Electronic Payments in the U.S.
`Economy: An Overview
`
`By Stuart E. Weiner
`
`Business publications are filled these days
`
`with stories about the digital or electronic
`economy. One routinely reads about e-com-
`merce, e-business, and e-banking. Terms such as
`e-mail and e-tickets have entered the common
`lexicon. Some analysts have gone so far as to
`proclaim that the U.S. economy is being funda-
`mentally transformed and is entering a (cid:147)new age(cid:148)
`of unparalleled growth and opportunity.
`
`While such a view is open to debate, clearly
`some major, potentially far-ranging, changes are
`under way. The most visible and most dramatic
`involve e-commerce. A growing amount of eco-
`nomic activity is taking place on the Internet,
`directly or indirectly impacting households and
`businesses throughout the economy. Less visi-
`ble, but also significant, are changes involving
`(cid:147)e-payments.(cid:148) Although the U.S. payments sys-
`tem continues to rely heavily on paper-based
`methods, cash and checks, for conducting trans-
`actions, electronic payments are steadily gaining
`a greater presence.
`
`This article provides an overview of e-payments
`as they currently exist in the United States. It
`shows that the U.S. payments system is becom-
`ing more electronic, principally through traditional
`
`Stuart E. Weiner is a vice president and economist and head
`of the Payments System Research function at the Federal
`Reserve Bank of Kansas City. This article is on the bank(cid:146)s
`web site at www.kc.frb.org.
`
`means. While new instruments are beginning to
`emerge, it is the traditional e-payment types(cid:151)
`credit cards, debit cards, and ACH transac-
`tions(cid:151)that are driving the U.S. payments system
`forward.1
`
`The first section of the article reviews cash
`and check usage in the United States, noting that
`even these instruments are becoming more elec-
`tronic. The following sections then survey the
`various types of e-payments proper, including
`credit and debit cards, wire transfers and ACH
`transactions, and e-money. The article closes
`with a brief discussion of some of the factors
`that may influence the evolution of e-payments
`in the U.S. economy in the future.
`
`I. CASH AND CHECKS
`
`Cash and checks remain the dominant forms
`of payment in the United States. Even these
`paper-based instruments, however, are being
`affected by advancing electronic technologies.
`
`Cash and ATMs
`
`While the use of cash (currency and coin) is
`extremely difficult to measure, many estimates
`place its share at 50 percent or more in terms of
`the total number of transactions in the U.S.
`economy.2 Cash, of course, is inherently a
`non-electronic payments method. But its usage
`
`VISA - EXHIBIT 1017
`Visa Inc. et al. v. Universal Secure Registry LLC
`IPR2018-01350
`
`

`

`2
`
`FEDERAL RESERVE BANK OF KANSAS CITY
`
`Chart 1
`NUMBER OF ATM TERMINALS
`
`Thousands
`250
`
`Thousands
`250
`
`200
`
`150
`
`100
`
`50
`
`0
`
`1989
`
`1990
`
`1991
`
`1992
`
`1993
`
`1994
`
`1995
`
`1996
`
`1997
`
`1998
`
`1999
`
`200
`
`150
`
`100
`
`50
`
`0
`
`Source: Bank Network News, (cid:147)EFT Network Data Book-2000 Edition,(cid:148) vol. 18, no. 6, August 11, 1999.
`
`in recent years has been bolstered, or at least sup-
`ported, by a decidedly electronic dispenser, the
`automated teller machine (ATM). ATMs do not
`represent a payments type per se, but rather are
`an electronic means of dispensing cash. They
`offer a convenient alternative to more tradi-
`tional dispensers, such as bank tellers, automo-
`bile drive-through facilities, and supermarket
`checkout lines.
`
`An ATM card allows a customer to withdraw
`cash from his or her bank account by entering a
`PIN number and having the amount of the with-
`drawal immediately debited from the account.
`ATM transactions rely on an extensive commu-
`nications system that includes both regional and
`national networks that can interact with one
`another. The four participants in an ATM trans-
`action include the customer, the card-issuing
`
`bank, the ATM owner, and the network or net-
`works that the card-issuer and ATM owner join.
`Outwardly seamless and quick, an ATM trans-
`action in fact involves a series of complex,
`underlying, interrelated processing steps.
`
`The total number of ATM transactions has
`more than doubled over the last ten years and is
`estimated to reach near 11 billion again this
`year. And although there are signs that ATM
`volume may be peaking, ATM access continues
`to grow. The total number of ATM terminals
`has tripled over the last ten years (Chart 1).
`Today, more than 50 percent are located off
`bank premises at such locations as convenience
`stores, gas stations, and shopping malls (Bank
`Network News). Somewhat
`ironically,
`the
`growth in ATMs and their ever-widening access
`is contributing to the e-economy (cid:147)feel(cid:148) despite
`
`

