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Focus on Payments: Debit Cards Surpass Checks, Credit Cards Decline for First Time

Moderator: Welcome to the Federal Reserve Bank of Atlanta's Financial Update podcast. The Federal Reserve recently released the fourth in a series of studies of noncash payments in the United States. This study estimates the total number and value of payments made in 2009 by check, debit card, credit card, automated clearinghouse, as well as prepaid cards. And today we're speaking with Rich Oliver, executive vice president at the Atlanta Fed and former—and long-time—head of the Fed System's Retail Payments Office.

Rich, thanks for joining us today.

Photo of Rich OliverRich Oliver: It's a pleasure to be with you.

Moderator: Well, Rich, first off, can you talk just a little bit about the history of the study? If I'm not mistaken, this is the fourth time we've done it.

Oliver: Yeah, it sure is. And we actually started it back in 2000, when we started really taking a hard look at the check and ACH businesses that we were running. We realized that we didn't have any idea how many checks there were, what our market share was, whether check funding was growing or declining—and that didn't sound like a very good business proposition. But we understood the rest of the industry didn't either, and we were all investing a lot of money in infrastructure to support these types of payments. So, we decided to get together with the Board of Governors and do a study to look at the actual volumes and values of retail payments in this country.

Moderator: Well, Rich, from the most recent study, what are the major findings, as far as how the payment system is changing?

Oliver: To a certain extent, the recent study mostly confirmed a lot of things that we all suspected. And we have to recognize, too, that the study occurred during a very difficult year in terms of the economy, and so the effects of the economic crisis are somewhat reflected, I think, in the data. But, some of the highlights, I think, are this: first of all, total noncash retail payments continued to grow over the three-year period at about 4.6 percent, which was the same number that we experienced, for the most part, in the prior three years. We also saw, though, that during the period the value of those payments fell by about 1.3 percent on a compound annual rate. When we talked to economists about this, because we thought it seemed strange, they came back and told us that this is typically what does happen during a recessionary period. People tend to write more payments because they're more selective in their shopping, but they are for smaller dollar amounts. We see in the survey, of course, that check volume—both checks written and checks cleared—continues to fall, and fall at an increasing rate over the previous studies. Most of the decline appears to be in checks written from consumers to businesses.

Check clearing has become increasingly electronic. Debit cards have now surpassed checks as the most used retail payments instrument. And, in the card world, we saw something we've never seen before. For the first time, not only in the history of these studies but from what we can tell in the history of the country, an electronic vehicle fell in volume, and credit cards fell in volume over the three-year period. But at the same time, prepaid card usage has exploded and become a much more prominent part of the landscape.

Moderator: Any thoughts on why credit card usage would have declined?

Oliver: We think it's probably related almost entirely to the economic downturn. And while we say it declined over the three-year period, we suspect that probably there was growth in the early part of that period, and significant declines in '08 and '09. We think, obviously, you hear a lot of people have put away their credit cards and have gone back to cash-type payments during the crisis. We also know that getting a credit card was a lot harder during this period, too.

Moderator: Well, Rich, obviously we've heard a good deal about the decline in the usage of checks over the last several years. Are we likely to see the actual death of the traditional paper check, or is this a story that's maybe been a little exaggerated?

Oliver: Well, there's been decline, and this time around we saw a 7.2 percent decline in the number of checks being cleared, a 6.1 percent compound annual rate of decline for checks being written. The fact of the matter is there's still 24.4 billion checks out there—that's a lot of checks. And when we look underneath the covers, we realize that almost half of those have to do with business-to-business payments, business-to-consumer payments, and consumer-to-consumer payments for which we really haven't seen electronic alternatives that are available today that would be encouraging to convert those items. So, while there's a lot out there, we think there's going to be at least some substantial number for a good time to come.

Moderator: Is that, to some degree, a sort of generational story? Younger people who grow up not using checks may never use checks? Or is that a bit of a reach, maybe?

Oliver: No, I think it's certainly affected by the demographics. And we talk a lot about the demographics of people that are our main consumers today, and it's pretty clear that young people are just not used to writing checks. I hear anecdotal stories from people about their kids who never write a check. Even my son in college a few years ago was writing a couple of checks a month and the rest was all debit card transactions. So, some of it clearly is generational. Yet we know that generationally there are people in the older demographic units that are using debit cards and other instruments, too, because they find them to be convenient.

Moderator: Well, Rich, any big surprises in the most recent study?

