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Changes in Payment System Will Accelerate

Richard Oliver

It’s official: For the first time, electronic payments have surpassed checks as the nation's payment method of choice.

According to the 2004 Federal Reserve Payments Study, in 2003 Americans made 44.5 billion electronic transactions and 36.7 billion check payments. The decline in the number of checks paid reflects an annual average rate of decline of 4.3 percent from 2000 to 2003.

ACH, debit cards drive checks’ decline
Two phenomena are primarily responsible for the quickening decline in check volume. First, the number of automated clearinghouse (ACH) payments—which include recurring bill payments (such as those for mortgages, auto loans, insurance, and utilities) as well as check conversions—has soared by nearly 50 percent from 2000 to 2003. Many checks are converted to electronic payments by companies that have notified their customers in advance that they may do so.

Check conversions are often transparent to many consumers who still write checks at places such as Wal-Mart, for example, or pay certain bills by check. In fact, these transactions are processed as electronic payments, and check writers are unaware that these checks are no longer processed as paper items.

Second, debit card use has skyrocketed. The number of debit card transactions grew at 23.5 percent per year during the same three-year period. While that spectacular growth rate probably won’t continue indefinitely, it does signal that all generations are using debit cards in place of not only checks but also, in some cases, credit and cash, said Richard Oliver, executive vice president of the Federal Reserve Bank of Atlanta and retail payments products manager for the Federal Reserve System.

Federal Reserve Board press release on payments study

The 2004 Federal Reserve Payments Study

The Direct Payments Site

Changes coming faster
“That’s a real cultural sea change,” Oliver said. “People are getting comfortable with debit cards, and it's not just young people. That shift portends even more rapid change ahead.”

Credit card usage also increased between 2000 and 2003 although at a more modest rate of 6.7 percent. “At current growth rates, credit cards and debit cards will both surpass checks in terms of total annual transactions in 2007,” he added. “Such rapid change presents opportunities and challenges for an industry traditionally geared toward paper-based payments.”