`

`ECONOMIC REVIEW l FOURTH QUARTER 1999
`
`3
`
`Table 1
`NONCASH PAYMENT TYPES, UNITED STATES
`
`Number of
`transactions
`1997
`(billions)
`
`66.09
`16.88
`3.91
`4.55
`.15
`
`Average annual
`growth in
`number of
`transactions,
`1993-97
`(percent)
`
`2.3
`7.8
`53.3
`15.5
`7.3
`
`Share of number of transactions
`
`1993
`(percent)
`
`1997
`(percent)
`
`79.1
`16.4
`.9
`3.4
`.1
`
`72.2
`18.4
`4.3
`5.0
`.2
`
`Checks
`Credit cards
`Debit cards
`ACH
`Wire transfer
`
`Source: Derived from BIS, Statistics on Payment Systems in the Group of Ten Countries, December, 1998, p.110, and
`NACHA, (cid:147)ACH Statistics Fact Sheet 1989-1998,(cid:148) www.nacha.org/resources/facts/1998achstats.htm. Shares do not sum to
`100.0 due to rounding.
`
`being intrinsically linked to a core, paper-based
`payments method.
`
`Checks and ECP
`
`The other principal paper-based method, the
`check, also remains deeply embedded in the U.S.
`payments system. As shown in Table 1, 66 bil-
`lion checks were written in the United States in
`1997, accounting for 72 percent of the total num-
`ber of noncash transactions. The United States
`utilizes checks more than any other industrial-
`ized country.3 But while check usage remains at
`an extremely high level, its share is trending
`downward (from 79 percent in 1993) as the
`growth in checks trails the growth of other, elec-
`tronic, payments types. As noted in the table,
`credit cards, debit cards, ACH transactions, and
`wire transfers are all experiencing faster growth
`than checks, the result being that the sum of their
`transaction shares has risen from 21 percent in
`1993 to 28 percent in 1997. Thus, e-payments
`are on the rise in the United States, and each of
`these payments types will be discussed shortly.
`
`Still, checks remain pervasive in the U.S.
`payments system, used by individuals, busi-
`nesses, and governments alike to pay for a
`vast array of goods and services. And, unfortu-
`nately, the clearing and settling of a check is an
`expensive process, estimated to cost two to
`three times more than an electronic payment
`(Hancock and Humphrey). A check accepted by
`a merchant, for example, must first be depos-
`ited at the merchant(cid:146)s bank, sorted with other
`checks, and then physically transported to the
`payer(cid:146)s bank for collection. Along the way,
`there are numerous processing steps, and the
`associated personnel, equipment, and transpor-
`tation costs are high.
`
`In recognition of this, clearing house associa-
`tions, the Federal Reserve, and the banking
`industry in general have been striving in recent
`years to electronify various aspects of the check
`collection process. This effort is called elec-
`tronic check presentment (ECP), a process by
`which the routing and payment information on
`a paper check is unbundled from the check
`
`

