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Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.

Take On Payments

October 7, 2019


Payments Webinar October 10: Cash in the 21st Century

As I write this, I am drinking my morning cup of joe. For me, that means half caf/half decaf, then cut in half with microwaved nonfat milk. (Slurp.)

Day in, day out, I want it just that way. No sugar for me. Nonfat milk, not 2 percent. Black only when I open the door to an empty fridge.

Odds are, you're like me when it comes to coffee and payments. Your habits—and mine—are sticky. We've found something that works for us and—day in, day out—we take our coffees and choose to pay the same way. These are our preferences.

What happens when we change our minds about what we prefer? Shaun O'Brien at the San Francisco Fed has been looking into the relationship between our stated preferences for making in-person purchases and the payment instruments we use in the moment.

In an economic model that incorporates consumer demographics, household income, transaction characteristics, and the payee, Shaun finds that, over time, a change in stated preference eventually results in an increased probability of using a newly preferred payment instrument.

Note that word eventually.

For example, say I stated a preference for cash in 2016 and then switched to a stated overall preference for debit card in 2017. It might not be until 2018 that you would start to see a small change in my mix of payments, with relatively less use of cash and more of debit. Like a coffee habit, my preferred payments habit is slow to change. (Keep in mind that, as I have blogged previously, preference is one of a number of factors that are important, including, for example, what a payee is willing to accept.)

Whatever your morning beverage, I hope you'll join Shaun, the Atlanta Fed's Oz Shy, and me for the next Talk About Payments webinar, October 10, 2019.

We'll look at current data from the Survey and Diary of Consumer Payment Choice and new research—including Shaun's findings reported above—to investigate the 5 Ws and also the How of cash:

  • WHAT is happening with cash?
  • WHO uses cash?
  • WHERE do consumers use cash?
  • WHEN do consumers use cash?
  • WHAT might cause cash users to switch to another payment method?
  • HOW do consumers get cash?

This webinar is open to the public but you must register in advance to participate. (Registration is free.) You can register online. Once registered, you will receive a confirmation email with login and call-in information.

Date: Thursday, October 10, 2019
Time: 1–2 p.m. (ET)
Register now!

October 7, 2019 in cards, checks, mobile payments, payments study | Permalink

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September 16, 2019


Is There a Generation Gap in Cash Use?

How different are millennials from boomers in their reported payment habits, especially regarding their use of cash? New data from the Survey of Consumer Payment Choice, out this month, lets us look at age segments using the interactive charts accompanying the report.

For example, in 2018, consumers overall made 17 payments a month in cash. Drilling down, consumers aged 25 to 34—that is, millennials—used cash for 15 payments per month. Consumers 55 to 64—the boomers—used cash for 18 payments a month.

It's good to put these numbers in context. Here's a fact that surprised me: the younger group makes more total payments per month (73) than does the older group (67). That means that, as a percentage share of all payments, the difference by age is more pronounced:

  • Millennials: 21 percent of their payments in cash
  • Boomers: 27 percent of their payments in cash

The differences are similar when we look at paper checks, which the younger group used for 2 payments per month (3 percent of their payments) and the older group for 4 payments per month (6 percent).

Payment-method-use-by-age-range

You'll notice in the chart that payments instrument usage has been relatively stable for all the age groups since 2015.

Millennials' relatively lower use of cash doesn't mean, however, that the cashless society is going to arrive any time soon. In 2018, 85 of 100 consumers used cash in a typical month. And, in an analysis that incorporates a complete set of demographic variables plus income, differences by age could prove not so relevant. So, is there a generation gap in cash use? Yes. Does it mean the end of cash? No.

The charts at the website let you look at consumer payment choice by household income group and by the type of transaction. For example, you can examine how consumers' use of payment instruments is different for P2P payments than for bill payments. Check them out.

Photo of Claire Greene By Claire Greene, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

September 16, 2019 in cards, checks, currency, payments, payments study | Permalink

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August 14, 2017


Extra! Extra! Triennial Payments Data Available in Excel!

