMING IN THE MARKET FOR PAYMENT MEDIA: EVIDENCE FROM YOUNG FINNISH CONSUMERS Ths verson: 27th January, 2004 We would lke to thank Nel Gandal, Aja Leponen, Marko Tervö, Otto Tovanen and John Zysman as well as semnar partcpants at the Bank of Fnland, Helsnk School of Economcs, and Noka Corporaton for helpful comments. Ths research s a part of the wreless communcaton research program (bre-etla.org) of ETLA, the Research Insttute of the Fnnsh Economy and BRIE, the Berkeley Roundtable on the Internatonal Economy at the Unversty of Calforna at Berkeley. Hyytnen gratefully acknowledges fnancal support from Noka and the Natonal Technology Agency (Tekes). We would also lke to thank The Fnnsh Bankers Assocaton for provdng us wth the survey data and Vrp Andersson and Mka Pajarnen for research assstance. All opnons expressed are those of the authors. Addresses: Ar Hyytnen, Vstng research fellow, Unversty of Calforna, Berkeley. Permanent address: The Research Insttute of the Fnnsh Economy (ETLA), Etlateto Ltd, Lönnrotnkatu 4 B FIN Helsnk, Tel: , Fax: , E-mal: Tuomas Takalo, Research Department, Bank of Fnland, P.O.Box 160. FIN Helsnk, Fnland. e-mal: ISSN

3 HYYTINEN, Ar TAKALO, Tuomas, MULTIHOMING IN THE MARKET FOR PAYMENT MEDIA: EVIDENCE FROM YOUNG FINNISH CON- SUMERS. Helsnk: ETLA, Elnkenoelämän Tutkmuslatos, The Research Insttute of the Fnnsh Economy, 2004, 40 p. (Keskusteluaheta, Dscusson Papers, ISSN ; No. 893). ABSTRACT: We am at explanng why some consumers use only one medum when payng for ther pont-of-sale transactons, whle others multhome and use many. Usng data on young Fnnsh consumers, we fnd that one key determnant of multhomng behavor n the market for payment meda s consumer awareness. Our nstrumental varable estmates ndcate that the better nformed use tmes more payment meda than the less nformed. Because many payment method nnovatons are typcally frst used smultaneously wth the establshed methods, our results suggest that ncreasng consumer awareness could sgnfcantly speed up the adopton of new means of payment, such electronc money and moble payments. JEL: G200, E590. KEYWORDS: Payment meda, multhomng, consumer awareness, adopton of fnancal technology. HYYTINEN, Ar TAKALO, Tuomas, MULTIHOMING IN THE MARKET FOR PAYMENT MEDIA: EVIDENCE FROM YOUNG FINNISH CON- SUMERS. Helsnk: ETLA, Elnkenoelämän Tutkmuslatos, The Research Insttute of the Fnnsh Economy, 2004, 40 s. (Keskusteluaheta, Dscusson Papers, ISSN ; No. 893). TIIVISTELMÄ: Tässä tutkmuksessa tarkastellaan stä, mks jotkut kuluttajsta käyttävät van yhtä maksuvälnettä ja toset kuluttajat mona maksuvälnetä maksaessaan pävttäsä ostoksaan. Käyttämällä anestoa nuorsta suomalassta kuluttajsta löydämme, että yks tärkemmstä maksuvälneden käyttöön vakuttavsta tekjöstä on kuluttajen ylenen tetosuus maksamseen lttyvstä kysymyksstä. Instrumenttmuuttujaestmonnt osottavat, että paremmn tetoset kuluttajat käyttävät kertaa useampaa maksuvälnettä kun vähemmän tetoset kuluttajat. Koska mona uusa maksuvälnetä käytetään usen aluks olemassa oleven maksuvälneden rnnalla, tuloksemme tukevat näkemystä, että kuluttajen tetosuuden lsäämnen maksamsesta ja maksuvälnestä vos nopeuttaa uusen maksuvälneden, kuten elektronsen rahan ja moblen maksuvälneden, käyttöönottoa. JEL: G200, E590. AVAINSANAT: Maksuvälneet, kuluttajen tetosuus, maksuvälneden käyttöönotto.