`

`4
`
`FEDERAL RESERVE BANK OF KANSAS CITY
`
`itself and transmitted electronically to the paying
`bank. In the strong form of ECP(cid:151)known as
`truncation(cid:151)the paper check never follows. In
`the weak form of ECP, the paper check is eventu-
`ally sent to the paying bank, negating some of the
`cost savings that would result from full trunca-
`tion but still making the check collection process
`faster and more efficient. Over the first seven
`months of this year, 18 percent of the total
`checks processed by the Federal Reserve were
`presented electronically, either in truncated form
`or with checks to follow.
`
`As part of the ECP effort, other programs are
`also under way that are designed to bring
`advanced technologies to check clearing and set-
`tlement. Some Federal Reserve offices, for
`example, are now offering pilot programs that
`offer digital images of truncated checks to ECP
`customers over the Internet. The use of digital
`imaging in other parts of the check process is
`being explored as well. Thus, as with cash and
`ATMs, there is a growing (cid:147)electronic(cid:148) aspect to
`checks. But in all such check electronification
`programs, a paper check still enters the system.
`The mark of a true electronic payments type(cid:151)an
`e-payment(cid:151)is no paper. E-payments are taken
`up next.
`
`II. CREDIT CARDS AND DEBIT
`CARDS
`
`The first major category of electronic pay-
`ments is credit cards and debit cards. Together,
`they account for nearly a quarter of noncash
`transactions in the U.S. economy.
`
`Credit cards
`
`Credit cards are the most common and most
`familiar e-payment type in the United States.4
`As shown in Table 1, there were nearly 17 billion
`credit card transactions in 1997, representing
`18.4 percent of all transactions. Over the 1993 to
`1997 period, credit card transactions grew at a
`7.8 percent annual rate.
`
`Credit card transactions take place over large
`electronic networks,
`typically linking card-
`holders, merchants, card-issuing banks, mer-
`chants(cid:146) banks, and the credit card companies.5
`Roughly half a billion general purpose cards are
`in circulation, with 85 percent of those being
`bank-issued MasterCard or VISA cards. But
`nonbank general purpose cards(cid:151)American
`Express, Discover, and Diners Club cards(cid:151)
`also play an important role, presently account-
`ing for over one-fourth of all general purpose
`dollar outlays (Nilson Report 1999).6
`
`Some of the recent growth in credit card
`transactions no doubt reflects the increase in
`purchases of goods and services over the
`Internet, that is, e-commerce. Although defini-
`tive data are lacking, available information sug-
`gests that a large majority of Internet purchases
`are currently conducted via credit card.7 Some
`card-issuing banks are aggressively seeking to
`grow their Internet-related business, urging
`customers to choose their particular credit card
`for online purchases. Other card-issuing banks
`are viewing the Internet more as a marketing
`tool, using online advertising to entice new cus-
`tomers to apply for their card. Reflecting both
`strategies, cobranding of bank credit cards with
`Internet firms is on the rise (American Banker).
`
`Credit card usage for Internet sales has also
`spurred discussion of so-called digital wallets.
`One of the drawbacks of using credit cards for
`online purchases is that credit card information,
`as well as billing and shipping information, has
`to be reentered into a form every time a new
`merchant is visited. A digital wallet is software
`that permits the cardholder to store such infor-
`mation on his or her personal computer or on a
`server operated by the company issuing the
`wallet. When the customer is ready to make an
`online purchase, he or she can transmit these
`data with a single mouse click, making Internet
`credit card transactions easier. To date, how-
`ever, digital wallets have attracted little interest
`from consumers.8
`
`

