Payments in the US undergoing evolution, not revolution, says Cleveland Fed policy advisor Daniel Littman
Nevertheless, “faster payments” system may accelerate changes in the payments landscape
Much attention is being paid to new ways to make and receive payments, such as chip-equipped credit cards, contactless debit cards, mobile wallets, and two-dimensional barcodes carried on smartphones. According to Federal Reserve Bank of Cleveland policy advisor Daniel Littman, these new payment methods, while innovative, are not revolutionary because they use legacy payment networks for payments instructions and settlement.
Cash remains the payment product used most often by consumers, representing one-third of all consumer transactions in 2015, according to the Federal Reserve’s Diary of Consumer Payment Choice. But Littman says cash use is declining in relation to other payment types. According to the Federal Reserve Payments Study 2016, on an average day in the United States in 2015, consumers, businesses, and governments made nearly 400 million noncash payments with a total value of $487 billion. The largest non-cash transaction type in 2015 was debit cards.
While the number of paper checks processed declined from a peak of nearly 50 billion per year in 1995 to the 2015 estimate of 17 billion, a 65 percent reduction, the number of debit card transactions rose from about 9 billion in 2001 to almost 60 billion in 2015, an increase of more than 600 percent.
Littman notes that a number of countries around the world have implemented some version of a new payment network labeled “faster payments” or “real-time payments.” “These are networks that in their purest form allow payments to move in an instant from one party to any other party and, in several cases, operate 7 days a week, 24 hours a day,” says Littman. He says such faster payments networks, now under construction in the US, should become available to end users by the end of 2018.
While a revolution in payments doesn’t appear on the horizon, Littman says the United States is due for continuing evolution. “Faster payments will not drive any of the legacy payment products to extinction in the foreseeable future, but the experience in other countries with real-time payment systems suggests that faster payments will reduce the growth rate of ACH and accelerate the decline of checks and cash. Faster payments will also improve convenience, certainty of payment, and security for end users,” says Littman.
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
Doug Campbell, firstname.lastname@example.org, 513.455.4479