In countless old black-and-white movies, street newspaper vendors would shout out the latest sensational news from hot-off-the-press special editions. The Fed is no different in that we want to shout out that it is no longer necessary to mine the PDF-based Federal Reserve Payments Study report to extract the study's data. For the first time, we are offering our entire aggregated data set of estimated noncash payments in an Excel file. The report accompanying the data is here.

The data set is very rich and covers the following categories:

Accounts and cards
Private-label credit processors
Checks Person-to-person and money transfer
ACH Online bill pay
Non-prepaid debit Walk-in bill pay
General-purpose prepaid Private-label ACH debit
Private-label prepaid issuers & processors Online payment authentication
General-purpose credit Mobile wallet
Private-label credit merchant issuers  

Here is another table that is just one extract from the non-prepaid debit card portion of the extensive payments data available.

To get a taste of what this data can teach us, let's look closer at the cumulative volume distribution by payment dollar value threshold for non-prepaid debit cards (the data are shown above) along with general-purpose credit cards. The number and value of both types of payments grew substantially from 2012 to 2015, the last two survey periods. The chart compares these distributions, showing more vividly how this growth affected the relative proportions of payments of different dollar values.

Chart-two

For example, debit card payments below $25 accounted for 59.1 percent of all payments in 2012 versus 61.8 percent in 2015—evidence that debit card purchases are migrating to lower ticket amounts. The trend is even more dramatic over the same time span for general-purpose credit cards.

Because this is a distribution, increases in the relative number of small-value payments must be offset by decreases in the relative number of large-value payments. Unfortunately, our previous survey capped the payment threshold at $50 in 2012. Otherwise, we would see the dashed 2012 lines crossing over the solid 2015 lines at some payment value threshold above $50. In brief, the results suggest cash payments are continuing to migrate to debit cards, while credit cards may be garnering some share at the expense of both cash and debit cards.

The challenge is on for you data analysts out there. Please share your findings.

Photo of Steven Cordray  By Steven Cordray, payments risk expert in the Retail Payments Risk  Forum at the Atlanta Fed

August 14, 2017 in ACH, cards, checks, debit cards, mobile payments, payments study | Permalink

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June 19, 2017


Calculating Fraud: Part 2

Part 1 of this two-part series outlined an approach for whittling down credit card transactions to the value or number of authorized and settled payments as the denominator for calculating a fraud rate. This post reviews the elements needed to quantify the numerator.

To summarize from the previous post, when analyzing credit card fraud rates, you should consider what is being measured and compared. To calculate a fraud rate based on value or number, you need a fraud tally in the numerator and a comparison payment tally in the denominator. The formula works out as follows:

Fraud Rate = Numerator
                      Denominator

Where, for any given period of time
Numerator = Value, or number of fraudulent payments across the payments under consideration,
Denominator = Value, or number of payments under consideration.

Before calculating the numerator value, you must first decide what types of fraud to include in the measurement. One stratification method divides fraud into the following two categories:

  • First-party payments fraud results when a dishonest but seemingly legitimate consumer exploits a merchant or financial institution (FI). That is, the legitimate cardholder authorizes a credit card transaction as part of a scam. One manifestation of this is "friendly fraud," whereby a consumer purchases items online and then falsely claims not to receive the merchandise.
  • Third-party payments fraud occurs when a legitimate cardholder does not authorize goods or services purchased with his or her credit card. Besides the victimized cardholder, the other two parties to the transaction are the fraudster and the unsuspecting merchant or FI.

Sometimes no clear delineation between first-party and third-party fraud exists. For example, a valid cardholder may authorize a payment in collusion with a merchant to commit fraud.

The 2016 Federal Reserve Payments Study used only third-party unauthorized transactions that were cleared and settled in tabulating fraud. The study measured and counted fraud as having occurred regardless of whether a subsequent recovery or chargeback occurred. Survey results had to be adjusted because some card networks report gross fraud while others report net fraud, after recoveries and chargebacks. Furthermore, the study made no effort to determine which party, if any, in the payment chain may ultimately bear the loss. Finally, the study did not measure attempted fraud.