`

`ECONOMIC REVIEW l FOURTH QUARTER 1999
`
`5
`
`Debit cards
`
`While credit cards remain the principal type of
`electronic payment in the United States in terms
`of the number and share of transactions, the use
`of debit cards is growing at a much faster rate.
`Indeed, debit cards are the most rapidly growing
`payment type in the United States. As seen in
`Table 1, annual debit card transaction growth has
`averaged 53 percent in recent years, and debit
`cards now account for over 4 percent of total
`transactions. The number of debit cards in circu-
`lation has reached some 250 million (Bank Net-
`work News). A recent Federal Reserve Bank of
`Kansas City survey reflects these trends: 77 per-
`cent of responding banks now offer debit cards,
`and an additional 14 percent plan to do so within
`a year.
`
`Debit cards are used for point-of-sale (POS)
`transactions; that is, a customer presents a debit
`card to a merchant just as he or she would pre-
`sent a credit card. But debit card transactions do
`not involve credit. Instead, as with ATM transac-
`tions, debit card transactions are linked to a cus-
`tomer(cid:146)s bank account. Online debit transactions
`require the customer to enter a PIN number, and
`the amount of the transaction is immediately
`debited from the customer(cid:146)s account. Offline
`debit transactions require a signature, and, while
`settlement is not immediate, authorization is
`required.
`
`Like ATM and credit card transactions, debit
`card transactions are made possible through
`interlinked communications networks. Partici-
`pants include consumers, merchants, card-issu-
`ing banks, merchants(cid:146) banks, and regional and
`national networks. Online debit card transac-
`tions operate through the same networks as ATM
`transactions. Offline debit card transactions
`operate through credit card networks. A typical
`debit card will allow the holder to access one or
`more debit card networks as well as one or more
`ATM networks.
`
`A number of factors have likely contributed
`to the increased use of debit cards in recent
`years. Growing familiarity with the debit card
`instrument, increased consumer and merchant
`acceptance, more aggressive marketing on the
`part of banks, and the convenience of coupling
`POS and ATM capabilities on a single card
`have probably all played a role. Another key
`factor has been the emergence of the VISA and
`MasterCard offline debit card networks, which
`piggyback off their respective credit card net-
`works. Introduced in the early 1990s, these net-
`works have opened up the entire VISA and
`MasterCard credit card infrastructures to debit
`card users.
`
`Reflecting this, while the number of online
`debit card transactions has been rising sharply,
`the number of offline transactions has surged
`even more. Since 1995, offline transaction vol-
`ume has grown at a 60 percent pace (Bank Net-
`work News). The number of offline debit cards
`in circulation has nearly tripled (Chart 2).
`
`In addition to their standard uses, debit card
`networks and ATM networks are also being
`used for Electronic Benefits Transfer (EBT)
`programs. These programs are being used by
`various government agencies to deliver cash
`entitlement and food assistance benefits to
`recipients who do not have bank accounts.
`Recipients are issued cards that allow them to
`make cash withdrawals from designated ATM
`machines or to make food purchases at the debit
`card terminals of designated grocery and con-
`venience stores. At present, the federal govern-
`ment and 39 states have EBT programs in place,
`providing benefits to over 4 million families
`(Federal Electronic Commerce
`Program
`Office).
`
`III. WIRE TRANSFER AND ACH
`
`A second major category of electronic pay-
`ments is funds transfer systems. Unlike credit
`and debit cards, which place a payments instru-
`
`

`

`6
`
`FEDERAL RESERVE BANK OF KANSAS CITY
`
`Chart 2
`NUMBER OF DEBIT CARDS
`
`Offline
`
`Online
`
`Millions
`300
`
`250
`
`200
`
`150
`
`100
`
`50
`
`0
`
`1995
`
`1996
`
`1997
`
`1998
`
`1999
`
`Source: Bank Network News, (cid:147)EFT Network Data Book-2000 Edition,(cid:148) vol. 18, number 6, August 11, 1999.
`
`Millions
`300
`
`250
`
`200
`
`150
`
`100
`
`50
`
`0
`
`ment in the hands of the user, funds transfer sys-
`tems are entirely instruction-driven. Two types
`of funds transfer systems operate in the United
`States, wire transfer and ACH (Automatic Clear-
`ing House).
`
`Wire transfer
`
`transactions are high-value,
`Wire transfer
`(cid:147)wholesale(cid:148) payments that are made among
`banks and other financial institutions. As shown
`in Table 1, wire transfers account for less than 1
`percent of transactions in terms of volume. How-
`ever, they account for a very large share of trans-
`actions in terms of dollar value.9
`
`Wire transfers are conducted over two elec-
`tronic payments networks, Fedwire and CHIPS
`
`(Clearing House Interbank Payment System).
`Fedwire is operated by the Federal Reserve
`System and is used to settle interbank transac-
`tions. CHIPS is operated by the New York
`Clearing House Association and is principally
`used to settle foreign exchange transactions.
`The average size of a Fedwire transaction is
`currently about $3 million, while the average
`size of a CHIPs transaction is about $6 million
`(Gramlich).
`
`ACH
`
`ACH funds transfers, in contrast, are typically
`much lower in value, currently averaging about
`$3,000 (Gramlich). As such, they are closer in
`function to the other (cid:147)retail(cid:148) instruments, that
`is, cash, checks, and credit and debit cards.
`
`

