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Banking

Debit Cards Overtake Checks in Payments Mix

photo of hand holding atm cardMore consumers are choosing debit cards instead of checks and other noncash payment options, according to a recent Federal Reserve payments study. The increase in debit card payments—from 25 billion in 2006 to nearly 38 billion in 2009—mirrors a wider trend as consumers increasingly shift toward electronic payment methods. Indeed, the study found that in 2009, more than 75 percent of the nearly 109 billion noncash payments were electronic, compared with about 65 percent in 2006.

In contrast, the number of checks written continued to decline. During the three years covered by the survey, checks processed fell from 32 percent of noncash payments to 22 percent. However, there is one category where checks are still the dominant noncash payment instrument—consumer-to-consumer payments. Here, the number of checks written grew from 2.2 billion to 2.4 billion during the three-year period covered by the study.

"The results of the study clearly underscore this nation's efforts to move toward a more efficient electronic clearing system for all types of retail payments," said Richard Oliver, executive vice president at the Atlanta Fed. Indeed, similar to the wider trend toward electronic payments, the number of checks processed electronically more than doubled between 2006 and 2009. According to the study, 96 percent of interbank checks—those deposited at one institution and drawn on another—involved electronic clearing in 2009.

Consumers, businesses cut back on credit card use
Credit cards, the only electronic payment instrument to decline, dropped 0.2 percent a year between 2006 and 2009. However, the decline in credit card usage could be a symptom of the economic downturn and does not necessarily reflect a long-term trend in consumer and business preferences, said the study.

Federal Reserve Governor Elizabeth Duke made a similar observation during a speech in early December on consumer credit and payments. "This shift in credit to debit makes sense from the perspective of the consumers," she noted. "If credit is tight and consumption is contracting, consumers who are reluctant or unable to increase their credit levels can use debit cards to pay for current expenses out of current, rather than future, income."

Prepaid cards log rapid growth
In contrast to the decline in credit card usage, prepaid cards were the fastest-growing noncash payment instrument, the report said. Prepaid card transactions, which include gift cards and payroll cards, increased nearly 22 percent a year from 2006 to 2009. However, they still account for a relatively small share of noncash payments at 6 percent.

The 2010 Federal Reserve Payments Study, the fourth in a series of triennial studies, estimates the number and value of noncash payments in the United States, including checks, debit cards, credit cards, and prepaid cards. The study is made up of three separate efforts, the results of which will be released in early 2011.

December 29, 2010