Excluding first-party payments fraud
The study excluded first-party fraud due to the greater ambiguity around identifying and measuring it along with the idea that it is difficult to eliminate, given that controls are relatively limited. One control option would be to place repeat offenders on a negative list that, unfortunately, might not be shared with other parties. As a result of excluding first-party fraud, the study focused on fraud specific to the characteristics of the payment instrument being used.

Paraphrasing from page 30 of the 2013 Federal Reserve Payments Study, first-party fraud, while important, is an account-relationship type of fraud and typically would not be included as unauthorized third-party payments fraud because the card or account holder is by definition authorized to make payments. Consequently, first-party fraud can occur no matter how secure the payment method.

As with tallying payments, you could follow a similar process for tallying fraudulent payments for other types of cards payments, with more questionnaire definitions and wording changes needed for other instruments such as ACH and checks.

Photo of Steven Cordray  By Steven Cordray, payments risk expert in the Retail Payments Risk  Forum at the Atlanta Fed

June 19, 2017 in ACH, cards, checks, debit cards, fraud | Permalink

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May 8, 2017


Calculating Fraud: Part 1

When analyzing payments fraud rates, we have to consider what is being measured and compared. Should we measure fraud attempts that might have been thwarted—fraud that penetrated the system but might not necessarily have resulted in a loss—or fraud losses? Whatever the measure, it is important that the definition of what is included in the numerator and denominator be consistent to properly represent a fraud rate.

In calculating a fraud rate based on value or number, a fraud tally is needed in the numerator and a comparison payment tally in the denominator. The formula works out as follows:

Fraud Rate = Numerator
                     Denominator

Where, for any given period of time
Numerator = Value, or number of fraudulent payments across the payments under consideration,
Denominator = Value, or number of payments under consideration.

This post offers a process for tallying payments for the denominator. Part 2 of this series will focus on tallying the numerator, basing its approach on the process that the Federal Reserve Payments Study 2016 used. That process includes fraud that initially cleared and settled, not attempts, and does not exclude losses subsequently recovered.

The Fed’s 2016 payments study offers a method for whittling down all payment transactions to a subset of transactions suitable for calculating a fraud rate. Below is an extract, with clarifying commentary, from one of the study’s questionnaires, which asked card networks for both the value and number of payments.

Chart-one2

At first blush, totals for value or number under questions 1, 2, 3, and 4 could conceivably be used to provide a comparison tally for fraud. However, we should rule out the total from question 1 since the definition includes declined authorizations, making it unnecessarily broad. Question 2, "total authorized transactions," has the disadvantage of including pre-authorization only (authorized but not settled). While some of these transactions could have been initiated as part of a fraud attempt, they were never settled and consequently posed no opportunity for the fraudster to take off with ill-gotten gains. On balance, the preferred measure for payments is the result of question 3, which measures "net, authorized, and settled transactions." Unlike "net, purchased transactions" under question 4, this measure has the benefit of not excluding some of the fraud captured by chargebacks under question 3b.1. Other types of fraud are not covered under chargebacks, including when card issuers elect to absorb losses on low-value payments to avoid the costs of submitting a chargeback.

We could follow a similar process for tallying payments for ACH and checks, with adjustments to account for potential fraud resulting from the lack of an authorization system like that for cards, which requests authorization from the paying bank.

Part 2 of this series, which covers the process for calculating the numerator, will appear in June.

Photo of Steven Cordray  By Steven Cordray, payments risk expert in the Retail Payments Risk  Forum at the Atlanta Fed

May 8, 2017 in ACH, checks, debit cards, fraud | Permalink

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March 27, 2017


Don't Forget the Check

As the data in the recently released Federal Reserve Payments Study show, the decline of check usage continues—albeit at a slower rate than what past studies found. Despite the rapid decline in volume on the consumer side over the last 15 years, the check remains a key payment instrument for business customers. According to the study, in 2015, consumers and businesses wrote more than 19 billion checks representing $27.3 trillion.

While the share of the number of checks (12 percent) is dwarfed by the number of other noncash payments (debit/credit/prepaid card and ACH), which continue to grow, the check remains a key target of criminals. For that reason, we need to maintain, if not enhance, risk monitoring. Criminals use the check both to conduct fraudulent transactions and to launder money. The Financial Crimes Enforcement Network reports that the number of Suspicious Activity Reports (SAR) involving checks continues to increase. That number has grown more than 141 percent since 2013, as the chart shows. Also, checks are 71 percent of the total—by far the most common payment type of all the SAR categories.

