People have more ways to pay than ever, and payments are critical to our financial system. Their safety and efficiency impact the economic health of individuals, businesses, and the broader economy, which is why the Fed monitors payments trends closely.

Boston Fed senior economist and policy advisor Joanna Stavins is a payments expert. We talk to her about the “buy now, pay later” strategy as an alternative to traditional credit cards. We also explore some striking data about credit card debt in New England. And we discuss what consumers need to be aware of as payment speeds keep increasing.

ALLISON ROSS:

Hello, and thank you for joining us for this episode of Six Hundred Atlantic. I'm your host, Allison Ross. There are more ways to pay than ever, and payments are a fundamental part of our financial system. Their safety and efficiency impacts the economic health of individuals, businesses, and the broader economy. So, today we're going to talk about payment methods with Boston Fed senior economist and policy advisor Joanna Stavins.

Joanna studies aspects of payments, including the buy now, pay later strategy as an alternative to traditional credit cards. We'll also explore credit card debt with Joanna. She has some recent research on credit card debt in New England. So, Joanna, welcome to the podcast.

JOANNA STAVINS:

Thank you very much for having me.

ALLISON ROSS:

First, there was cash or card, but now you can tap or send money instantly. It can be tough to keep up with the growing number of payment types. So how do these options benefit the consumer and the economy? And are there things to be wary of as the options increase, like more opportunities for fraud or theft?

JOANNA STAVINS:

In general, I would say that more options are always better. So, consumers certainly benefit from having more options and more ways to pay. And in fact, if you look at the number of payments that are available to consumers, nothing has gone away. So, we started with cash, we then added checks, we then gradually added credit cards, and on and on and on, and nothing has really gone away. So, despite various predictions, we are still not a cashless economy or even a checkless economy, even though we write fewer checks.

Having said that, you mentioned there are drawbacks and potential risks of having more payment options. Consumers, as we have found out over the years of research, value convenience and speed. However, with more convenience and faster payment, there is also a danger of doing something that you didn't intend to do and there is a potential risk of having more scams.

ALLISON ROSS:

Right, and that could be as easy as maybe even just sending your friend too much money or miscalculating when you're typing that in. And I think something that's interesting about this payment space is that we're all impacted by this.

JOANNA STAVINS:

Absolutely. And I think one of the benefits of doing research on payments is that everybody has personal experience, anecdotal evidence, everybody's interested in it. And sadly, everybody has some experience with fraud and scams, including myself. So, one thing to be aware of is that it's very easy to make a mistake. Check and double-check who you are paying, how much you're paying, check the amount. Because with some of those newer payment methods, there is no established liability structure. So, unlike with credit cards, where you can pretty much complain and reverse any type of transactions, it's not necessarily the case with Zelle and Venmo, and other mobile type of payments.

ALLISON ROSS:

I want to switch to talking about a method many online sellers use to allow customers to make bigger purchases with installments. This is, of course, “buy now, pay later.” It's something that you've done a lot of research on, and it can be enticing. So, you see an item that maybe costs $200 and you potentially only have to pay 20-ish dollars now and the rest later. The benefits seem to be somewhat clear here, but what are some of the potential consequences of this?

JOANNA STAVINS:

The benefit is clear. You spread your payment typically into four installments over a few weeks. It's not like getting a mortgage that you repay for 30 years. On the other hand, you might be tempted into buying something that you don't necessarily, I don't want to say need, because that's a very subjective term, but you might not necessarily have resources to cover. So, you might have best intentions to repay the transaction within four installments, as scheduled, but then time comes, two, four weeks later, turns out that maybe you didn't get your paycheck on time or maybe you had other bills you didn't anticipate, or you didn't remember about and you forget, or just don't have money to cover those expenses. So, there is a potential risk of not paying as scheduled.

ALLISON ROSS:

And I want to go further on that and talk about one stat in particular. In your paper you say that some 71% of consumers who use the buy now, pay later plans already had built up some credit card debt in 2023, but only 40% of credit card holders who didn't use a buy now, pay later plan had built up credit card debt. So, what is significant about those stats? Is this plan targeting those who have debt, and what is the danger, and why does this matter?

