Will it Play in Peoria? How Payment Instrument Preferences Differ Across Low and High Density US States

Abstract

In this study, I seek to locate the effects of density on payment instrument payment preferences, most notably on cash usage and credit usage, but secondarily on debit usage and check usage. I run four models in the course of this study, one for each method of payment (cash, credit, debit, and check) and the effect of density on each of those, with several demographic control variables. I also run a fifth model for density’s effect on credit without any influence from debit holding involved to further isolate the relationship between credit and density. I did find results confirming my expectations that density has a negative effect on cash and a positive effect on credit, but with too high a reported standard error for a valid degree of significance. The results for the variables for smartphone usage provide remarkable consistency, beyond the 99% significance level, and confirm underlying network effect theory regarding the role of smartphone technology in competing with cash usage while simultaneously boosting credit usage. Education also displays a significant impact on payment instrument choice, with college education showing a negative effect on cash usage, and a strong positive impact on credit usage. This factor adds to the results from the smartphone ownership variable in contributing to the positive network effects of credit while also requiring a higher level of education and trust in credit for it to be an effective payment instrument in a two-sided market. Cash, a relatively more accessible and lower-education/technology-intense payment instrument, demonstrates durability in the face of growing tech innovation and adoption from the results of this study.