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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.

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November 9, 2020

The Importance of Digital Payments to Financial Inclusion

Editor's note: In December, macroblog will become part of the Atlanta Fed's Policy Hub publication.

A recent Atlanta Fed white paper titled "Shifting the Focus: Digital Payments and the Path to Financial Inclusion" calls for a concerted effort to bring underbanked consumers into the digital payments economy. The paper—by Atlanta Fed president Raphael Bostic, payments experts Shari Bower and Jessica Washington, and economists Oz Shy and Larry Wall—acknowledges the importance of longstanding efforts to bring the full range of banking services to unbanked and underbanked consumers. (For another take on the white paper and its relationship to the Atlanta Fed's mission, you can read here.) However, the white paper observes, progress towards this goal has been slow. It further notes the growing importance of digital payments for a wide variety of economic activities. It concludes by highlighting a number of potential policies that could expand inclusion in the digital payments economy for policymakers to consider.

The 2017 Federal Deposit Insurance Corporation (FDIC) National Survey of Unbanked and Underbanked Households found that 6.5 percent of U.S. households are unbanked and an additional 18.7 percent underbanked. In this survey, a household is considered underbanked if it has a bank account but has obtained some financial services from higher-cost alternative service providers such as payday lenders. The proportions are even higher in some minority communities, with an unbanked rate for Black households at 16.9 percent. These figures were down modestly from earlier FDIC surveys, but progress remains inadequate.

The white paper retains full inclusion as the ultimate goal but argues we should not let the difficulties of achieving full inclusion deter us from moving aggressively to spread the benefits of digital payments. Such digital payments in the United States are typically made using (or funded by) a debit or credit card. Yet a recent paper by Oz Shy (one of the coauthors of this post) finds that over 4.8 percent of adults in a recent survey lack access to either card. Moreover, those lacking a card tend to be disproportionately concentrated in low-income households, with almost 20 percent of households earning under $10,000 annually and over 14 percent of those earning under $20,000 a year having neither card. These numbers also vary by ethnic groups: 4.8 percent of white and 10.2 percent of Black surveyed consumers.

The lack of access to digital payments has long been a costly inconvenience, but recent developments are moving digital payments from the "nice-to-have" category toward the "must-have" category. Card payments are increasing at an annual rate of 8.9 percent by number in recent years. While cash remains popular, debit cards have overtaken cash for the most popular in-person type of payments. Moreover, the use of cards in remote payments where cash is not an option nearly equals their use for in-person transactions. Most recently, COVID-19 has accelerated this move toward cards, with a 44.4 percent year-over-year increase in e-commerce sales in the second quarter of 2020.

These trends in card usage relative to cash usage pose several problems for consumers who lack access to digital payments. First, some retailers are starting to adopt a policy of refusing cash. Second, many governments are deploying no-cash parking meters, along with highway toll readers and mass transit fare machines that do not accept cash. Third, the growth of online shopping is being accompanied by a decrease in the number of physical stores, resulting in reduced access for those lacking cards.

The last part of the white paper discusses a number of not mutually exclusive ways of keeping the shift from paper-based payments (cash and checks) to digital payments from adversely affecting those lacking a bank account. A simple, short-term fix is to preserve an individual's ability to obtain cash and use it at physical stores. No federal law currently prevents businesses from going cashless, but some states and localities have mandated the acceptance of cash.

However, merely forcing businesses to accept cash does not solve the e-commerce problem, nor does it promote the development of faster, cheaper, safer, and more convenient payment systems, so considering alternatives takes on greater importance. One option the paper discusses is that of cash-in/cash-out networks that allow consumers to convert their physical cash to digital money (and vice versa). Examples of this in the United States include ATMs and prepaid debit cards, as well as prepaid services such as mass transit cards that can be purchased for cash in physical locations.

Another option is public banking. One version of this that has been proposed is a postal banking system like the ones operating in 51 countries outside the United States and the one that was once available here. Another public banking possibility would provide consumers with basic transaction accounts that allow digital payments services. The government or private firms (such as banks, credit unions, or some types of fintech firms) could administer such services.

The paper concludes with a discussion of some important challenges inherent in moving toward a completely cashless economy accessible to everyone. One such consideration is access to mobile and broadband. This issue has a financial dimension, that of being able to afford internet access. It also has a geographic dimension in that many rural areas lack both high-speed internet and fast cellphone networks. Another dimension is that of providing a faster payment service that would allow people to obtain earlier access to their incoming funds, and result in bank balances more accurately reflecting outgoing payments. Finally, the white paper raises the potential for central bank digital currency to expand access to digital payments. However, central bank digital currency raises a large number of issues that the federal government and Federal Reserve would need to work through before it could be a viable option.