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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

March 18, 2019


The Patriots of the Payments Landscape

Last February, the New England Patriots and their future first-ballot Hall of Fame quarterback, Tom Brady, won their sixth Super Bowl title since 2002. Over this 17-year period, they have played for the National Football League title nine times. In college football, a similar scenario has emerged, with two teams (the University of Alabama and Clemson University) winning seven out of the last 10 collegiate football national titles. It is proving to be very difficult to upend the dominant players in this sport, and many football fans and pundits believe that such domination makes the overall sport less interesting (especially if your favorite team isn’t Alabama, Clemson, or the Patriots). They think it’s bad for the sport and argue it would be better to see more variety in championship teams. As I think about that perspective, my mind drifts to a payments conversation that I am often a part of in both business and social settings: Where are payments going to be in the next three to five years?

While it would be much "more entertaining" in my social settings to be able to discuss some great shift in payments on the horizon, the fact is that right now payments is in a place similar to football’s. Card-based payments are sitting on top of the non-cash-based payments world and will be difficult to dethrone anytime soon. According to the Federal Reserve Payments Study 2016 (the last report that provided annual estimates for both automated clearinghouse (ACH) and check payments), card payments, by number of transactions, made up 72 percent of noncash payments. Now the latest figures from the payments study’s 2018 Annual Supplement report reveal that there were 123.5 billion card transactions in 2017, a figure representing robust growth of 10.1 percent from 2016. The report also highlights that, during this 2016–17 period, the number of network ACH payment transactions grew at an accelerated pace of 5.7 percent while large-institution check payments declined in number of transactions at an accelerated pace of 4.8 percent. The Federal Reserve is currently conducting its triennial payments study, which will provide updated national estimates on all noncash payments for 2018.

In the future, we might be dipping cards more often, tapping contactless cards, or even tapping our phones more, but it’s hard to envision a new payment channel making much headway in the next three to five years. Cards just have too big of a share and are experiencing accelerating growth. Consumers are not only accustomed to using them, but they also find that cards work very efficiently for them. And just like the football fans and pundits who talk or write about the need for different champions in the football world, payments professionals and pundits are enamored with writing about and discussing how blockchain, distributed ledger technology, faster payments, or some other brave, new technology are going to be the next frontier in payments. And you know, they might be right one day, but it’s not going to happen anytime soon, certainly not before Mr. Brady finds his way into the Hall of Fame.

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

 

March 18, 2019 in credit cards, debit cards, emerging payments, fintech, innovation | Permalink

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March 11, 2019


Payments Webinar Explores a Fintech Talent Gap

Developments in financial technology (fintech), as welcome as they may be, are pressuring one of our most valuable resources: our workforce. Not only are there not enough candidates experienced in new fintech, but also there is a growing gap between the skills employers want and the skills that employed professionals have.

As fast as fintech is moving, it is important not to be hasty when making talent development decisions. Now is the time to be strategic and intentional in evaluating the ways to bridge the fintech talent gap. Most new banking technologies, especially those that are payments related (whether they’re offered by a traditional financial institution or a non-bank entity), require a new approach to software and cybersecurity. With this in mind, a fundamental feature of workforce development is aligning education and training programs with real business needs.

In the next episode of our Talk About Payments (TAP) webinar series, our panel will explore the underlying emerging technologies that are essential core knowledge for the payments and fintech workforce. We will also explore initiatives that are under way to bridge the fintech talent gap. Our panel will include:

  • Jessica J. Washington, AAP, Payments Risk Expert, Federal Reserve Bank of Atlanta
  • James Senn, Founding Director, Georgia Fintech Academy
  • Allen Sautter, Information Security Officer, Federal Reserve Bank of Atlanta

We encourage financial institutions, merchants, fintechs, payments processors, law enforcement, academia, and other payments system stakeholders to participate. Participants will be able to submit questions during the webinar.

The webinar will take place on March 21, from 1 to 2 p.m. (ET). To participate in the webinar, you must register in advance (there is no charge). You can register here. Once you have registered, we will send you a confirmation email with the login and toll-free call-in information. You can direct questions concerning the webinar to David Lott at david.lott@atl.frb.org. We hope you will join us and be part of the discussion.

