On December 8, 2010, the Federal Reserve issued a summary of its fourth triennial study on noncash payments trends in the United States, 2006-2009. The study is a sweeping view of noncash payments as well as a glimpse into where payments are headed.
Recently AFP Exchange magazine spoke with one of the authors of the study, Richard Oliver, Executive Vice President of the Federal Reserve Bank of Atlanta.
AFP: Richard, what jumps out at you looking at the summary results?
Richard Oliver: When we look at it, I think a lot of the results corroborated the general feeling about what was going on. What struck me might be the emergence of prepaid cards and the volumes at which they’re being utilized. I think the fact that credit card utilization, for the first time in any of our surveys, showed a decline, which from a milestone standpoint makes it the first time an electronic payment vehicle has ever declined in terms of volume use during the 10 years of our surveys.
I think the other thing that jumps out at me has to do with the lack of progress in electronification in some of the types of check payments and in particular, business-to-business, business-to-consumer, and consumer-to-consumer checks. We’re just not seeing much uptake on electronification side.
AFP: Do you have any thoughts on why prepaid cards jumped so high like that?
Oliver: I’m thinking about prepaid cards has as much to do with the changing demographics of this country perhaps as anything. It also has to do with the availability and fungibility of that particular product. I saw a recent survey, I believe done by the FDIC that as much as 20 percent of our society is unbanked or under-banked, which means that principally they’re in the business of utilizing cash and other vehicles as their primary means of doing business. The prepaid card is a very convenient product in that area. In fact, it’s being utilized in other countries for the same purposes, for the same type of population.
I think, too, the prepaid card, one form of which is the gift card continuous to be an increasingly popular vehicle, and perhaps even during a recession, it might be a vehicle that a lot of people use for gift exchange as opposed to going out and buying something more expensive. That’s a pretty dramatic rise in the survey over a period of four years but it’s very clear right now that the prepaid card is a very strong vehicle. It has widespread acceptance and there’s a lot of people building new payments applications around the use of prepaid cards.
AFP: You also mentioned electronic check payment not getting taken up at a rate you expected. Why do you think that is?
Oliver: I think that may be my biggest disappointment mainly because over the years, the electronification of the check has sort of been not only a Federal Reserve but perhaps even a country’s goal. Two or three reasons—I think they’re actually all different for the different types of payments. What’s notable when you look at the results of our survey on the business-to-business side is that the actual number of business-to-business payments that are written from one company to another as a bill payment or remittance payment actually went up during the period.
It’s the leading indicator, I think, that we still have, as an industry, made very good inroads into the ability to use other vehicles like ACH to conduct B-to-B payments. We still cling to the check because our systems are set up around it. We know how to use it, it’s convenient, and the ability to be able to send payments-related information in the envelope with the payment per se is still a very attractive feature, and a result, when we talk to corporations, they’re not in a position or ready yet to go electronic because there are other problems like the transmission of related information with the payment that we still don’t have very efficient end-to-end electronic products for.
On the business-to-consumer side, a lot of what we see there—and we saw a reduction in billion transactions over a three-year period—a lot of that category tends to be things like hourly payrolls, rebate programs, and things like that. The hourly payrolls have been a problem in converting to ACH for a long, long time.
In order to do hourly payrolls, they generally want to cut them off on a Thursday for a Friday payroll, and the ACH schedule pretty much dictates that you cut off payrolls on Wednesday for a Friday payroll because they have to be delivered by the opening of business on Friday. And so we don’t really have yet, within the ACH environment, any type of a same-day ACH capability for credit, and as a result, we don’t see much take-up here. I would guess that most of the take-up we see in this category in terms of electronification is likely to be payroll cards.
And then finally, in the consumer-to-consumer area, we actually saw a slight increase. These typically, consumer-to-consumer payments tend to be checks that people write, for example, between you and your neighbor, the Girl Scout, the babysitter, those types of practices. And the fact of the matter is there is no easy and convenient vehicle yet on the electronic side to substitute for this. What we’re seeing and probably conjecturing is that global payments, when implemented in some form that allows P-to-P may be the answer to this one, but we’re not anywhere near being ready for that yet.
AFP: Can you give us a hint of when the more detailed results will come out?
Oliver: We’re targeting the end of March for that. We want to be able to share the information in a more detailed study at the payments conference in early April and so we’re targeting the end of March, and in that more detailed report, you’ll see all the summary level data but you’ll also see breakdowns within various categories, geographic distributions, dollar cuts, for example, on debit card utilization that gives you some hints as to what might be cash replacement versus check replacement, and a lot of breakdowns like that. And you’ll also have the answer to some other more general qualitative questions about backroom practices.