`

`ECONOMIC REVIEW l FOURTH QUARTER 1999
`
`7
`
`The ACH network is a nationwide electronic
`payments system in which payment instructions
`are exchanged among participating financial
`institutions acting on behalf of consumers, busi-
`nesses, and governments. In existence since the
`early 1970s, the network is used for such transac-
`tions as payroll deposits, automatic bill pay-
`ments, and corporate tax payments. It also is
`often used as the underlying settlement mecha-
`nism for other transaction types, including ATM,
`credit card, and debit card transactions. Accord-
`ing to industry estimates, 20,000 financial insti-
`tutions, 2 million businesses, and 100 million
`consumers directly or indirectly use the ACH
`network (NACHA 1999c).
`
`As seen in Table 1, ACH is the second-fastest
`growing payment
`type in the United States,
`growing at a 16 percent annual rate in recent
`years. Like debit cards, however, its share of
`overall
`transactions remains relatively small,
`currently 5 percent.10
`
`An ACH transaction involves a number of par-
`ties. At its root is an (cid:147)originator(cid:148)(cid:151)an individual,
`business, or government(cid:151)electronically transfer-
`ring funds to (credit) or from (debit) the bank
`account of another party, the (cid:147)receiver.(cid:148) Origina-
`tors and receivers gain access to the ACH net-
`work through financial institutions. Financial
`institutions, in turn, use a central clearing facil-
`ity(cid:151)an ACH (cid:147)operator(cid:148)(cid:151)to process, distribute,
`and settle transactions. There currently are four
`ACH operators in the United States. The largest
`is the Federal Reserve, which clears approxi-
`mately 80 percent of all ACH transactions.11
`
`As noted above, the ACH network is used for a
`variety of transactions. Most familiar, perhaps,
`are direct deposit transactions, in which individ-
`uals have their salary pay or government benefits
`directly deposited into their checking or savings
`accounts. Roughly 50 percent of employees now
`participate in payroll deposit programs, for
`example, and 75 percent of social security recipi-
`ents now receive their benefits electronically.12
`
`A second way in which many individuals and
`households use the ACH network is to make
`automatic, recurring bill payments, such as
`mortgage and utility payments. Bill payments
`and other consumer debits generated 1.2 billion
`ACH transactions in 1998, a 17 percent
`increase from a year earlier (NACHA 1999b).
`
`Businesses also use the ACH network exten-
`sively. In addition to offering payroll deposit
`programs to employees, many businesses use
`ACH to pay suppliers and contractors electroni-
`cally. Some businesses, particularly large retail-
`ers, use the ACH network to consolidate funds
`received at dispersed locations. And a growing
`number of businesses are also making corpo-
`rate tax payments via ACH.
`
`The third major originator of ACH transac-
`tions is the federal government. Currently, 73
`percent of all U.S. Treasury-disbursed pay-
`ments are conducted electronically, including
`96 percent of payroll payments, 73 percent of
`benefit payments, and 50 percent of vendor
`payments (U.S. Department of the Treasury,
`Financial Management Service). In keeping
`with the goals of the Debt Collection Improve-
`ment Act of 1996, the federal government has
`been actively promoting use of electronic pay-
`ments under the EFT 99 umbrella program.
`
`The ACH network is of interest not only
`because of current activity but also because of
`prospective activity. Two emerging payments
`vehicles, electronic bill presentment and pay-
`ment (EBPP) and POS check conversion, are
`receiving increased attention from consumers
`and businesses. Both are ACH-related.
`
`Electronic bill presentment and payment.
`EBPP is a way for consumers to receive and pay
`bills on the Internet. EBPP has two compo-
`nents(cid:151)electronic bill payment and electronic
`bill presentment. Electronic bill payment is
`already a reality. Numerous providers, both banks
`and nonbanks, currently offer bill-payment ser-
`
`