Chart-one

In addition, the Association for Financial Professionals notes in its 2016 Payments Fraud and Control Survey that checks remain the most targeted payment method. Seventy-one percent of the 627 responding companies reported successful or attempted check fraud on their business accounts in 2015. The survey also found that checks accounted for the largest dollar amount of loss of all the payment methods, including wire transfers. On a positive note, the percentage of companies actually suffering a financial loss from check fraud declined from 57 percent in 2013 to 43 percent in 2015.

Checks remain a target since they are so easy to counterfeit or alter compared to electronic items. While much of the risk management effort focuses on electronic payments, be sure not to forget about the paper check. It is obvious the crooks haven't.

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

March 27, 2017 in checks, cybercrime, fraud | Permalink

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May 23, 2016


What Would Happen If the Lights Went Out for a Long, Long Time?

In 1859, a massive geomagnetic solar storm known as the Carrington Event caused extensive damage to telegraph systems and other nascent electrical devices worldwide. Telegraph lines sparked and telegraph operators could send and receive messages without the use of electric batteries. The Northern Lights lit up the sky in all of North America. Though not widely reported, on July 23, 2012 a massive cloud of solar material similar in magnitude to the Carrington storm erupted off the sun's surface, radiating out at 7.5 million miles per hour. Fortunately the impact of the solar storm missed Earth by nine days because of the Earth's orbit position.

One report estimates that a Carrington-level storm today could result in power outages affecting as many as 20–40 million Americans for a duration ranging from 16 days to two years at an economic cost of up to 2.5 trillion dollars. A research paper in Space Weather estimated the odds of a Carrington-level storm at about 12 percent over the next 10 years. Early warning of such a storm is possible since satellites can detect impending storms and have the potential to provide a minimum one-day warning before it hits Earth.

So what would happen if the lights went out in much of the United States because of such a cataclysmic event? One could anticipate serious disruption of electronic payments such as ACH, cards, and wire transfers in the affected areas and beyond. What would one do to facilitate commerce in such an emergency? Well, cash and, to a lesser degree, checks could come to the fore. Use of checks would be problematic given the electronification of checks, high risk of fraud, and overdrawn accounts if banking systems are not up and running. Cash would have fewer problems if it were on hand to distribute to the affected population. Perhaps cash accompanied by ration books could be used to mitigate hoarding.

For a low-probability extreme-impact event that results in cash becoming the only way, among existing payment instruments, for commerce to take place, what contingency plans are in place to ensure that consumers and businesses can obtain cash? Since the contingency systems we have in place to handle a future Hurricane Katrina or Hurricane Sandy are likely not sufficient for an extreme event of nationwide scale, some of the issues that need to be resolved include:

  • How does one ensure that sufficient cash is on hand during an emergency?
  • How is cash going to be distributed and accounted for along the supply chain with ATMs and bank offices and their core systems inoperable due to no electricity?

Addressing these questions and others involves a monumental effort, and I don't have a ready answer. Fortunately, cash solves the problem for small-scale, low-value payments during a long-term power outage. That is, during the immediate, in-person exchange, it is an instrument that doesn't require electricity, communication networks, or computers.

This and other major calamities have always made me concerned about the push in some quarters for a full transition to electronic payments at the expense of payments less reliant on electricity and our communication networks. As an engineer by training, it is in my nature to wonder what can go awry if failsafe systems aren't in place when the unexpected happens.

With the possibility of a catastrophic event in our lifetime, would you rather have cash in hand or a card/mobile app? As for me, I'm going to the bank to cash out my accounts and then on to the hardware store to buy a gas-powered electric generator. Just kidding, though I think serious consideration and appreciation is needed for the contingency aspects of cash when things invariably go awry.

Photo of Steven Cordray  By Steven Cordray, payments risk expert in the Retail  Payments Risk  Forum at the Atlanta Fed

May 23, 2016 in ACH, cards, checks, payments | Permalink

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October 19, 2015


Got Cash?

