The Federal Reserve’s 2010
Payments Study shows that non-cash payments have fared well
over the past few years. This growth, writes Louise Naughton, is
likely to have been driven by move towards close cash
substitutes.
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The
years between 2006 and 2009 may have been tumultuous for the US
payments market, but it was an undeniably exciting period too.
The global recession had its
obvious impact on consumer spending and the shift from credit to
debit in this time is proof of that lasting impression as consumers
withdrew from the seemingly unstable world of credit to the
perceived comforting and safe haven of debit to lick their
wounds.
A snapshot of the US electronic
payments landscape comes in a Federal Reserve study, which, from
2006-2009, investigated the total number and value of payments made
by cheque, debit card, credit card, automated clearing house (ACH)
and prepaid cards.
The 2010 Federal Reserve
Payments Study – Non-cash Payment Trends in the United States:
2006-2009 was publicly released in April.
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By GlobalDataThe estimated number of non-cash
payments reached 109bn in 2009 and is valued at $72.2trn. The
number of non-cash payments increased at a compounded annual rate
(CAGR) of 4.6% since 2006.
The report shows that electronic
payments made with cards and by ACH collectively exceeded
three-quarters of all non-cash payments while payments by cheque
now account for less than one-quarter of all e-payments.
“The results of the study clearly
underscore this nation’s efforts to move toward a more efficient
electronic clearing system for all types of payments,” says Richard
Oliver, executive vice-president for the Federal Reserve Bank of
Atlanta.
“It is also likely that the results
reflect changing consumer behaviour during difficult economic
times.
“Not only does this study show the
continued move from cheques to the various electronic means of
making payments, but we also see the extraordinary progress the
industry has made in electrifying the clearing process for the
27.5bn cheques still being written.”
Shift towards
e-payments
There were
84.5bn e-payments made in the US during 2009 which were valued at
$40.6trn.
The number of electronic payments
increased at an average annual rate of 9.3% between 2006 and
2009.
The Federal Reserve attributes the
rise in e-payments and the decline of cheques to the influence of
technological and financial innovations.
Other factors include the business
cycle, changes in the composition of economic activity, regulatory
developments and population growth.
Not surprisingly, credit cards,
including both general purpose and private label cards, were the
only form of e-payments to demonstrate a decline in usage from 2006
to 2009.
The total number of payments made
by credit cards declined at an annual rate of 0.2% during the three
year period studied, from 21.7bn transactions in 2006 to 21.6bn in
2009.
The value of credit card payments
declined at an annual rate of 3.4% from $2.1trn in 2006 to $1.9trn
in 2009 for an average of $89 per transaction.
“The decline in credit card
spending likely reflects the economic recession and may not
represent permanent changes in payments preferences of consumers
and businesses,” says the report.
However credit cards were not on a
continual decline during the 2006-2009 period. Data from the report
shows the number of transactions on general purpose credit cards
increased from 2006 to 2007 and from 2007 to 2008 before starting
its decline the following year.
Some 1.9bn of the 19.9bn US general
purpose card transactions in 2009 were card-not-present (CNP)
e-commerce transactions. Interestingly, CNP transactions had higher
transaction values ($119) than in-person credit card payments
($76).
There were 20m contactless credit
payments in the US during 2009, which accounted for 0.1% of all
general purpose credit card payments.
Average contactless
transaction high
From a European perspective, the
average contactless credit transaction in the US is surprisingly
high at $43 – half the average general purpose credit card
transaction and $33 less than the average card present transaction
– as the current limit for a contactless credit payment is €25
($35.8) in the eurozone.
What is even more surprising is the
Fed deems this transaction value as being “relatively low”. It
claims this figure reflects the types of retailers that have chosen
to invest and implement contactless terminals and the types of
transactions cardholders prefer to make contactless payments.
Ten million more contactless
signature debit transactions were made in 2009 with a collective
value of $100,000m ($0.01trn) and accounting for 0.15% of total
signature debit card payments and 0.08% of their total value.
Contactless signature debit card
transactions had an average value of $20 – almost half the value of
signature debit transactions overall.
Contactless
transactions are typically aimed at low-value transactions and more
specifically are a means to displace cash. With the card schemes
setting limits of £15 ($24.52) in the UK, PLN50 ($18) in Poland,
A$100 ($107) in Australia and the option of limitless contactless
transactions in Turkey, it is difficult to determine exactly what a
contactless transaction value should be.
Unsurprisingly, debit card payments
continued their ascent with double-digit growth during the
2006-2009 period, accounting for 34.7% of non-cash payments in 2009
and 2% of non-cash payments’ total value.