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5 1 Introducton A strkng feature of the market of payment meda s that some consumers use only one medum, whle others adopt many and therefore multhome. The theoretcal lterature on multhomng (e.g., Rochet and Trole 2003) suggests that consumer multhomng s should be a key consderaton for merchants, snce t ntensfes payment platform competton over the merchants. Unfortunately, n partcular for the merchants but also for the ssuers of payment meda and monetary polcy-makers, the determnants of multhomng n the market for payment meda are not well understood. 1 Monetary costs naturally hnder adopton of new payment methods (cf., e.g., Humphrey, Km, and Vale 2001), but relatvely lttle s known about the role of non-monetary costs such as learnng and searchng costs as well as other costs arsng from mperfect consumer nformaton. The am of ths study s to nvestgate how severe a barrer to the dffuson of new payment meda such non-monetary costs are. Our evdence from a random sample of young Fnnsh consumers suggests that the non-monetary costs cannot be overlooked. In partcular, we argue and fnd that consumer awareness enhances multhomng. The economcs of ths postve relaton s that consumer awareness reduces learnng and searchng costs as well as mperfect consumer nformaton. It does so almost by defnton. Before we run nto emprcs and put consumer awareness nto specfc terms to quantfy ts effect, we formulate a theoretcal model of multhomng. In our model consumers multhome, because t reduces the tme cost of transactons. The negatve relaton arses because the more payment meda a consumer carres, the 1 In many other dmensons the lterature on payment systems and methods s qute extensve, as can be seen from the excellent surveys by Hancock and Humphrey (1998) and Drehmann, Goodhart, and Krueger (2002). The focus of earler research has often been

6 2 easer her access to a modern economy s accountng network n dfferent crcumstances. Balancng the tme cost of transactons aganst the monetary and nonmonetary costs of adoptng multple payment meda results n the optmal level of multhomng. The model also predcts that the optmal level of multhomng depends on consumer awareness, because the non-monetary costs are nversely related to t. As we wll argue, multhomng s an ncreasngly relevant phenomenon n modern economes wth advanced accountng networks and payment markets. Because we beleve that Fnland s a good approxmaton of such an economy, we test the predctons of our model of multhomng usng Fnnsh data. We can also take advantage of some unque features of the survey data on young Fnnsh consumers avalable to us. The data contans drect measures of the pont-of-sale payng habts of consumers. The measures allow us to generate a dependent varable at the level of ndvdual consumers that dstngushes the pont-of-sale payng from settlng blls and the actual use of the payment meda from havng an access to them. As Guso and Jappell (2003) pont out n ther study of the consumer awareness and stock market partcpaton, consumer awareness can take many guses and be an elusve concept, for t can be both about the exstence and characterstcs of payment meda. We get a grp of t because the data ncludes a seres of questons capturng the consumers exposure to the provson of nformaton about fnancal servces and payment meda. The data also contans nstruments, whch allow us to control for the potental endogenety of consumer awareness.

7 3 Young consumers typcally show a great rate of adopton of new payment meda (Humphrey et al and Stx 2003). We can evaluate the mportance of both non-monetary and monetary costs for ths segment of consumers n solaton. Our data supports the noton of multhomng, as more than half of the young Fnnsh customers n our sample multhome. Not surprsngly, we fnd that the monetary costs of adopton are also mportant for the young. But consumer awareness turns out to be at least equally mportant determnant of multhomng. Endogenety of consumer awareness cannot, however, be gnored, because we fnd that not controllng for the endogenety can severely bas the effect of consumer awareness downwards. Our nstrumental varable estmates ndcate that the better nformed use tmes more payment meda than the less nformed. The fndng suggests that ncreasng consumer awareness could speed up the adopton of payment method nnovatons, such electronc money and moble payments. The remander of the paper s organzed as follows: In the next secton, we descrbe some specal characterstcs of the Fnnsh market of payment meda that make Fnland a neat case for our study. In secton 3 we consder the theoretcal underpnnngs of our study. The emprcal mplementaton of the theoretcal model s explaned n secton 4. In secton 5 we descrbe our data and the constructon of varables. We go trough the basc estmatons, ther results, and robustness tests n secton 6. In secton 7 we address the potental endogenety of consumer awareness. The concludng secton (secton 8) ncludes a dscusson of the mplcatons of our fndngs for the adopton of new payment meda.