Photo of Jessica Washington By Jessica Washington, AAP, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

 

March 11, 2019 in emerging payments, financial technology, fintech, payments innovation, skills gap, workforce development | Permalink

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February 11, 2019


AI and Privacy: Achieving Coexistence

In a post early last year, I raised the issue of privacy rights in the use of big data. After attending the AI (artificial intelligence) Summit in New York City in December, I believe it is necessary to expand that call to the wider spectrum of technology that is under the banner of AI, including machine learning. There is no question that increased computing power, reduced costs, and improved developer skills have made machine learning programs more affordable and powerful. As discussed at the conference, the various facets of AI technology have reached far past financial services and fraud detection into numerous aspects of our life, including product marketing, health care, and public safety.

In May 2018, the White House announced the creation of the Select Committee on Artificial Intelligence. The main mission of the committee is "to improve the coordination of Federal efforts related to AI to ensure continued U.S. leadership in this field." It will operate under the National Science and Technology Committee and will have senior research and development officials from key governmental agencies. The White House's Office of Science and Technology Policy will oversee the committee.

Soon after, Congress established the National Security Commission on Artificial Intelligence in Title II, Section 238 of the 2019 John McCain National Defense Authorization Act. While the commission is independent, it operates within the executive branch. Composed of 15 members appointed by Congress and the Secretaries of Defense and Commerce—including representatives from Silicon Valley, academia, and NASA—the commission's aim is to "review advances in artificial intelligence, related machine learning developments, and associated technologies." It is also charged with looking at technologies that keep the United States competitive and considering the legal and ethical risks.

While the United States wants to retain its leadership position in AI, it cannot overlook AI's privacy and ethical implications. A national privacy advocacy group, EPIC (or the Electronic Privacy Information Center), has been lobbying hard to ensure that both the Select Committee on Artificial Intelligence and the National Security Commission on Artificial Intelligence obtain public input. EPIC has asked these groups to adopt the 12 Universal Guidelines for Artificial Intelligence released in October 2018 at the International Data Protection and Privacy Commissioners Conference in Brussels.

These guidelines, which I will discuss in more detail in a future post, are based on existing regulatory guidelines in the United States and Europe regarding data protection, human rights doctrine, and general ethical principles. They call out that any AI system with the potential to impact an individual's rights should have accountability and transparency and that humans should retain control over such systems.

As the strict privacy and data protection elements of the European Union's General Data Privacy Regulation take hold in Europe and spread to other parts of the world, I believe that privacy and ethical elements will gain a brighter spotlight and AI will be a major topic of discussion in 2019. What do you think?

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

February 11, 2019 in consumer protection, emerging payments, fintech, innovation, privacy, regulations | Permalink

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December 10, 2018


A Look in the Rearview Mirror of Payments for 2018

I'm sure just about everyone else in the payments industry would agree with me that 2018 was yet another exciting year for payments. The year was filled with a host of newsworthy events, but fintech most certainly took center stage in the financial services industry, including payments. Whether the news highlighted an announcement of a new product to increase financial access or discussed the regulatory challenges and associated concerns within the fintech space, it seemed that fintech made its way into the news on a daily basis. Still, for payments, 2018 will be remembered for more than just fintech.

The Retail Payments Risk Forum's last Talk About Payments webinar of 2018 will feature Doug King, Dave Lott, and Jessica Washington sharing their perspectives and memories on the year-in-payments in a round table discussion. Among the topics they will discuss are consumer payment preferences, the changing retail environment, and the state of fraud—and fintech, of course. We encourage financial institutions, retailers, payments processors, law enforcement, academia, and other payments system stakeholders to participate in this webinar. Participants will be able to submit questions during the webinar.

The webinar will be held on Thursday, December 20, from 1 to 2 p.m. (ET). Participation in the webinar is free, but you must register in advance. To register, click on the TAP webinar link. After you complete your registration, you will receive a confirmation email with all the log-in and toll-free call-in information. A recording of the webinar will be available to all registered participants in various formats within a couple of weeks.