The governments in countries such as Sweden and Nigeria may have taken initial steps to move to a "cashless" nation, but here in the United States, there is no question that cash is still king. It remains the most-used retail payment instrument, especially for low-value payments. This finding from the Fed's Cash Product Office (CPO) was welcome news to a group of independent (nonfinancial institution) ATM operators that I had the pleasure of addressing last month at their annual conference. The primary business of these entrepreneurs is getting cash into the hands of consumers through their terminals located in a variety of malls and merchandise, food, and beverage stores. Of the estimated 400,000–425, 000 ATMs and cash dispensers operating in the United States, approximately 60 percent are owned by these nonfinancial institutions.

One of the CPO's main missions is maintaining a supply of currency and coin to meet demand in both normal times and special situations such as natural disasters, when other forms of payment might be unavailable. As a critical part of accomplishing that mission, the CPO constantly evaluates research to determine how cash use is changing in this country. One of the main sources of research is the Fed's Diary of Consumer Payment Choice (DCPC). Data collection was last fielded in 2012, but is being conducted again now. To collect the data, the DCPC asks a representative national sample of about 2,500 individuals to record all their financial transactions over a rolling three-day period. In addition to recording the transaction and demographic information, respondents were also asked to indicate their top preferred payment method and their second preferred method of payment in instances when their top choice is not available.

Some of the major findings of that study include:

  • Debit and credit cards represent the stated primary payment choice, at 64 percent, but 30 percent of the consumers stated their primary payment preference was cash.
  • Cash serves as the backup payment method for all segments, reflecting its importance in our overall payment infrastructure.
  • Interestingly, although 3 percent of the consumers said their preferred payment method was checks, they actually used cash twice as often as writing checks.
  • Reflecting the tendency for people to use cash for small-value payments, cash payments represented 40 percent of the number of payments made by the survey participants but only 14 percent of the total value of the payments.
  • Cash clearly dominates the small-value segment under $10.
  • Cash was the payment method used in two-thirds of person-to-person (P2P) payments.
  • The use of cash in P2P transactions is different from other cash transactions; P2P transactions are two-thirds higher in value ($35 versus $21) than other types of expenditures.
  • While 51 percent of the adults in the 18–34-year-old age group indicated that debit cards are their most preferred payment method, cash followed closely at 40 percent for the 18–24 year olds and 31 percent for the 25–34 age groups. Will the 2015 results show a departure from this finding?

It is clear that the United States is a long way from becoming a cashless society despite the predictions of many over the last twenty years. The 2015 results will provide important information as to how cash continues to be used by the general population and the emerging millennials segment in particular.

So is there cash in your wallet? I bet there is and will be for quite some time.

Photo of David Lott By David Lott, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

October 19, 2015 in cards, checks, currency, payments | Permalink

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July 6, 2015


Growing, Growing, Gone!

As we've blogged before, check writing has been steadily declining as electronic payments have grown. For example, the number of checks written in 2012 was 21 billion, down from 27.8 billion in 2009, according to the 2013 Federal Reserve Payments Study. We may be writing fewer checks than ever, but more than anything, we want the convenience of depositing our checks with mobile devices. A 2013 survey by ath Power Consulting found that mobile remote deposit capture (mRDC) is the "most sought-after mobile banking feature" among consumers. And financial institutions are answering this demand. According to 2014 surveys from Federal Reserve Banks (the Dallas Fed's, for example), about 48 percent of responding institutions are currently offering mobile capture and another 41 percent are planning to offer it within the next two years.

With mRDC in such demand, solutions providers and financial institutions should be investing in risk management strategies. But if check writing is a declining business, will mRDC risk management investments end up on the disabled list? Financial institutions must look at the potential losses and how they occur, evaluate the means to minimize these, and carefully weigh these factors against the dwindling check industry.

The mRDC channel faces two primary loss challenges: fraudulent items and duplicate check presentment. A fraudulent item might be an altered, forged, or counterfeit check; it can also be an intentional duplicate presentment. The other challenge occurs when a customer unintentionally presents a deposited item a second time. Research and anecdotal evidence suggest many duplicate presentments result from customer errors. These represent a growing customer education need. Financial institutions must find room in the allocated lineup and spending cap for fraud and duplicate detection enhancements.