8 4 2 The Fnnsh Market for Payment Meda The Fnnsh market for payment meda s has some dstnctve propertes that smplfy the study of multhomng. 2 There are also some profound dfferences wth the often-studed US market of payment meda (see Ausubel 1991 and Humphrey, Pulley, and Vesala 2000 for a descrpton of the US market). The Fnnsh market for payment meda s relatvely advanced, for Fnns ncreasngly rely on accessng electronc payment networks n pont-of-sale payng. Checks are for example no longer used n consumer trade, whereas debt cards are ncreasngly popular. Varous surveys show that between 1999 and 2003, ther use as the most common way of payng for daly consumer goods and servces almost doubled from 17% to 30%. In 2002, they accounted for 2/3 of the value of the card payments. The use of cash s decreasng rapdly. Between 1999 and 2003, the use of cash as a way of payng for daly consumer goods and servces decreased by 18% (13 percentage ponts, to 58%). Although t stll s relatvely common n pont-ofsale transactons, the rato of currency n crculaton to GDP, about 1.8% n 2002, s n Fnland among the lowest n Europe. Moreover, the use of cash s almost nvarantly preceded by the use of an ATM: The entre currency n crculaton (2,4 bllon euros) goes through the ATMs seven tmes a year. There are two reasons for ths: Frst, vrtually everyone has a bankng account where ncomes are credted drectly and an ATM (compatble) card. The use of cash wthout frst accessng one s bank account va an ATM s a habt that s restrcted to the senor ctzens that have never learned to use ATMs. Second, the coverage of the ATM net- 2 Most of the ndustry detals presented here are taken from surveys and other data that are avalable at The Fnnsh Bankers Assocaton www-pages. For more nformaton, see

9 5 works s rather extensve n Fnland, and the networks of dfferent banks allow for roamng. 3 In Fnland the market for payment meda s concentrated, because the few man depost banks that domnate the bankng sector are the man ssuers of payment meda. Because the ssuers of payment meda are relatvely homogenous the payment meda, ther prcng, and the ways of provdng them wth customers tend to be smlar across the ssuers, at least after controllng for the bankng relatonshps of consumers. The prcng of the payment meda s also qute smple. At least one ATM or payment card s often automatcally attached to a bankng account as a part of a bankng servce package. As explaned by Kosknen (2001), the packages can nclude varous payment meda, whose prcng hence depends on the prcng of the bankng servce packages. Ther prcng n turn s ted to the age of a consumer. It s typcal that the basc packages are free of charge untl the age of 26. Last but not least, Fnns use ther cards prmarly for payng, not for accessng credt. For example, our data (descrbed more closely n secton 5.1) tells us that n 2002, 37% of the young had an outstandng credt balance, but only for 5% t orgnated from payment card borrowng (for 4% from credt cards). For the rest, the loan was ether a mortgage or a student loan. Borrowng va payment cards s drectly related to age even wthn the young. Instead of borrowng, the young have other motvatons to acqure a credt card, such as a Vsa or a Master- Card. One of them s the desre to use t abroad n the pont-of-sale transactons. 3 The reason for the extensve ATM networks s that the Fnnsh bankng sector was heavly regulated untl the late 1980s. Because both depost and loan nterest rates were regulated, the bankng groups competed by the scope of ther servce network. The last phase of the servce competton was an ntroducton of ATMs. The deregulaton and the subsequent bankng crss of the early 1990s actually frst ntensfed the competton through ATM networks, because the banks replaced ther branches by a set of ATMs to cut down costs.