We look forward to you joining us on December 20 and sharing your perspectives on the major payment themes of 2018.

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


December 10, 2018 in banking regulations, banks and banking, crime, cybercrime, emerging payments, fintech, innovation, payments fraud | Permalink

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December 3, 2018


Building Blocks for the Sandbox

I just returned from a leave of absence to welcome my third child to this world. As I catch up on payments news, one theme emerging is the large number of state and federal regulatory bodies launching their own fintech sandboxes. Typically, these testing grounds allow businesses to experiment with various "building blocks" while they innovate. Some businesses are even allowed regulatory relief as they work out the kinks. As I've researched, I've found myself daydreaming about how my new little human also needs to work with the right building blocks, or core principles, to ensure he develops properly and "plays nice" in the sandbox.

But—back to work. What guidance do fintechs have available to them to grow and prosper?.

On July 31 of this year, the U.S. Department of the Treasury released a report suggesting regulatory reform to promote financial technology and innovation among both traditional financial institutions and nonbanks. The report in its entirety is worth a review, but I'll highlight some of it here.

The blueprint for a unified regulatory sandbox is still up for discussion, but the Treasury suggests a hierarchical structure, either overseen by a single regulator or by an entirely new regulator. The Treasury suggests that Congress will likely have to assist by passing legislation with the necessary preemptions to grant authority to the newly created agency or a newly named authoritative agency.

The report outlines these core principles of a unified regulatory sandbox:

  • Promote the adoption and growth of innovation and technological transformation in financial services.
  • Provide equal access to companies in various stages of the business lifecycle (e.g., startups and incumbents). [The regulator should define when a business could or should participate.]
  • Delineate clear and public processes and procedures, including a process by which firms enter and exit.
  • Provide targeted relief across multiple regulatory frameworks.
  • Offer the ability to achieve international regulatory cooperation or appropriate deference where applicable.
  • Maintain financial integrity, consumer protections, and investor protections commensurate with the scope of the project, not be based on the organization type (whether it's a bank or nonbank).
  • Increase the timeliness of regulator feedback offered throughout the product or service development lifecycle. [Slow regulator feedback is typically a deterrent for start-up participation.]

Clearly, the overarching intent of these principles is to help align guidance, standards, and regulation to meet the needs of a diverse group of participants. Should entities offering the same financial services be regulated similarly? More importantly, is such a mission readily achievable?

People have long recognized the fragmentation of the U.S. financial regulatory system. The number of agencies at the federal and state levels with a hand in financial services oversight creates inconsistencies and overlaps of powers. Fintech innovations even sometimes invite attention from regulators outside of the financial umbrella, regulators like the Federal Communications Commission or the Federal Trade Commission.

In the domain of financial services are kingdoms of industry. Take the payments kingdom, for example. Payments are interstate, global, and multi-schemed (each scheme with its own rules framework). And let's be honest, in the big picture of financial services innovations and in the minds of fintechs, payments are an afterthought, and they aren't front and center in business plans. Consumers want products or services; payments connect the dots. (In fact, the concept of invisible payments is only growing stronger.)

What is more, a fintech, even though it may have a payments component in its technology, might not identify itself as a fintech. And a business that doesn't see itself as a fintech is not going to get in line for a unified financial services regulator sandbox (though it might want to play in a payments regulator sandbox).

When regulatory restructuring takes place, I hope it will build a dedicated infrastructure to nurture the payments piece of fintech, so that all can play nice in the payments sandbox. (Insert crying baby.)

Photo of Jessica Washington By Jessica Washington, AAP, payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

December 3, 2018 in bank supervision, emerging payments, financial services, fintech, innovation, regulations, regulators | Permalink

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October 15, 2018


An Ounce of Prevention

Benjamin Franklin coined the phrase "An ounce of prevention is worth a pound of cure," and after attending late September's FinovateFall 2018 Conference in New York City, I find this aphorism as relevant today as it was in 1735. The conference showcased 80 demonstrations of leading-edge financial technology over two days with presenters representing five continents. Demos touched on a wide range of technologies and solutions, including game-based marketing and financial education; "lifestyle" mobile banking applications that integrate social media, news, e-commerce, and financial management to deliver personalized recommendations; lending and home buying; and integration with intelligent personal assistants. What stood out to me most were the many possible technologies offered to authenticate users, cards, and mobile transactions, each with the potential to prevent payments fraud.