The report shows the total number
of debit card payments grew at a rate of 14.8% per year, from 25bn
in 2006 to 37.9bn in 2009 and its value increased at an average
annual rate of 13.5%, from $1trn in 2006 to $1.4trn in 2009.
According to the Fed, the number of
PIN debit transactions increased at a more rapid pace per year than
that of signature debit – 15.6% and 14.3% respectively.
However, before the industry can
get too excited about the move to chip and PIN, the absolute
increase in the number of signature debit payments (7.7bn) far
exceeded the number of PIN debit transactions (5.1bn) from 2006 to
2009.
The report estimates that 14.5bn
PIN debit card payments were made in the US during 2009, reaching a
value of $563.1bn.
The Fed breaks these figures down
further to claim 77% of such transactions were made by cardholders
at commercial banks, which accounted for 76% of the collective
value of PIN debit payments. The average transaction value was $39
in 2009 – this figure includes cash-back at the point-of-sale –
while the average transaction value for signature debit dropped
from $40 to $37.
Fastest-growing payment
type
Prepaid card transactions only
represented 5.4% of all US non-cash payments but the Fed deems them
to be the fastest growing major payment type in the 2006 to 2009
period.
The number of prepaid card
transactions increased by an average 21.5% year-on-year, reaching
sixbn in 2009, the value of which also increased at a meteoric rate
of 22.9% year-on-year to reach $140bn in the same year.
Private label prepaid was the used
the most frequently by US consumers with an estimated 2.7bn
transactions made in 2009. However, the payment type grew 11.8% per
year during 2006 and 2009 – exhibiting the lowest growth rates in
that period among prepaid products.
Comparatively, the use of
Electronic Benefit Transfer (EBT) cards increased by 21.4% on an
average annual basis since 2006 and the number of general purpose
prepaid card transactions exploded during the three year period –
showing annual growth rates of 63.4%.
“We anticipate that the data from
this study will spawn a number of ancillary research efforts to
refine the data and learn more about consumer and business
preferences in the selection of retail payments instruments,” said
Oliver.
Although the findings in the Fed’s
report are neither surprising nor controversial, they do
nevertheless shine a light on the speed of which the transition to
electronic payments is taking place in the US.
However, it is difficult to come to
a complete conclusion regarding the adoption of e-payments in the
US as the Fed has neglected to track cash payments during the 2006
to 2009 period.
Step forward the 2009 Survey of
Consumer Payment Choice (SCPC) report by the Federal Reserve
Bank of Boston’s Consumer Payments Research Centre, a report that
not only investigated the growth and changes in electronic payments
but that of cash as well. This gave a more rounded view than the
Fed’s efforts and provided some surprising results.
Total consumer payments per month
declined by 4.2% during 2008 and 2009 and consumers seemed to shift
more towards making more payments by cash and close cash
substitutes.
Fewer hold
cards
The report notes that cash payments
increased by 26.9% during the recession-fuelled year and in a
further blow to the payments industry, consumers in the US also
reduced their e-payments activity – payments by credit card were
down by 21.9%, bank account (26.1%), cheque (14%) and debit card
(10%).
The report claims it is also
“reasonably clear” that fewer consumers held credit and debit cards
in 2009 than in 2008, as the adoption rates of such payment
instruments declined by 6.1% and 3.2% respectively.
In stark contrast, total cash
holdings of the average consumer in the US increased by 26.5% from
2008 to 2009, from $230 to $291. Total cash withdrawals per month
during the year grew by 29.2% (from $336 to $434) and the average
cash withdrawal increased by 16.7% (from $102 to $119).
This high-frequency shift toward
cash conflicts with the ongoing, long-run transformation of
payments from paper to cards and electronics, documented in the
Fed’s 2006-2009 study.
“For many years, consumers had been
migrating away from paper instruments toward cards and
electronics,” says Scott Schuh, director at the CPRC.
“In 2009, consumers reversed that
trend and moved back to more reliance on cash. The finding raise
the important question of whether this move signals a permanent
reversal or a transitory response to the severe recession.”
According to the report weaker
economic conditions may have encouraged a shift away from credit
card payments, for both supply and demand reasons, and perhaps
toward cash because it can help consumers cut costs and improve
budgeting.
The changes in government
regulations toward credit and debit cards and bank pricing of
payment card services during 2008 and 2009 (CARD Act) would not
have helped matters either.
Whether this shift towards cash is transitory or permanent
remains to be seen but the fact the SCPC report claims consumers
continue to rate cash highest in virtually every payment
characteristic – acceptance, convenience, cost and security –
certainly suggests the war on cash is far from being won.
