From Seashells to Bytes
Electronic Payments: The Wave of the Future, Here Today
Check Use Slowing but Still Important
Cash Is Still Popular
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.
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.
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.
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:
|direct payroll deposits and Social Security payments;|
|automatic monthly bill payments for mortgages, car loans, and power and phone service; and|
|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.
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.