`

`8
`
`FEDERAL RESERVE BANK OF KANSAS CITY
`
`vices in which customers who have received
`bills in the mail can contact the provider by tele-
`phone or personal computer to initiate payments.
`Where possible, payments are made through
`ACH transactions; otherwise, they are made by
`check. Use of electronic bill payment is becom-
`ing more popular, reportedly doubling in 1997
`from a year earlier (Furst and others).
`
`EBPP combines electronic payment with
`electronic presentment; that is, it brings bills
`online to the consumer. The consumer is able to
`access his or her bills online and then to pay
`online. Two principal models are being devel-
`oped for doing so. In the first, the Biller Direct
`model, the billing firm (say, a utility) makes its
`bill available to the consumer at the firm(cid:146)s web
`site. The consumer accesses the bill and pays it
`via ACH or credit card. The drawback is the con-
`sumer has to visit the web sites of all billers. In
`the second model, the Consolidator model, some
`third-party (cid:147)presenter(cid:148) collects bills from a num-
`ber of billers and makes them available to the
`consumer at a central site.13 In this case, the cus-
`tomer only has to visit, and pay bills, at that one
`presenter(cid:146)s web site. EBPP is still in the devel-
`opment stages, but it is getting a good deal of
`attention.14
`
`Check conversion. The same is true of POS
`check conversion. This is a process by which a
`paper check is converted at the point of sale into
`an ACH transaction. A customer presents a blank
`check, which is scanned for account information.
`The check is then stamped void and either given
`back to customer or kept by the merchant. Either
`way, a paper check never enters the system. POS
`check conversion has been tested at approximately
`1,700 pilot locations and is beginning to be offered
`by some major retailers (Chain Store Age).
`
`In a similar vein, some Internet sites are offer-
`ing what might be called online check conver-
`sion. This vehicle is similar to POS check
`conversion in that the customer first provides
`check information, and then the transaction is
`
`converted to an ACH transaction. Like its POS
`counterpart, however, such transactions are just
`starting to be used.
`
`IV. E-MONEY
`
`Another class of emerging e-payment instru-
`ments might be grouped under
`the term
`(cid:147)e-money.(cid:148) Although most of these have gener-
`ated only limited consumer and merchant interest
`to date, and sketchy data preclude an entry in
`Table 1, the group includes some innovative and
`potentially important payments mechanisms.
`
`Stored-value instruments
`
`One type of e-money is prepaid stored-value
`products. Funds are stored in electronic form
`on either cards(cid:151)"stored-valued cards"(cid:151)or on
`computers(cid:151)"e-cash." Stored-value cards can
`be either multipurpose (open-system) cards that
`are used to make a variety of payments or sin-
`gle-purpose (closed-system) cards that are used
`more narrowly. E-cash products are typically
`multipurpose in design.
`
`There are numerous examples of single-pur-
`pose stored-value cards. These include mass
`transit cards, telephone cards, photocopying
`cards, and electronic gift certificates. The use of
`such cards appears to be growing, but an accu-
`rate count is difficult to obtain because of the
`lack of comprehensive data.
`
`Far less prevalent are multipurpose stored-
`value cards. Such cards, which typically employ
`(cid:147)smart card(cid:148) technology by embedding a com-
`puter chip in the card itself, have not gained
`much acceptance in the United States.15 The
`conceptual advantage of such cards(cid:151)wide appli-
`cability(cid:151)is also a disadvantage. For such a sys-
`tem to be successful, a large number of
`merchants must be willing to incur the costs of
`installing associated hardware.16 Some European
`countries,
`in contrast, have seen somewhat
`greater acceptance of multipurpose cards.17
`
`

