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Payment Fee Disclosures

The recently released Federal Reserve Payment Study documents that in 2003 the number of electronic payments exceeded paper checks paid in the United States. The study reports that there were 43.7 billion electronic payments vs. 36.7 billion checks paid. Electronic payments accounted for 55% share of non-cash payments in 2003, up from a 42% share in the year 2000. Importantly, the data shows that between 2000 and 2003, electronic payment volume increased by 45% while check volumes decreased by 12%.

Growth of Non-Cash Payments in the U.S., 1979-2003

Check payment volume has been eclipsed by electronic payments, which are poised to displace paper checks at an accelerating rate. The ‘Tipping Point’ has arrived. If recent growth rates continue, electronic payment volume may double by the year 2010, and may drive checks’ share to below 25% of non-cash payments.

The 2003 Electronic Payment Instruments Study (EPIS), which was conducted by Dove Consulting for the Federal Reserve Bank, documents the results of an industry-wide survey of EFT payment networks, organizations and processors.

The accelerating decline in checks and their dramatic displacement by electronic payments has rapidly transformed the payments landscape. Key factors driving the swing from paper to electronic payments include consumer adoption, FI card issuance and cooperation through shared networks supported by sophisticated payment processing operations, and merchant willingness to deploy systems that accept electronic payments. The payment instruments that are growing the most quickly are.

	Card-based payments: In addition to the ability to access credit, many consumers have been drawn to credit and debit card loyalty programs that incent them to concentrate purchases. Other consumers are attracted to the convenience and control provided by PIN debit cards. Recent acquisitions of PIN debit networks by credit card and core processors indicate the importance of debit cards to consumers.
	ACH: Direct Deposit has grown steadily over the past 20 years. More recently, online bill payment has become widely adopted and is beginning to displace an increasing number of consumer checks, particularly for recurring (e.g., utility) bills. The remaining checks written by consumers are increasingly being converted into ACH eChecks at the lockbox (ARC) and Point of Sale (POP).
	Government: Electronic Benefits Transfer (EBT) programs, increased usage of ACH payments, and the issuance of procurement cards are also cutting into check volume.

The implications and consequences of this change in the payments mix -- not the least of which will be increased unit cost of paper-based payments -- will be significant for all parties: financial institutions, corporate treasury functions, processors, networks and consumers. A future edition of On Payments will provide a more detailed discussion on the Fed Study results and implications for industry participants.

To view the summary report, please click here.

Dove Consulting, a division of Hitachi Consulting, is a Boston-based consulting practice specializing in strategy and organizational effectiveness. The practice's Financial Services Group is a leader in developing retail payments, distribution, and customer strategies. The group has performed payment strategy work with 8 of the Top 10 U.S. banks, major payment networks, and government entities. Our client consulting work is supported by an ongoing commitment to industry research, addressing payment trends related to consumers, retailers, ATM deployers, card issuers, and remittance processors.

Visit us at: www.doveconsulting.com, or send feedback to: onpayments@doveconsulting.com.

© Copyright 2008 Hitachi Consulting. Contents in this newsletter may be reprinted with proper attribution to Dove Consulting.