As card payments continue to dominate consumer transactions in the United States, usage is increasing in other countries, and remote purchases gather steam, the demand for fast, reliable identity and payment authentication has also grown. So has the even greater demand from consumers for frictionless payments. But how does technology reward the good guys, keep out the bad ones, and prevent cart abandonment or consumer frustration? Here are just a few examples of how some of the fintech companies at the conference propose to satisfy these competing priorities.

SMS—While one company proclaimed that SMS was designed for teenagers and never intended for use as a secure messaging means, another proposed a three-factor authentication method that combined the use of a PIN, Bluetooth communication, and facial recognition via SMS sent to account holders to identify a possible fraud event in real time. Enhancing this technology was artificial intelligence that analyzes facial characteristics such as smiling or frowning.

Biometrics—Developers demonstrated numerous biometrics options, including those using unique, multifactor, non-gesture-based biometric characteristics such as the speed and pressure we use to swipe our mobile devices. Also demonstrated was the process of linking facial recognition to cards for both in-person and e-commerce purchases, as well as "liveness" tests that access the mobile phone's gyroscope to detect slight physical movements not present when a bot is involved. Another liveness test demonstrated was one in which people use their mobile devices to shoot videos of themselves reciting a number or performing randomized movements. Video content is then checked against identity verification documents, such as driver's license photos, that account holders used at setup. The developers noted that using video for liveness testing helps prevent fraudsters from using stolen photos or IDs in the authentication process.

Passwords—Some developers declared that behavioral biometrics would bring about the death of the password, and others offered services that search the corners of the dark web for compromised credentials. Companies presented solutions including a single, unique identification across all platforms and single-use passwords generated automatically at each login. One of the most interesting password technologies displayed involved the use of colors, emojis, numbers, and logos. This password system, which could be as short as four characters, uses a behind-the-scenes "end code," where the definition of individual password characters is unique to each company employing the technology, rendering the password useless in the event of a data breach.

As I sat in the audience fascinated by so many of the demos, I wished I could go to my app store to download and use some of these technologies right away; the perceived security and convenience, combined with ease of use, tugged at the early adopter in me. Alas, most are white-labeled solutions to be deployed by financial institutions, card networks, and merchant acquirers rather than offered for direct consumer use. But I am buoyed by the fact that so many solutions are abiding by the words of Ben Franklin and seek to apply an ounce of prevention.

Photo of Ian Perry-Okara  By Nancy Donahue, project manager in the Retail Payments Risk Forum  at the Atlanta Fed

 

October 15, 2018 in biometrics, cards, cybersecurity, emerging payments, fintech, innovation | Permalink

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September 24, 2018


Racing Ahead in the Wireless Space

This past Sunday, Eliud Kipchoge smashed the marathon world record at the Berlin Marathon, with a time of 2:01:39, shaving 1 minute 22 seconds off the previous world record. Though some running experts claim a marathon under two hours will never happen, I think elite runners will continue to push the speed envelope and we will witness a sub-two-hour marathon one day.

The marathon isn’t the only area where the speed envelope is being pushed. Another area, and the focus of today’s blog, is in the wireless space.

It was in 2002 when the first commercial 3G network launched in the United States. 3G made it possible for our phones to run applications using a global positioning system (GPS) or using videoconferencing, among other things. The second half of 2010 marked the first commercial launch of 4G in the United States, with many of the mobile network operators launching this service. 4G expanded on the speed of 3G and made it possible for consumers to access the web with their mobile devices, stream high-definition video, and connect Internet of Things devices.