Oliver: You know, I don't know that there were huge surprises. The thing that startled me the most was the growth in prepaid card usage. We went from 3.3 billion prepaid cards in 2006 to 6 billion prepaid cards in 2009. This is probably related to people going back to more of a cash economy. Prepaid cards have been demonstrated to be a great substitute for cash that comes with less of the problems of carrying cash. But also, recent studies done by the FDIC have indicated that as many as 20 percent of the population of this country is now unbanked or underbanked. Around the world, the prepaid card has become a major vehicle of use for people that are unbanked and underbanked.

Moderator: So, prepaid cards—we're not talking about debit cards, right? It's an entirely different…

Oliver: No. We're talking about gift cards, we're talking about the VISA/MasterCard prepaid reloadable cards, we're talking about payroll cards on the disbursement side. We did not count, by the way, in this study, transit cards and some of the other closed-loop cards. So, to a certain extent, this 6 billion may be understated in terms of the use, but we wanted to go with those things that are being more broadly used in less restrictive open-loop environments.

Moderator: So, not to spend too much time on this in particular, but is it safe to assume that a lot of the use of the prepaid card is probably people new to the country, or immigrants, or, as you mentioned, just various people who perhaps don't have bank accounts?

Oliver: I'm absolutely sure they're being used in great numbers by those people, but let me ask you a question: what did you get for Christmas last year?

Moderator: I got some gift cards (laughter).

Oliver: (laughter) You got a bunch of gift cards, didn't you? And so did I. And, as a matter of fact, a staff member just walked in and gave me an envelope that had some cards for theaters. I think it's split, and I certainly know, we certainly know, from the trends and the way the volumes run that they are a huge vehicle being used for gifts around the country, too.

Moderator: Rich, can we expect more information from this study? Because I notice that what was has been released so far, if I'm not mistaken, is a summary. So, will there be more to come, or is what we've seen pretty much the gist of what we're going to see?

Oliver: No, there's going to be a lot more to come. When we went out this year, we actually almost doubled the number of questions we asked, and this really concerned us in terms of what we would expect in response rates. Incidentally, we sent out 2,700 surveys to financial institutions, and over 1,300 responded. We sent out surveys to 116 electronic payments service providers; 94 of them responded. The ones that responded, we think, cover about 95 percent or more of the total dollars in volume, so we felt real good about the response rate.

There's so much data, though, that we've accumulated, particularly in the area of things like "backroom practices." Are people still sending out paper statements? Are they using ACH to post other types of transactions? What are they doing in some of the image areas? But we also asked a lot of questions about emerging payment types. So we went out to people who are providing services in the mobile payments area and the person-to-person payments area, and we're still manipulating that data and grinding it down, and we think that somewhere near the end of the first quarter, we'll produce an updated report with much more information in it that will allow people to understand even more about what's going on under the covers of the payments system.

Moderator: Well, Rich, did this study delve at all into fraud in the payment system, or is that study for another day?

Oliver: No, I think it's a study for another day, and people who do that type of work find that it's very difficult work. Not everybody wants to share their fraud information, clearly. You will see, however, that that is—with respect certainly to debit card utilization—some of the data the Board's now gathering as a part of their assignment with the Durbin Amendment to regulate interchange on debit cards. They are getting a first taste of what it's like to try to get people to share that type of data with them. But this does not deal with that.

One thing it does do, though, is it has looked at some of the exception rates. In the check area, when we asked financial institutions about the level of penetration, let's say, of image exchange—and, in fact, by the way, we got back data that indicates that almost 96 percent of all checks are now being electronified somewhere in the clearing process—but when we went out, we asked them about exception processing in the check image world because at the advent of Check 21,that was a really big concern.

Moderator: Now, what is "exception [processing]"? What does that mean?

Oliver: So, exception processing would be images that don't read properly, duplicates, items that might have mismatched code line with the real code line on the check, or what have you. And we found in this survey, and in the study you'll see this, some extraordinarily low rates. Only four checks in every 10,000 are experiencing image-quality problems. Only one check in every 10,000 is a duplicate. So, great strides have been made in the industry, not only to somehow electronify the check world in a mere five years, but actually to do it in a way that shows pretty high quality in the processing environment.

Moderator: Well, thanks for joining us today, Rich.

Oliver: It's been my pleasure. Always good to share this information with everyone, and hopefully as they see the study, which is out on frbservices.org, and see the update to the study later in the first quarter, folks will be able to use this for their purposes of trying to understand how to make investments in the future of the payments system.

Moderator: Well, you've been listening to Federal Reserve Bank of Atlanta's Financial Update Focus podcast. Please return to frbatlanta.org for more podcasts.

Thank you for your time.