JOANNA STAVINS:

So, I would say that buy now, pay later maybe is not targeting specifically people who have credit card debt. However, I do find there's a strong correlation between having credit card debt and using buy now, pay later. The danger here, of course, is that if you already have credit card debt and then you use buy now, pay later, even though it doesn't function the same way as credit card debt does, you have a risk, you're at risk of potentially accumulating more debt.

And so, credit card debt is very costly. We all know credit card debt carries high interest rate, and then on top of that you get additional debt, and then you're faced with having a choice of which one to pay back and maybe not having enough resources to pay either. So, buy now, pay later is what I find is problematic, because people who use it tend to have fewer resources. They have less money in their bank account, they have lower credit scores, they tend to be minorities, often women. And so, they might be financially vulnerable.

ALLISON ROSS:

You recently published a paper that looked at credit card delinquencies in New England. In that paper you found that New Englanders are less likely to carry a revolving balance, meaning carrying an unpaid balance into the next billing cycle or be delinquent, compared to the rest of the country. Do you have any thoughts about why this region carries less debt?

JOANNA STAVINS:

I would say that New Englanders are more highly educated and wealthier compared to the rest of the country. And what I have found in my other research over the years is that education and income are both strongly correlated with credit card use and credit card revolving. So, that's consistent with the demographic differences between New Englanders and the rest of the country.

And so, they use credit cards in sort of what I would call more responsible way in a sense that they're less likely to revolve. Delinquencies are luckily very rare. So, the percentage of credit card users who are delinquent on their payment is low, but it is the most dangerous type of debt, because that means that you don't even pay your minimum balance. And so, again, we find New Englanders are less likely to be delinquent compared to the rest of the country.

ALLISON ROSS:

We've touched on a lot of different payment methods, and in your research, you've looked at the factors that affect whether a person will adopt a new payment method. So, what are some of those factors?

JOANNA STAVINS:

We find strong correlation between demographics, and income, and payment behavior. So, one of the strong predictors of the adoption of credit card instruments is education, as well as income, race, gender, and age. For example, we find very strong correlation between education and the number of payment instruments. So, people who are more highly educated tend to have more payment instruments. And on the flip side of it is lower-income and women, and minorities are more likely to use buy now, pay later, which carries some of the risks we already discussed.

What's interesting is that repeating the research many years later, some of the same correlations between demographics, income and payment behavior holds. So, when I did a similar study over 10 years ago, some of the same factors, income, education, and age were very strongly correlated with payment behavior. And now 10-plus years later, using different data, we find that some of the same factors influence payment behavior, despite the fact that we have lots of new options including mobile wallets, Venmo, Zelle, etc.

ALLISON ROSS:

And then, speaking of those faster payments, what is driving the innovation for faster and faster payments, these instant payments?

JOANNA STAVINS:

Well, I think this goes together with other aspects of our life. People like speed, and we like to do everything faster. In fact, faster payments have been introduced in the U.S. later than they have in some of the other countries. So, in a sense, we're kind of behind in terms of technology. But in general, I would say the technology moves much faster than consumers’ payment habits. And so, we have many different options, and faster payments is the most recent one of those. However, people's behavior changes more slowly. And so, we still like to use cash, we still like to write checks, and obviously, speed is valued by consumers. But we have to be extremely careful, because there is some tradeoff between speed and security. And so, the instant payments potentially carry some of the risks of irreversible transactions that might be a mistake.

ALLISON ROSS:

Right. And besides those irreversible transactions, are there any other major red flags that people should be on the lookout for?

JOANNA STAVINS:

Well, just be extremely careful in what you do, and it's true with any type of payment behavior. Obviously, it's even true with cash and checks, but it's especially true with the new instant and fast payments, and mobile payments. Be careful who you pay. Be careful, make sure that you're paying the right recipients in the right amount.

ALLISON ROSS:

Joanna, thanks so much for joining us on the podcast.

JOANNA STAVINS:

Thank you very much for having me.

ALLISON ROSS:

Joanna's most recent paper is called, “Credit Card Delinquencies: Are New England Consumers Better Off?” You can find that paper and more on Bostonfed.org, along with all her other work we discussed today. While you're there, check out bostonfed.org/sixhundredatlantic, where you can listen to interviews, as well as our podcast seasons. And please don't forget to rate, review, share, and subscribe to Six Hundred Atlantic on your favorite podcast app. I'm Allison Ross signing off on another episode of Six Hundred Atlantic. Thanks for listening.