Now, as we approach the fourth quarter of 2018, we are on the cusp of 5G networks, which will be 10 times as fast as our 4G networks. According to a recent Wall Street Journal article on 5G that sparked my interest in the topic, the speed of 5G networks will allow the proliferation of applications such as self-driving cars, virtual reality, and remote surgery. And this got me thinking, what impact will 5G have on the future of commerce, payments, and security?

I haven’t spent any time researching that last question, but no doubt there will be significant benefits and risks that 5G networks will introduce into retail payments. I can draw inspiration from one of my favorite cartoons, the Jetsons, and think ahead to what a Jetson house might look like in 2025: one that is filled with connected devices that communicate with not only us but also each other. Close your eyes and imagine a house with a robotic vacuum that communicates with a virtual home assistant when it needs new bags—and zero human interaction is needed in the process. Or imagine a vehicle that drives itself to the nearest gas station when the low-fuel light appears. Undoubtedly, this new faster-speed wireless world will create security threats that we have yet to face.

So as we at the Risk Forum think about the possibilities and new risks of a 5G world and its impact on commerce, payments, and security, what should we be paying attention to?

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

September 24, 2018 in data security, emerging payments, innovation | Permalink

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June 25, 2018


Down but Not Out

As I noted in my last post, consumer habits are sticky when it comes to cash. Despite the many ways to pay, consumers make almost one-third of payments (by number) in cash. But sometimes cash just isn't an option. You can't use cash to buy a snack on an airplane, for example. This week, I look at factors about merchants that constrain consumers' payment options, including their unwillingness to accept cash for in-person payments or their inability to accept cash for online payments. (My colleague Doug King touched on cashless locations a couple of weeks ago.)

At the in-person point of sale, merchants' willingness to accept a payment instrument could affect the prevalence of cash. Consumers obviously cannot use cash when merchants will not accept it. Recent headlines (here and here) suggest that some quick-service restaurants, coffee shops, and food trucks may be growing reluctant to accept cash. As an example, here's a picture of a sign on a San Francisco food cart in late May.

20180612_RPO_TOP_Cashless_image The flip side of a merchant's unwillingness to accept cash is the merchant's willingness to accept card payments for ever-lower dollar values. And indeed, the average dollar value of card payments is dropping. For instance, the average dollar value of an in-person, non-prepaid debit card purchase fell from $35 in 2012 to $32 in 2016 (Federal Reserve Payments Study: 2017 Annual Supplement). This trend could indicate that merchants are increasingly agreeable to accepting cards for small-dollar transactions.

Consumers show they are aware of evolving merchant acceptance. The 2017 Survey of Consumer Payment Choice reported that consumers rate credit and debit cards highest for acceptance, with cash coming in third. The survey asked respondents to rate how likely each payment method is to be accepted by stores, companies, online merchants, and other people or organizations.

At the online point of sale, cash is not an option. (However, Doug mentioned in that same post that at least one online retailer is trying to make cash possible.) The share of purchases made online is still small—just about 12 percent of retail goods and services by number (2017 Survey of Consumer Payment Choice). Yet over the past four years that share has steadily increased. Data about remote card purchases in the Federal Reserve Payments Study (2017 Annual Supplement ) show the growing importance of online purchases. As Jessica Washington noted in her post in early May, remote card purchases grew more rapidly from 2015 to 2016 than did in-person card purchases, measured by both number and value.

Despite these developments, cash continues to dominate quick purchases. In October 2016, consumers paid for about half of their fast food purchases with cash. They used cash for 62 percent of convenience store purchases (2016 Diary of Consumer Payment Choice).

Cash has had staying power over decades of technological innovation. It may be down, but it isn't out.

To learn more about consumer payment choices and preferences, visit the Federal Reserve Bank of Atlanta's new consumer payments web pages that house a variety of surveys, studies, and research reports on the topic.

