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Economic Brief
JUNE 2009, EB09-06

the Growth of Paperless
money: retail Payments
in the United states
Continue to Evolve
By t. stuart Desch and Kiran Krishnamurthy

The use of electronic payment methods
has increased rapidly over the last decade.
Recent studies shed greater light on the
forms these payments are taking – and
why checks still serve a vital function for
certain transactions.

Increasingly, consumers and businesses are turning to electronic and
other non-cash forms of payments, like debit cards. As a result, in 2001
the Federal Reserve System began the Retail Payments Research Project
to estimate, among other things, the annual number and value of alternative retail payments in the United States.1 This project has provided a
much clearer and up-to-date picture of changing payments practices of
households and businesses than previously existed. This Economic Brief
examines the results of the most recent studies which were published
in 2007.
The report on electronic payments instruments examined two main
components –“core”electronic payment instruments and prepaid
cards such as gift cards. The study also looked at emerging payment
technologies, including online bill payment and person-to-person (P2P)
payments such as PayPal, the latter of which are charged to a credit card
or routed through the Automated Clearing House (ACH) network.
The report found that core electronic payments grew from 44.1 billion
transactions in 2003 to 62.7 billion in 2006, which amounts to a
compound annual growth rate of 12.4 percent during that period.2
When the most common form of prepaid transactions are included,
total electronic payments for 2006 rose to 65.8 billion transactions.
Another interesting observation, though not discussed in the report,
is how different segments of the population use non-cash payment
methods. For instance, age is a strong predictor of payment instrument
preference, as younger consumers are less likely to use cash. Payment
preference also varies by ethnicity – the Latino population, for instance,
is more likely to use cash than other population segments. Adoption of
cash substitutes can also vary geographically.
Yet, despite these specific differences, there are strong overall trends
that illustrate the average consumer’s shift away from the use of cash
and checks. Those trends are detailed below, grouped by payment

EB09-06 - thE fEDEral rEsErvE BaNK of riChmoND

CorE ElECtroNiC PaymENts
The core electronic payments category consists of general-purpose
credit cards, private label credit cards, Personal Identification Number
(PIN) debit cards, signature debit cards, ACH, Electronic Benefits Transfer

(EBT) cards, and emerging payment technologies. The primary sources
for the information studied are major credit card industry associations
and processors; Electronic Funds Transfer (EFT) networks (which link
automated teller machines and point-of-sale debit card acceptance
devices to accounts at depository institutions); federal government
agencies; and other entities that can provide accurate and reliable data
on electronic payments originated in the United States.3
Among core electronic payments, PIN debit cards accounted for the
most significant percentage growth in terms of both the number of
transactions and total dollar value. PIN debit payments rose from 5.3
billion transactions in 2003 to 9.4 billion in 2006, a growth rate of
20.6 percent. The total dollar value rose from $204.3 billion to $348.6
billion during the same period, a year-over-year increase of 19.5 percent.
Second in percentage growth to PIN debit card transactions were ACH
transactions. The number of ACH payments grew from 10.5 billion to
18.1 billion from 2004 to 2007, or by 20 percent year over year.
Transactions over the ACH network come from several sources, including
direct deposits for payroll, IRS tax refunds, pension benefits, childsupport disbursements; direct payments for insurance premiums,
utility bills, tuition, subscriptions/memberships, and mortgage and
other loan payments; transactions via ACH debit cards, such as those
being developed by large supermarket chains; P2P payments such as
PayPal; and more.
The value of ACH payments increased an average of 18.1 percent per year
– from an estimated $86.7 trillion in 2004 to $142.7 trillion in 2007.
Meanwhile, the average value of ACH payments fell from $8,279 to
$7,896, a reflection of the increase in the proportion of ACH payments
that are relatively low-value transactions.

PrEPaiD CarDs
Prepaid cards, first introduced as replacements for paper gift certificates,
today represent a broad and growing payment category. The advent of
prepaid cards in the mid- to late 1990s – an innovation pioneered by
the movie rental company Blockbuster to the mass market in 1995 –
completed the scope of card-based payment options, the study notes, in
that consumers can now choose to pay later (with credit cards), pay now
(with debit cards) or pay before making a purchase (with prepaid cards).
Collectively, the participating card associations, EFT networks, and
payments processors accounted for about 42 percent of the number
of payment transactions and 42 percent of the dollar value of prepaid
card purchases that originated in the United States in 2006.4 Retailer
gift cards remain the largest category among prepaid cards. These
“closed loop”cards have been adopted by nearly all major merchants,
from supermarkets to department stores to coffee shops to convenience
stores. In 2006, closed loop prepaid transactions numbered 3.1 billion
and were valued at $36.6 billion.
What drove this growth? Closed loop prepaid cards, the study notes,
provide benefits to retailers through lessening the need for postholiday price discounting, decreasing check-out line waiting time,
and increasing incremental profits as a result of expired or broken cards.
The latter seems to be consequential: Estimates vary, but anywhere from
20 percent to 40 percent of prepaid card value is unspent, according to
the Fed study.

