For two decades electronic payments have been steadily ousting
cheques and cash as the preferred means of transacting in the US,
particularly amongst consumers. Now developments such as cheque
truncation and fast-growing use of online bill payments are
accelerating this well-entrenched trend.
For two decades electronic payments in the US have been steadily
gaining ground as the favoured means of non-cash payments and in
terms of transaction volumes have overtaken the once dominant
cheque. According to the Federal Reserve System (Fed) the number of
electronic payments exceeded cheque payments for the first time in
2004, having been about equal in 2003. A new study published by the
Fed in December 2007 reveals that this trend is continuing at a
relentless pace.
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Fed data reveals that the migration from cheques to electronic
payments began in earnest in the early 1980s, a development that
has seen the number of paper cheque transactions fall from about 85
percent of all non-cash payments in 1979 to 57 percent in 2000 and
33 percent in 2006. Decline in paper cheque transactions has
gathered pace in recent years thanks largely to a surge in the
conversion of cheques into automated clearing house (ACH) debits,
the primary driver of which is the Check Clearing for the 21st
Century Act – better known as Check 21 – implemented in October
2004.
Cheque decline accelerates
The impact of Check 21 is reflected in the accelerated decline in
the number of paper cheques being cleared. For example, between
1995 and 2000 Fed data show that the number of paper cheque
transactions fell from 50 million in 1995 to 42 million in 2000, an
average rate of decline of 3.5 percent per year. Between 2000 and
2006, during which time the number of paper cheques process fell to
33 million, the rate of decline increased to 5.1 percent.
Notably, one of the fastest declines in the use of cheques has
been seen in payments by the US Treasury. According to the Fed,
Treasury annual cheque payments remained static at about $300
billion between 2000 and 2003 and then fell to about $200 billion
in 2006, an average annual decline of 9.1 percent over the three
years.
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By GlobalDataThe sharp decline in the number of paper cheques processed has
resulted in a significant increase in the volume of ACH
transactions. Between 2000 and 2006, Fed data reflects a 15.3
percent CAGR in ACH transaction volume and a 14 percent CAGR in
value terms.
All indications point to this trend having continued in 2007,
spurred on by the formal go-ahead given in early 2007 by the
National Automated Clearing House Association for the introduction
of back office conversion of cheques of less than $25,000 by
retailers and other merchants into ACH debits. Indicative of the
trend, SVPCO Image Payments Network, the electronic cheque and
cheque image exchange unit of the Clearing House Payments Company
(CHIPS), cheque image volume grew in 2007 to 747 million, up 376
percent on 2006 volume. The total value of cheques converted into
electronic format was $5.3 trillion, up 167 percent compared with
2006.
The trend is set to continue, believes CHIPS. “In 2008, the
business case for image exchange will be even stronger, as image
costs decline and paper cheque processing costs increase,”
predicted its senior vice president Susan Long.
Total CHIPS volumes also indicate a sustained swing to
electronic payments. In its most recent data release CHIPS reported
average daily ACH transaction volumes of $2.102 trillion in
September 2007, up 29.82 percent compared with September 2006.
Providing further impetus will be significant changes to fee
schedules for services provided to depository institutions by the
Fed. On 2 January 2008, a 12 percent increase in fees on paper
cheque deposits came into force while fees on cheques deposits
destined to electronic recipients were lowered by 3 percent. Fees
on other electronic payment services were cut by 8 percent.
Fed scaling back facilities
In anticipation of declining paper cheque volumes, the Fed is to
significantly scale back capacity at 12 of its16 cheque processing
sites between 2008 and 2010. Total cheque processing staff numbers
will be cut from 3,300 to 1,740. Notably, research firm Aite Group
predicts that the total number cheques written will have fallen to
about 25 million by 2012 of which 75 percent will be cleared
electronically.
However, despite the decline in paper cheque volumes they still
represent the biggest single non-cash payment means in terms of
value – 55 percent in 2006. For electronic payments service
providers a big challenge is to make significant inroads in the
business-to-business market where, according to industry body the
Electronic Transactions Association (ETA), 80 percent of
transactions rely on paper invoices and paper cheques.