10 6 3 Multple Payment Methods n a Shoppng Tme Model 3.1 Two Observatons We buld our analyss of payment meda on two observatons. Frst, as also the studes by Humphrey, Pulley, and Vesala (1996, 2000) ndcate, an ncreasng fracton of all pont-of-sale purchases of goods and servces are pad for by means of sgnals to an accountng network. The wdespread use of the electronc payment meda means that there s less need for transfers of a tangble medum of exchange. But more substantally, even when the tangble medum s transferred, t s often preceded by a connecton to an ATM network. Indeed, Attanaso, Guso, and Japell (2002) fnd that the dffuson of ATM cards s the man factor explanng the shrnkng currency holdng. Because payng n cash practcally translates nto ownng and usng an ATM card, we nterpret an ATM card as yet another varety of a payment card. An ATM card s a payment card wth mproved securty and prvacy, but wth larger costs of debtng a buyer s account, because all physcal, monetary, and tme costs are borne by the cardholder pror to a transacton. Our second buldng block comes from the costs of transacton tme. We hypothesze that adoptng addtonal payment meda can reduce t. As Rochet and Trole (2003) demonstrate, the two-sded feature of payment meda market easly leads to a stuaton where some merchants do not accept some payment meda that are accepted by other merchants. Thus, the broader s the set of payment meda a consumer carres, the easer s her access to the accountng network n varous crcumstances, snce she can more flexbly ntate debts and credts to her wealth accounts for transacton purposes. As a result, n countres lke Fnland where checks are no longer used n the pont-of-sale transactons, consumers effectvely choose an optmal number of varous cards to economze the transacton tme and assocated costs.

11 7 3.2 Implcatons of the Two Observatons The two observatons yeld two mplcatons. Frst, today s consumers choose the optmal number of payment meda rather than the optmal currency holdng. They fnd the optmal number,.e., the optmal level of multhomng, by weghtng the tme cost of transactons aganst the cost of adoptng multple payment meda. In other words, the trade-off underlyng the demand for payment meda s deceptvely smlar to that behnd the demand for money n the classc Baumol-Tobn model (Baumol 1952, and Tobn 1956). We therefore take the key ngredents for our model from the modern varants of the Baumol-Tobn model by McCallum and Goodfrend (1987), Santomero and Seater (1996), Mullgan and Sala--Martn (2000), and Attanaso et al. (2002). 4 Second, the margnal beneft of adoptng new payment cards s decreasng n a smlar manner as the margnal beneft of real cash balances n the Baumol- Tobn model. Ths property arses, f the payment cards are heterogeneous n how effectvely they reduce shoppng tme and f consumers adopted them n ther preference order. Ths mplcaton may sound unfounded, because t assumes that the remanng characterstcs of payment cards are of second order mportance and because there s large lterature buldng on the varous dfferences between the payment cards (see, e.g., Shy and Tarkka 2002, and the references theren). Nonetheless, we have good reasons to thnk that for our purposes the assumpton s less restrctve than t seems to be from the outset: As Santomero and Seater (1996) suggest, payment meda can be hard to rank unambguously, because they dffer 4 Santomero and Seater (1996), n partcular, allow for several payment meda. In ther model obtanng a medum of exchange requres a separate trp to the bank for each medum and, accordngly, consumers choose the number of bankng trps separately for each payment medum. In contrast, our model bulds on the assumpton that consumers drectly choose the number of payment meda nstead of the number of bankng trps assocated wth each medum.

12 8 n many dmensons. Some are assocated wth foregone nterest, some nvolve longer processng costs, some provde more prvacy, some protect better for fraud and others for accdental losses. A typcal model ncorporates one or two dmensons but neglects the rest, both because of analytcal tractablty and because of the perceved dffcultes n dentfyng whch method outperforms the others and n what dmensons. Here we abstract from all these dfferences except for the effcency n reducng shoppng tme. Yet another reason why we can focus on the number of payment cards and on ther effectveness n generatng transacton servces s that technologcal progress may somewhat paradoxcally have rendered the payment meda more homogeneous. If checks are no longer used and f usng cash means usng an ATM card, the relevant choce set for consumers reduces to the set of avalable cards. At least ths stuaton essentally prevaled n Fnland under the perod where our data comes from. 3.3 Model Formulaton The abovementoned two mplcatons suggest that multhomng reduces the tme cost of transactons but ts margnal effect s decreasng. The followng Baumol- Tobn type of technology determnng transacton tme captures formally ths dea: τ = γ T n 2 γ1 AT (1) where A s a technology parameter, T s the amount of transactons to be conducted, and γ 1 and γ 2 are parameters, and n s the prncpal varable of the nterest, the number of payment cards adopted by a consumer,.e., her level of multhomng. Buldng on ths technology, our goal s to derve a model of the determnaton of n that gudes our emprcs.

