The changing nature of payments

Man at an ATM machineWhen buying items at a store or eating at a restaurant, have you noticed an increase in the use of debit and credit cards for buying merchandise? Have you or your students made the switch to electronic payments?

According to the Federal Reserve's 2007 study of noncash retail payments, Americans are increasingly moving away from writing checks and toward electronic methods for making payments. The study showed that in 2006 more than two-thirds of all noncash retail payments were made electronically. This shift represented a dramatic change from three years earlier, when a similar Federal Reserve study showed that checks and electronic payments each accounted for half of noncash payments.

Debit cards and ACH pull ahead
Two big stories emerged from the 2007 study. One was that debit cards for the first time surpassed credit cards as the most frequently used electronic payment type. Over the three-year study period, consumers made 25.3 billion payments with debit cards versus 21.7 billion with credit cards. Another big story involved the increasing use of automated clearinghouse (ACH) payments, which transmit money electronically over data networks as in a direct payroll deposit. ACH transactions grew faster—19 percent per year—than any other payment type between 2003 and 2006. Debit cards weren't far behind, growing 17.5 percent annually.

Check usage declines
Although the percentage of payments made by check is dropping, Fed experts don't expect checks to disappear any time soon. "With around 33 billion checks written in 2006, we expect checks to be around for some time," said Richard Oliver, an executive vice president at the Atlanta Fed and the Federal Reserve System's product manager for retail payments.

Even the processing of paper checks has moved toward the electronic age. The Check 21 Act, which took effect in 2004, allows banks to send digital electronic images instead of paper checks through the check processing system. By the time of the 2007 survey, about 40 percent of all interbank paper checks had been replaced with electronic information at some point in the collection process.

In addition to the 30 billion checks paid using paper in 2006, almost 3 billion consumer checks that started out as paper were converted and cleared as ACH payments. This conversion represented an eightfold increase since 2003.

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By Ed English, staff writer
Spring, 2008