Handling duplicate check presentments landed an all-star position on the agenda at most payments operation conferences this past year. Duplicate check presentments mean returns and adjustments, which in turn mean time and money for the financial institutions. When duplicate presentment involves more than one bank of first deposit, losses are often sustained from misunderstanding holder-in-due-course rights and return-versus-adjustment processes. Financial institutions often need to reconstruct what happened, analyze the facts, and possibly consult legal counsel.

But rather than handling these risks with expensive roster moves, considering the declining use of checks, financial institutions can meet the threat at the origin, through customer education and enforcement policies. Financial institutions that offer mRDC can make disclosed stipulations. For example, they can require that the original check be destroyed after confirmation, or that checks have a specific restrictive endorsement that includes "for mobile deposit only." Ultimately, if a consumer deposits a check twice, financial institutions can charge a fee or suspend service. In general, customers want to avoid fines, so they tend to play within the rules when fines are looming. If training customers is a home run in mitigation, then the grand slam is having detection systems that support the stipulations and rules put into place.

Photo of Douglas A. King By Jessica J. Trundley, AAP, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

July 6, 2015 in checks, consumer protection, mobile banking, mobile payments | Permalink

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June 9, 2014


Magic 8 Ball, Will We Ever Be Cashless?

Predictions of a cashless society have been broadcast sporadically throughout the decades. It became a popular concept in the United States in 1965 when Thomas J. Watson Jr., CEO of IBM, said, "In our lifetime, we may see electronic transactions virtually eliminate the need for cash." Watson believed, or hoped, that the newly released IBM mainframe computers would revolutionize financial transaction processing and make carrying cash unnecessary. Later that decade, the concept was expanded to a checkless/cashless society, with some predicting that both payment forms would be extinct by the 1980s.

Despite consumers' growing use of cards and the emergence of the ACH system, the cashless society concept took a bit of a detour during the 1980s and 1990s—ATMs and shared EFT networks proliferated, both offering tremendous convenience and making it very easy to distribute currency. When card-based point-of-sale (POS) programs also emerged, they offered an alternative to currency and checks, while also increasing the convenience of currency by allowing cash-back transactions. This expansion of currency convenience took place even as consumers were being warned of the dangers of coin and currency—the germs, the cocaine residue, the increased chance of robbery, and so on. Certainly this was a more intense negative campaign than the spontaneous combustion danger my mother warned me about when I was young. I'd received some birthday money that I was anxious to spend, and she declared that the money was "burning a hole in your pocket."

While the central banking authorities of some countries such as Sweden and Nigeria have announced a goal of moving to a less-cash society, consumers in the United States are seemingly moving in the opposite direction, as evidenced by some recent San Francisco Fed research. Researchers examined the data from the 2012 Diary of Consumer Payment Choice (DCPC) study by the Boston, Richmond, and San Francisco Federal Reserve Banks. The San Francisco Fed research included these key findings

  • Cash remains the most-used form of payment, accounting for 40 percent of payment transactions.
  • Cash is generally used for lower-value transactions. The average value of a cash transaction was only $21, compared with $168 for checks and $44 for debit cards.
  • Cash is used most often in gift and P2P (or "person-to-person") transfers, with food and personal care supply purchases second (see the chart).
    Figure 4: Payment Instrument Shares, by Spending Category
  • Contrary to the conventional wisdom of millennials' love for all things electronic, 40 percent of 18–24 year olds prefer cash over all other payment methods—the highest percentage of any age group.

Yes, card, ACH, and other electronic transactions are continuing to increase and gain larger shares of the overall consumer transaction mix while check usage remains in a steady decline. Despite the dire outlook for checks, my colleague Doug King pointed out in a recent post that check usage among P2P users actually increased, according to the latest Fed payments study. My Magic 8 ball is predicting that coin and currency are going to be around for quite some time. What does yours say?

Photo of David LottBy David Lott, a retail payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

June 9, 2014 in cards, checks, currency | Permalink

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