Why Don't Consumers Use Electronic Banking Products? Towards a Theory of Obstacles, Incentives, and Opportunities

Abstract

This paper proposes a framework for describing why consumers use electronic banking products such as electronic bill payment, credit cards, debit cards, stored value, and e-cash. The paper surveys the literature; reports on the results of several studies, and develops a framework for evaluating consumer electronic banking usage. The framework includes three primary factors that explain consumer electronic banking usage: (1) household wealth, (2) personal preferences (e.g., convenience, budgeting, control, incentives, involvement, security), and (3) transaction-specific factors (e.g., dollar size, variability of dollar amount, offline versus online location, etc.). A number of ad hoc theories could be created to explain payment instrument successes on a case by case basis. However, the author proposes that this general decision-making framework is a superior tool for management and public policy analysis because of its simplicity, ability to explain a range of outcomes, and ability to develop testable forecasts. The paper suggests that consumers make rational decisions regarding the use of alternative payment instruments, rather than being "irrationally" resistant to change. Including a broader list of financial and non-financial factors, beyond just cost and convenience, explains the "irrationality" that is sometimes attributed to consumers. This paper goes on to consider the potential substitutability of alternative electronic payment methods for cash and checks. This decision-making framework is consistent with new product adoption models that suggest that some consumer segments will adopt products more quickly and that adoption will grow over time. However, this framework also suggests that product and service enhancements will be critical in reaching more mainstream use of electronic banking products. This paper asserts that to the degree that electronic payments carry features similar to those of checks and credit cards, consumers will migrate towards electronic payments. Consequently, the future migration towards electronic banking products will be more dependent on establishing business cases for innovations than in overcoming consumer reluctance. Some payment providers are already bundling more attractive features with these innovations (e.g., debit cards most significantly, as well as electronic bill payment and consumer-to-consumer payment innovations) and increasing the communications programs that support them. Anecdotal evidence provides some support, though not scientifically proven yet, that these efforts are leading to increased consumer usage of electronic banking products.