When purchasing goods and services, consumers can choose from an array of payment instruments. These choices include cash, checks, credit cards, debit cards, automated clearinghouse (ACH) payments and stored-value cards. Recent technological advances in electronics and telecommunications have reduced the cost of processing electronic payment instruments to a level that is, in most cases, below that of their paper-based counterparts. However, consumers continue to rely heavily on nonelectronic payment instruments, such as cash and checks.
What forces might stimulate greater acceptance of electronic means of payment over their paper counterparts? Part of the answer lies in the incentives that consumers and merchants have when using and accepting different forms of payment. In the short run, the dominant retail payment instrument will depend not only on cost, but also on the comfort and faith that it engenders. Once consumers are comfortable with and have faith in the electronic alternatives, cost differentials and other incentives, such as rewards for frequent use, will be the key factors in determining the dominant payment instrument.