`

`ECONOMIC REVIEW l FOURTH QUARTER 1999
`
`9
`
`E-cash products have also had little impact in
`the United States. Such products may entail
`installing software on consumer and merchant
`computers that allows some type of (cid:147)digital
`coin(cid:148) to be exchanged. An early, unsuccessful
`example was a program developed by DigiCash,
`Inc., in which a participating bank could issue
`e-cash(cid:151)a string of electronic digits(cid:151)to deposi-
`tors, who in turn could use this e-cash to make
`online purchases at participating merchants. A
`current example is a program developed by
`Flooz.com, in which a consumer purchases (via
`credit card) units of an electronic currency called
`(cid:147)Flooz,(cid:148) which in turn can be spent online at
`participating merchants. To date, however, the
`adoption of such instruments has been very
`limited.18
`
`Micropayments and e-checks
`
`An e-cash system provides one way to make
`(cid:147)micropayments(cid:148) on the Internet, that is, to accom-
`modate payments that are too small for credit
`card purchases. Other types of micropayments
`are also being explored. One involves billing
`through Internet service providers (ISPs). Partic-
`ipating merchants send purchase information to
`a customer(cid:146)s ISP, which adds it to the customer(cid:146)s
`monthly ISP bill. Another
`involves billing
`telephone company.19
`through a customer(cid:146)s
`Micropayment approaches like these in some
`sense represent a new variant of e-money.
`
`A final type of e-money is the (cid:147)eCheck,(cid:148) a pay-
`ments instrument that has been developed by the
`Financial Services Technology Consortium, a
`group of banks, government agencies, and other
`financial industry participants. The eCheck is
`modeled after the paper check, but it is com-
`pletely electronic. Each step of
`the pro-
`cess(cid:151)writing, delivering, depositing, clearing,
`and settling the check(cid:151)is done electronically.
`Because the eCheck is designed to be robust
`enough for use on the Internet, it uses advanced
`security technologies. A different
`instrument
`than the check conversion products described
`
`earlier, the eCheck is currently being tested on a
`limited basis by the U.S. Treasury Department.20
`
`V. CONCLUSION
`
`The U.S. payments system is becoming
`more electronic. As this survey has shown, all
`major
`types of e-payments are trending
`upward, and some new electronic payments
`instruments are beginning to emerge. While
`the United States still substantially lags behind
`other industrial countries, its use of electronic
`payments is rising.
`
`Clearly, checks remain the preferred form of
`noncash payment in the United States. From a
`consumer(cid:146)s standpoint, checks possess several
`attractive features. They are familiar, widely
`accepted, relatively convenient, and they give
`the user hands-on (cid:147)control(cid:148) over a given pay-
`ment. Most important, checks, like cash, enable
`individuals to make payments to other individu-
`als. No other single, competing electronic method
`presently offers the same mix of attributes. In
`addition, banks and other financial organiza-
`tions have committed heavy resources to the
`check collection process and have an incentive
`to support it as long as their customers are
`demanding it.21
`
`in
`Multipurpose stored-value instruments,
`particular, have been slow to catch on in the
`United States. One reason(cid:151)and one that typically
`factors into the adoption of any new payments
`mechanism(cid:151)is cost. An e-money system may
`require an investment in equipment and staff that
`merchants are unwilling to bear until they are
`convinced that customers will be interested. Cus-
`tomers, in turn, may not be interested in an
`e-money system until enough merchants are
`participating. Reaching this critical mass of
`users is a hurdle that any almost new payments
`mechanism has to overcome.22 A second factor
`that may be contributing to the slow growth of
`e-money instruments is uncertainty over
`security, standards, and compatibility issues
`
`