Contrasting with businesses, consumers have adopted electronic
payments with enthusiasm. This is reflected in a significant
increase credit and debit card transactions that, based on Fed data
and US Census Bureau data, increased from 56 per person in 2000 to
167 in 2006. In particular the debit card has come strongly to the
fore in recent years, overtaking the credit card in volume terms.
Fed data shows that debit card transactions lifted from 8.3 billion
in 2000 – 35 percent of the 15.6 billion total card transactions –
to 20.4 billion in 2006 – 54 percent of the 50 billion total card
transactions.
According to a survey by consultancy
Dove Consulting in 2007, debit cards have attained significant
market penetration with 72 percent of respondents reporting that
their deposit accounts had an associated debit card.
From the debit card issuers’ perspective, the two most important
drivers of growth identified by the survey were implementation and
the increased use of rewards programmes and marketing initiatives
tailored to target populations.
The attractiveness of debit cards is also being enhanced by a
general downward trend in the practice of charging consumers a fee
for PIN-based debit card transactions and an increase in the number
of banks allowing customers to complete purchases even when there
are insufficient funds in the underlying demand deposit account.
According to Dove, in 2003 34 percent of debit card issuers offered
overdraft protection, a level that had nearly doubled by
2006.
Online billpay soars
Another notable development in the US
payments industry in recent years has been the significant increase
in the payment of bills via the internet. Indeed, a study conducted
by online payments company CheckFree, The 2007 Consumer Bill
Payment Survey, found that in 2006 the 82.5 million online US
households for the first time paid more of their bills online than
via cheque.
According to CheckFree, online payments made up 39 percent of
the total volume of bill payments among online households in 2006,
an increase of four percentage points compared with its previous
December 2005 survey. The volume of cheques used fell four
percentage points to 34 percent of total bill payments.
CheckFree also found that online consumers paying at least one
bill online per month in 2006 rose to 74 percent compared with 69
percent the previous year. In CheckFree’s first survey conducted in
January 2002, only 37 percent of online households reported paying
at least one bill online per month.
Also helping to drive increased use of online bill payment is
the increasing number of banks offering so-called ‘pay anyone’
services such as CheckFree’s for free on their websites. According
to CheckFree, 93 percent of banks were offering pay anyone services
for free in January 2007 compared with 66 percent in 2002. In 2002
free electronic billing and payment also tended to be limited to
bank clients that met stipulations such as a minimum deposit
balance. Other customers were typically charged between $5 and $7
per month to use the service.
Use of cash
The impact of a trend towards non-cash payments has had on the use
of cash is unclear as no specific data on the role of cash are
available from the Fed. However, according to estimates made by
David B Humphrey of Florida State University’s finance department
the share of cash in all legal payments fell from 31 percent in
1974 to 20 percent in 2000 while the share of cash in consumer
payments fell from 39 percent to 16 percent.
With the advent of payment options such as contactless payment,
the downward trend in the use of cash has probably continued since
2000. Indicatively, Fed data shows that there were 6.1 billion cash
withdrawals from ATMs worth a total of $520 billion in 2003. In
2006 there were 5.8 billion ATM cash withdrawals worth a total of
$578 billion. This represented a total increase of 11.2 percent
compared with an increase of 32.3 percent in payments via credit
and debit cards. The average value of ATM withdrawals increased
from $85 in 2003 to $99 in 2006.
Other factors are also eroding the use of cash. Among these is
the fast-growing prepaid card market which consultancy Mercator
Advisory Group predicts will record total load volume of about $421
billion in 2010, up more than150 percent from $181.6 billion in
2005.
Undoubtedly the US payments industry is solidly on the
electronic route. Providing insight, Ed Labry, president of
payments processor First Data’s commercial services, gave his view
on future trends in the payment industry following receipt of the
ETA’s first Distinguished Payments Professional Award last
year.
“As the younger generations come through, I think we are going
to see more and more small-ticket transactions that have
traditionally been paid with cash, even sub-$5 transactions, be
paid with debit cards,” predicted Labry. “I think you’re going to
continue to see an emergence of prepaid products to the roughly 80
million non-banked and under-banked in the US,” he added. On mobile
payments he noted that it while it “means a lot of things to a lot
of people” it is not a matter of if mobile commerce will take off
but a matter of when.