13 9 Let ω denote the tme cost of transactons (shadow value of tme), and ψ the monetary and non-monetary cost of adoptng a new payment medum, whch s assumed to be fxed n the sense that t does not vary wth the number of adopted payment meda. The consumer chooses n so as to mnmze the sum of the costs of transacton tme, ω τ, and the total adopton costs, ψ n, subject to the transacton technology (1). Ignorng for brevty nteger problems, demand for payment meda s gven by γ 1+ γ 2 1+ γ 2 1 ω Aγ 1+ γ 2 2 n = T. (2a) ψ Equaton (2a) shows how the optmal level of multhomng s drectly related to the amount of transactons, T, and nversely related to the adopton cost, ψ. Our focus s on the adopton cost. The models of technology adopton by consumers suggest that the nonmonetary costs, e.g., searchng and learnng costs, prmarly arse from mperfect consumer nformaton. Because consumer awareness, denoted by a n what follows, reduces t and thus ψ almost by defnton, we assume that ψ = ψ( a) wth ψ '( a) < 0. It then mmedately follows from (2a) that n'( a ) > 0, that s, our model predcts that the optmal level of multhomng s drectly related to consumer awareness. 4 Emprcal Model of Multhomng 4.1 Consumer Heterogenety In practse both the adopton cost,ψ, and the amount of transactons, T, consst of several factors and probably vary across consumers. To allow for ths type of consumer heterogenety we rewrte (2a) as

14 10 1 ω Aγ + γ1+ γ 2 1 γ 2 2 n T 1+ γ 2 (2b) = ψ for each consumer = 1, 2,..., N. We follow Mullgan and Sala--Martn (2000) and assume that ψ vares both wth observable and unobservable characterstcs of consumers. For example, ncome and fnancal wealth are observable n our data. Also many demographc and soco-economc characterstcs such as gender, age and educaton, are observable to us. So s the awareness of consumer, a. The unobservable consumer heterogenety s defned as υ ln ψ x' δ + αa, (3) where δ s a column vector, and x' s a row vector that ncludes a constant and the observable consumer characterstcs except for awareness. The unobservable consumer-specfc component defned by (3) s by assumpton ndependently and dentcally dstrbuted wth the mean E[ υ ] = 0. In partcular, t s assumed to be ndependent of the amount of transactons, T, and the observable consumer characterstcs, x and a. Later we show that ths assumpton can to some extent be relaxed. After some manpulatons, we can substtute (3) for (2b) to obtan n 1 exp γ 2 [ lnωaγ + ( γ + γ ) lnt + αa x' δ υ ] = (4) Because ω and T are unobservable, we stll need to make two auxlary assumptons to arrve at an estmable model. Frst, as (4) already suggests, we assume that the tme cost of transactons, ω, does not vary across consumers condtonal on x. As a result, the frst term, lnωaγ 2, n the exponent functon can be subsumed nto x'.

15 11 Second, although we cannot drectly measure T, we can observe consumers ncome levels. An mplcaton of the standard consumpton functon relaton s that there s one-to-one mappng from a consumer s ncome to her consumpton. We postulate that there s also one-to-one mappng from the consumpton to T : the more one consumes, the more transactons need to be ntated. Such a relaton s ntutve and, accordngly, t has been mplctly assumed n the prevous lterature, e.g., n Mullgan and Sala--Martn (2000) and Attasano et al. (2002). It follows that a consumer s ncome and the amount of transactons she carres out have one-to-one relaton. We capture the relaton by assumng that T s a nonlnear functon of a consumer s ncome and her other characterstcs,.e., that T 2 ( 1INC + θ 2INC θ j xj ) = exp θ + j =, (5) 3 where INC denotes consumer s ncome level. The exponental specfcaton n (5) s chosen, because T s a count varable. Under our specfcaton, T could be the condtonal mean of a Posson densty, and hence an outcome of a count process. 5 Specfcaton (5) also ensures that the flow of transactons s postve. After substtutng (5) for (4) and usng the frst assumpton, we have n 2 ( 0a + π 1INC + π 2INC + π j xj ) ε = exp π =, (6) 3 j where υ ε exp 1+ γ 2 wth ( T, a, x ) = 1 E ε, π 0 α and, expect for π 0 1+ γ 2 and the constant, π ( γ + γ ) 1 2 j j j. 1+ γ θ δ 2 5 We could generalze ths condtonal mean to allow for multplcatve unobserved heterogenety, provded that the multplcatve component s d and ndependent of both the regressors and ν. The quas-lkelhood methods for count data that we wll use would be robust to ths type of extenson (see Wooldrdge 1997 pp ). For smplcty, we do not pursue ths extenson.

