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Consumer Information

From Seashells to Bytes

Electronic Payments: The Wave of the Future, Here Today

Check Use Slowing but Still Important

Cash Is Still Popular

Consumers' Corner

Electronic Payments:
The Wave of the Future, Here Today

More than half of the noncash payments made in the United States today are initiated electronically using debit cards, credit cards, or automated clearinghouse, or ACH, transactions, according to Federal Reserve studies. The number of electronic transactions increased 45 percent in just three years recently, climbing to about 44.5 billion separate payments in a single year. Below is an overview of various types of electronic payments.

Debit cards
When you use your debit card, you typically enter a secret personal identification number, or PIN, and the money is quickly, sometimes instantaneously, taken out of your checking account. It is then transferred into the account of the party you are paying.

Debit cards account for more than half of the overall growth in electronic payments; debit card payments in the United States recently doubled to nearly 16 billion transactions. The average dollar amount of a debit card transaction is $40, according to studies, mostly for routine retail purchases.

Paying with a debit card
At a retail store, you
swipe your card and
enter your PIN.
The card company's computer network verifies your
account information and balance, then reserves the purchase amount in your account.
Money is exchanged between your bank and
the store's bank.
Transaction is posted to your account.
(One example of a debit card transaction.)

Credit cards
Though not growing in number as fast as debit card payments, credit cards are used more often than debit cards, according to Federal Reserve data. Credit card usage is not growing as fast as debit cards because credit cards are a more mature product—most people already have one, while many are getting debit cards for the first time.

For consumers, the main difference between the two cards is that with a debit card, money comes directly out of your bank account, sometimes immediately. With a credit card, you borrow money from the credit card issuer, which pays the merchant for you. Then you receive a bill from the card issuer each month and, if you don't pay the entire balance, you must pay interest to the issuer.

Getting paid electronically
Ever wonder how your paycheck gets directly deposited to your bank account?

A day or two before payday, your employer's bank sends “files” of payroll information—such as the amount of the paycheck, your bank's routing number, and your account number—to the ACH operator, who then electronically sends the file to your bank.

ACH operators send banks such files four times each weekday. Your bank receives the electronic file and posts your paycheck to your account, usually on the same day. Payment industry rules require that if a bank gets an ACH file before 5 p.m., those funds must be available to the account holder by the opening of business the following day.

Automated clearinghouse
The Federal Reserve System operates one of two major automated clearinghouses, or ACH networks, in the United States. The ACH network functions like an electronic courier, delivering millions of digital financial packages a day. An ACH transaction takes money directly out of one bank account and delivers it to another, such as:

  bullet image direct payroll deposits and Social Security payments;
  bullet image automatic monthly bill payments for mortgages, car loans, and power and phone service; and
bullet image onetime telephone and Internet payments from checking accounts, such as a retail purchase or a utility bill payment.

In addition to domestic ACH services, the Fed provides services that consumers, corporations, and the U.S. Treasury use to send payments from the United States to other countries. FedACH International Services transmits payments from the United States to Canada, Mexico, Austria, Germany, the Netherlands, Switzerland, and the United Kingdom. The Fed plans to add more countries to the services as demand warrants.

Direct payroll deposit into your bank account
Employer's bank
sends payroll
data to an ACH operator (Federal Reserve or another one).
ACH operator sends your
payroll data to your bank.
Your bank gets data and
deposits money in your account.

Online payments
Consumers are increasingly making electronic payments over the Internet, either at the Web site of a retailer or biller—such as a utility or mortgage company—or at the Web site of a financial institution. Some online payments are processed through the ACH network. Typically, a biller's bank creates an ACH transaction in which the consumer's bank account is debited and the biller's account credited. Online retailers often use proprietary processing networks outside of the ACH network to complete transactions.

The rise of electronic check conversion
Many electronic payments start as paper checks but are then converted to automated clearinghouse transactions. The number of these check-to-electronic transactions has grown by 50 percent a year recently, and payments experts expect that growth rate to increase.

The check conversion process is usually initiated by merchants at point-of-sale registers and by large billers, such as telephone and power companies. In most cases, payment information from the check is converted to a digital document and the original paper check is destroyed.

If a merchant or biller plans to convert your check to an electronic payment processed by the ACH or the debit card networks, they must notify you. In a point-of-sale transaction, a merchant is supposed to post a conspicuous notice about the conversion, and the consumer must receive a copy of the notice, either on the receipt or another piece of paper. Billers who intend to convert checks electronically are also required to notify their customers, and they typically do so on the invoice or statement they mail.