`

`10
`
`FEDERAL RESERVE BANK OF KANSAS CITY
`
`associated with the new technologies. And a
`third reason may be the growing popularity of
`alternative, more (cid:147)traditional(cid:148) e-payments types,
`including debit cards and various ACH products.
`As the volume shares make clear, traditional
`e-payments have become an increasingly impor-
`tant component of the U.S. payments system.23
`
`Indeed, the U.S. payments system is becoming
`more electronic principally through traditional
`means. Existing e-payment types(cid:151)credit cards,
`debit cards and ACH transactions(cid:151)are account-
`ing for a rising share of U.S. transactions. More
`novel e-payment types have yet to have much
`impact.
`
`Looking ahead, there are reasons to believe
`that the trend toward greater electronification
`will continue. First, the dramatic rise in e-com-
`merce should provide the impetus and syner-
`gies for increased online transactions. Second,
`the shift in demographics toward a young-adult
`group that came of age in the high-tech 1990s
`may make the average household more com-
`fortable with electronic payments of all kinds.
`Of course, it is difficult to foresee with any cer-
`tainty how quickly and in what forms electronic
`payments will evolve in the U.S. economy.
`One of the defining characteristics of the new
`digital economy is its dynamic(cid:151)and unpredict-
`able(cid:151)nature.
`
`ENDNOTES
`
`1 Other general surveys of payment system developments
`include U.S. General Accounting Office, Bank for Interna-
`tional Settlements 1993, Bank for International Settlements
`1999, and Hancock and Humphrey.
`
`2 See, for example, Hancock and Humphrey, and Humphrey
`and Pulley.
`
`3 By comparison, checks(cid:146) share of the total number of non-
`cash transactions, in 1997, for various other countries was:
`France, 41.7 percent; Canada, 36.1 percent; United King-
`dom, 30.5 percent; Belgium, 8.0 percent; Germany, 5.7 per-
`cent; and Netherlands, 3.0 percent (Bank for International
`Settlements 1998).
`
`4 While credit cards are almost always treated as a payment
`type, analogous to cash, checks, and other instruments in
`facilitating the purchase of goods and services, they also pos-
`sess a consolidation feature. A monthly credit card bal-
`ance(cid:151)which itself
`is paid for
`through some other
`means(cid:151)represents, of course, the consolidation of a number
`of individual transactions.
`
`5 Credit card processing was not always electronic; at one
`time, it was heavily paper-based.
`
`6 A third group of credit cards, private-label cards for use at
`specific retailers (for example, department stores and oil
`companies) accounted, in 1997, for about 17 percent of over-
`all credit card dollar volume (Nilson Report 1998).
`
`7 Robert Powell of VISA and David Weisman of Forrester
`
`Research, for example, have reported such at recent indus-
`try conferences.
`
`8 For further discussion, see Electronic Consumer News
`1999b and Nilson Report 1999.
`
`9 Dollar-value shares in 1997 for the various payments
`types were: wire transfer, 87.49 percent; checks, 10.46 per-
`cent; ACH, 1.88 percent, credit cards, .14 percent; and
`debit cards, .02 percent.
`
`10 Although ACH transactions are subject to some double
`counting, industry sources estimate that such is extremely
`small, on the order of .4 to .6 percent in 1998.
`
`11 The other three operators are the Electronics Payments
`Network (EPN), American Clearing House Association,
`and VisaNet ACH.
`
`12 The payroll deposit figure is based on Mid-America
`Payment Exchange and Gramlich. The Social Security fig-
`ure is taken from U.S. Department of the Treasury, Finan-
`cial Management Service.
`
`13 Another option might be for the presenter to send the
`bills to the consumer via email.
`
`14 For further discussion, see Furst, Lange, and Nolle.
`
`15 Past U.S. experiments include the 1996 Olympic Games
`in Atlanta and 1997-98 pilot programs in New York City
`(Gramlich).
`
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`

`ECONOMIC REVIEW l FOURTH QUARTER 1999
`
`11
`
`16 Multipurpose stored-value cards could also potentially be
`used to transfer funds between individuals.
`
`17 Belgium, Germany, the Netherlands, Sweden, and Swit-
`zerland, for example, currently operate low-volume national
`syst