16 Estmaton Issues Equaton (6) forms the gst of our emprcal model of multhomng, as t provdes us wth the condtonal mean of a regresson model. We use three methods to estmate the model and partcularly, π 0, the effect of consumer awareness on multhomng. As a benchmark we estmate a model wth a lnear mean functon usng OLS. The lnear model s easy to justfy even f the condtonal mean functon s gven by (6), because n practce the two specfcatons produce qualtatvely smlar estmates. 6 Because n > 0, we can also resort to the wdely-used log transformaton of the dependent varable when estmatng the parameters of the condtonal mean equaton (6). OLS estmaton of the resultng transformed model provdes us wth a second set of results. Fnally, we estmate the model usng the Posson quas-lkelhood method and the robust Huber-Whte varance-covarance matrx. The Posson quas-lkelhood method has two advantages: Frst, the condtonal mean n (6) s convenently dentcal to the condtonal mean of a Posson (count) regresson model wth multplcatve unobserved heterogenety (see for example Wooldrdge 1997, pp and Cameron and Trved 1998, pp ). 7 Ths s advantageous, because the level of multhomng our dependent varable s defned as the number of dfferent payment meda a young consumer uses when payng for her purchases or consumpton of servces. An mplcaton of 6 The reason for the smlarty s that t can be shown usng a frst-order Taylor seres expanson of the condtonal mean around the sample mean of the dependent varable, n, that lnear mean slope coeffcents are approxmately n tmes exponental slope coeffcents (Cameron and Trved 1998, p. 89). 7 Ths generalzed count regresson has the property that the unobservables and observables are treated symmetrcally.

17 13 such a dependent varable s that we would have to model a count process, somethng that our condtonal mean equaton takes nto account by desgn. The second advantage s that we know from the results for generalzed count models that the consstency of estmaton requres only a correct specfcaton of the mean. Under the currently mantaned assumpton of exogenous consumer awareness, the Posson quas-maxmum lkelhood estmator wll yeld consstent estmates of the parameters of the condtonal mean functon, n partcular, π 0. Because we have specfed nether a varance functon nor the probablty densty functon for ε, the standard Huber-Whte sandwch estmator can be used to obtan consstent estmates of the varance-covarance matrx (Wooldrdge 1997). 8 What s less convenent s that we cannot, as equaton (6) shows, wthout addtonal assumptons dentfy the structural parameters γ 2 and α from the coeffcent of a. Only the total effect of consumer awareness on multhomng can be quantfed from the data. Nonetheless, the structural dervaton of the model uncovers the theoretcal components of the total effect. 5 Data and Defnton of Varables 5.1 Data The Fnnsh Bankers Assocaton has commssoned a survey of young adults [n Fnnsh: Nuorsotutkmus ] n 1996, 2000 and The prmary am of the surveys has been to collect data on the consumpton habts of young Fnns and ther 8 By specfyng a mxng dstrbuton for ε, we could derve the exact margnal dstrbuton for the dependent varable. A two-parameter gamma dstrbuton would result n a Posson-gamma mxture,.e., the famlar negatve bnomal model for counts (Cameron and Trved 1998, pp ). However, because a specfc parametrc dstrbutonal assumpton for ε s at best a crude approxmaton, we follow a more general approach of usng the Posson quas-maxmum lkelhood method and the Huber-Whte varance-covarance estmator. We return to ths ssue n the robustness tests n secton 5.2.