Behind PIN debit card and ACH transactions in terms of percentage
growth were signature debit, EBT, general-purpose credit card, and
private label credit card payments. Private label credit cards – which
include department store, gas, and other merchant-issued cards – were
the only category among core electronic payments to see a decrease
in the number of transactions, falling from 3.8 billion in 2003 to
2.8 billion in 2006.

Compared with credit and debit cards, the prepaid card industry is
still in the early stages of development, despite the rapid adoption
of closed loop cards by merchants. Yet several financial institutions have
also entered the prepaid card industry by issuing“open loop”prepaid
cards. These prepaid cards, which bear logos for Visa, MasterCard,
American Express, or those of EFT networks, do not have to be redeemed
at a specific retailer but can instead be used at any retailer that accepts
traditional credit or debit cards. Newer prepaid applications include
payroll and healthcare cards. Open loop“rechargeable”cards, which
give the holder the ability to add money to the card at a later date and
use the card as a store of value, are expanding and are typically targeted
at segments of the population least likely to have bank accounts.

The study reports that the decline in private label card use is to be
expected as card usage patterns in recent years have shifted away from
private label cards and toward general-purpose credit card and debit card
payments. As a result, several large portfolios and operations of retailers
such as Sears, Kohl’s, and Neiman Marcus have been sold to a number of
financial institutions and non-bank organizations.

Recent growth has been seen in the number of states that use prepaid
cards as a way to provide benefits through government-run welfare
programs. Use of these sorts of cards can result in cost savings – such as
eliminating the need to spend money to print a benefit check and mail it
– and greater efficiency. Fraud among government prepaid benefit
programs also remains relatively low. In 2006, state-issued prepaid cards

PAgE 2 EB09-06

accounted for 88.4 million transactions worth $3.2 billion. The average
transaction was $36.
EmErGiNG PaymENt tEChNoloGiEs
Several new products offer various front-end payment methods to
consumers yet still utilize traditional funding and settlement systems
behind the scenes. Some examples include online bill payment;
P2P payments such as PayPal; deferred payment transactions such
as Bill Me Later; transponders such as EZPass, which may charge
payments to a credit card; and ACH debit cards.
Emerging payment technologies for 2006 were used in over 6 billion
transactions and totaled $1.23 trillion. About 3.45 billion of those
transactions were bill payments that totaled $1.19 trillion.

payments. The average value of consumer-to-business remittance checks
was $360, while the average value of business-to-business remittance
checks was $2,351. Overall, more than a third of all checks were written
for $50 or less, and more than 80 percent of all checks were for transactions of $500 or less. So while check usage continues on its downward
trend, it appears that there are some uses for which electronic payments
have not yet provided a good substitute for checks.

t. stuart Desch is an assistant vice president in the Department
of Banking supervision & regulation at the federal reserve
Bank of richmond. Kiran Krishnamurthy is a writer in the Bank’s
Corporate Communications Department.

The type of payment technologies available to consumers continue
to grow. New products offered include google Checkout, which seeks to
offer a P2P alternative to industry leader PayPal.
The use of checks has continued to shrink. The number of checks
written in the United States decreased from 36.6 billion to 29.8 billion
between 2004 and 2007. But the value of check payments was relatively
unchanged during the same period: $41 trillion and $41.4 trillion, a
growth rate of 0.4 percent. The average amount per check increased
$274, from $1,118 to $1,392. The overwhelming majority of those
checks, about 24.4 billion valued at a total $38.8 trillion, were paid
through commercial banks, with an average per check value of $1,592.
The highest percentage of check payers were consumers (58 percent)
while the highest percentage of check payees were businesses (at 78
percent). But consumer-written checks account for 19.6 percent of the
total value of check payments, while businesses write checks accounting
for 77.8 percent of total check value. Businesses are both the heaviest
writers and receivers of check payments in dollar terms, with businessto-business checks accounting for 58.6 percent of the total value of check

Three studies were performed in 2001: the Electronic Payment Instruments Study, the Depository
Financial Institution Check Study (DI), and the Check Sample Study (CS). The first two studies were
repeated in 2004 in order to track and compare shifts in payment methods, while all three studies
were repeated in 2007. The Electronic Payment Instruments Study was performed by Dove Consulting, a division of Hitachi Consulting. The 2007 DI Study and 2007 CS Study were performed by global
Concepts and the Federal Reserve System. This Economic Brief is based on the 2007 studies’findings
or drawn directly from the studies.


All growth rates mentioned in this Economic Brief are compound annual growth rates.


Sixty-five out of 73 potential organizations participated in the core electronic payment category of
the study. Collectively, these participants accounted for an estimated 99.8 percent of the payment
transactions and 99.9 percent of the dollar value of electronic payments originated in the United
States in 2006.


The study reported that, unfortunately, it was not possible to obtain data from some of the largest
prepaid organizations. In cases where organizations chose not to participate, the study’s project
team developed estimates for the missing data using a wide range of sources.

The views expressed in this article are those of the authors and not
necessarily those of the Federal Reserve Bank of Richmond or the Federal
Reserve System.

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