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

 

June 25, 2018 in cards, currency, debit cards, emerging payments, mobile payments, online retail | Permalink

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June 18, 2018


Thinking about My Grandmother and Future-Proofing Payments

I often reminisce about times I spent with my grandmother. She passed away when I was only nine years old, but fortunately left me with a host of memories that I cherish. How I loved our trips to Walden Bookstore in the Hickory Ridge Mall whenever she'd visit us in my hometown of Memphis. We'd pick out a book or two and then return home to read them together. I often wonder what she would think about my family's book shopping and reading habits today. Online bookstores, e-readers, and audiobooks downloaded or streamed onto mobile phones would be completely foreign to her as the technology behind these was not even around during her lifetime! How could she ever have known how the world of books would evolve?

And this brings me to the notion of future-proofing payments. Mobile payments just might be the hottest topic when payment professionals get together to discuss the future of payments. It makes sense to think that maybe one day our mobile phones will replace our debit and credit cards and maybe even cash. But to date, the mobile phone has not done for cards and cash what it has done for mp3 players, digital cameras, and portable navigation devices, to list just a few things. Perhaps we need more time for mobile phones to transform payments—or could it be that payments as we know them today will be made over by a technology or device that is not yet widely available or even conceived? Is it possible that the primary payment methods we use today can withstand the test of time and remain our primary methods for many more years? Thinking about my grandmother and books, maybe future-proofing payments is a losing proposition and we should be nimble, ready to adapt to whatever changes come our way.

Join me for the Atlanta Fed's Retail Payments Risk Forum's latest Talk About Payments webinar on Thursday, June 28, from 1 to 2 p.m. (ET), when I will explore the future of mobile payments at the point of sale by first considering the debit card's long rise to prominence. Participation in the webinar is complimentary, but you must register in advance. After completing registration, you will receive a confirmation email with all the log-in and toll-free call-in information.

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

June 18, 2018 in banks and banking, emerging payments, mobile banking, mobile payments | Permalink

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June 11, 2018


Consumer Habits and Cash Use

As my colleague Doug King pointed out last month, cash is not going away anytime soon, Yanny/Laurel notwithstanding. By number, almost one-third of U.S. consumer payments were made in cash in 2017. Every year since 2008, the Survey of Consumer Payment Choice has found that cash is consumers' most popular or next-most-popular way to pay.

Many factors underlie cash's resilience, including access, current shopping habits, consumer ratings, and demographics.

Universal access. Paypal's chief financial officer commented to the Wall Street Journal earlier this year, "I don't think we will ever be entirely cashless, maybe in large part because I don't know if we will ever be in a world that every person has a smartphone or a mobile device."

Shopping habits. Most purchases—nine in 10—are made in person, not online (2015 Survey of Consumer Payment Choice). And when shopping in person, consumers prefer cash for small-dollar transactions. Two-thirds of U.S. consumers report that they prefer cash for in-person payments of less than $10 (2016 Dairy of Consumer Payment Choice). Forty percent prefer cash for in-person payments between $10 and $25.

Consumer ratings. Consumers say cash is the most cost-effective way to pay. The Survey of Consumer Payment Choice asks respondents to rate the cost of using a particular payment method, taking into account that fees, penalties, interest paid, etc. can raise the cost of a payment method, while discounts and rewards can lower it.

Demographics. People with fewer payment options use cash. That includes low-income people who have less access to credit cards as well as people without bank accounts who have no access to non-prepaid debit cards. It also includes millennials, who used cash for almost 30 percent of their payments in 2016 (Diary of Consumer Payment Choice).

You probably already know that card payments dwarf cash payments—almost 60 percent of consumer payments are made with some type of card, whether it's debit, prepaid, or credit. Yet cash persists. Recently, a new acquaintance told me he "never" uses cash. As evidence, he reported that he had no cash in his pocket, explaining "that's because I used my last $2 to buy coffee this morning."

Hmm. What does this say about the health of cash? What Dave Lott wrote in 2016 is still true today: not dead yet.

Next post: Merchant acceptance and the use of cash

To learn more about consumer payment choices and preferences, visit the Federal Reserve Bank of Atlanta’s new consumer payments web page that houses a variety of surveys, studies, and research reports on the topic.

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

June 11, 2018 in cards, currency, debit cards, emerging payments, mobile payments, payments | Permalink

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