18 14 vews about bankng and fnancal products and servces. The data for our analyss comes from the survey conducted between the 21 st February and 5 th March, The survey was based on a random sample of 1004 young adults aged between 15 and 28. We use the entre sample, whch represents approxmately 1/900 of the total populaton n the age group. The data s rch n detal concernng the young adults demographc and soco-economc characterstcs, fnancal affars, bankng relatonshps, and nformaton about bankng products and fnancal affars, ncludng payment meda. The data also ncludes nformaton about the use of varous payment meda n retal transactons. 5.2 Dependent Varable In ths study the dependent varable, n, s the number of dfferent payment meda a young consumer uses when payng for her purchases or consumpton of servces. The dependent varable summarzes the answers of the followng three related questons n the survey: 9 1) What s the most typcal way you pay for your purchases or consumpton of servces? ) cash, ) debt card, ) combned debt-credt card, v) credt card, v) debt or credt card ssued by a retaler, v) Vsa Electron, v) stored value card, v) GSM or WAP phone, x) by other means, how? (specfy); 2) What about the second most typcal way? Is t ) cash, ) debt card, ) combned debt-credt card, v) credt card, v) debt or credt card ssued 9 Translaton from Fnnsh by the authors.

19 15 by a retaler, v) Vsa Electron, v) stored value card, v) GSM or WAP phone, x) by other means, how? (specfy), x) there s no second way; 3) Do you stll use another ways to pay for your purchases or consumpton of servces? If yes, what are these? ) cash, ) debt card, ) combned debt-credt card, v) credt card, v) debt or credt card ssued by a retaler, v) Vsa Electron, v) stored value card, v) GSM or WAP phone, x) by other means, how? (specfy), x) there are no addtonal ways. Our method of countng of payment meda has some useful propertes. Frst, the three questons dentfy vrtually all the payment meda consumers could use when payng for consumpton or servces at the pont-of-sale n Fnland. Moreover, even f a payment medum was not properly dentfed, the respondents had three possbltes to dentfy such a medum by themselves. But no one dd. Thrd, all the questons concern actually usng a payment medum, not havng an access to t. We therefore need not to worry about card owners who never use ther cards even f they consttuted a sgnfcant fracton of card ownershp as, e.g., n Austra (see Stx 2003). Such phenomenon of sleepng cards can also exst n Fnland where, as mentoned n secton 2, almost every young has a bankng account n whch a payment card s automatcally attached as a part of a (free) bankng servce package. Yet another useful property of our data s that just before the questons of the use of payment meda n retal transactons were presented, the respondents had been asked about ther habts of payng for ther blls. Our count varable should thus capture the young adults payment habts n pont-of-sale-transactons nstead of ther bll-payng habts.

20 Consumer Awareness The prevous lterature unfortunately provdes lttle help n choosng a proxy for consumer awareness, a. We measure t based on a seres of questons ncluded n the survey that concern the provson of nformaton about payment meda. We code an ndcator varable that equals 1, f the respondent answered of havng ether receved or been offered a lot of nformaton about debt or credt cards, ways of payng blls, use of transacton accounts, or borrowng through credt cards; and zero otherwse. The ratonale for our defnton of a s that a consumer s awareness of the exstence and characterstcs of payment meda s lkely to be drectly related to the amount of nformaton the consumer has been offered about them. The amount should, n turn, be drectly related to the systematc and unsystematc forms of nformaton provson by the varous ssuers of payment meda. The currently mantaned assumpton of exogenous awareness requres that the exposure by consumer to the nformaton provson (as captured by a ) s not related to ε (the unobservable consumer heterogenety) after condtonng on the other observables (n ' x ). Although our measure of consumer awareness s certanly mperfect, we have several reasons to trust n t. Frst, n count models wth an exponental mean functon, the effect of an addtve measurement error n a rght-hand-sde varable s qualtatvely dentcal to that of unobserved heterogenety (Cameron and Trved 1998, pp ). Ths property means that our results based on the Posson quas-maxmum lkelhood estmator are robust to such a measurement error, provded that the measurement error s uncorrelated wth the regressors. Second, we show that our results hold n nstrumental varable estmatons that corrects for er-

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