Fed Report: Plastic Strengthens Its Grip on Payments As Credit Cards Resume Growth

More than ever, plastic dominates the business of electronic payments in the United States, with two-thirds of all noncash transactions in 2012 occurring on a card, up substantially from 60% just three years earlier. That’s according to the Federal Reserve System’s triennial payments study, released Thursday.

The sweeping research report, which covers payments by check and the automated clearing house as well as by credit, debit, and prepaid card, also unearthed a number of more granular results, including a rapid runup in card-not-present volume and a count of total chip-based card transactions.

Overall, “The 2013 Federal Reserve Payments Study” estimates there were 122.8 billion noncash transactions last year, up 14% from 2009, the last year for which the Fed released similar research. Card-based payments grew 28% in that brief span, to 82.3 billion, while the ACH accounted for 22.1 billion transactions, up 16%, and checks paid plunged 25%, to 18.3 billion. “The growth picture is with cards, debit, credit, and prepaid,” James M. McKee, senior vice president in the Atlanta Federal Reserve’s Retail Payments Office, tells Digital Transactions News.

Growing at a torrid pace are general-purpose and private-label prepaid cards, which registered a 56% jump in transactions in just three years, from 5.9 billion to 9.2 billion. Roughly two-thirds of these transactions occur on private-label prepaid cards, which include electronic benefit transfer cards and gift cards, according to the report.

Credit cards have resumed an upward growth path after languishing during the sharp downturn that started in late 2007 and extended into 2009. Transactions on general-purpose cards grew 22% over the three years through 2012, to 23.8 billion, while even store-issued charge cards saw volume increase a healthy 60%, from 1.5 billion to 2.4 billion transactions. By contrast, the two types of credit cards combined had dropped to 21 billion transactions from 21.7 billion over the three years from 2006 to 2009.

“Last time [in 2009], we were in the throes of the Great Recession, and credit card growth had leveled off or was slightly negative,” notes McKee. “But credit cards did return to a steady growth pattern.”

As for the ACH, check conversion is in decline along with the volume of checks, according to the report. The business of converting paper checks to ACH e-check codes peaked in 2009 at 3.3 billion transactions, declining to 2.7 billion last year. As a fraction of all ACH traffic, check conversion peaked in 2006 at 18%. That’s now down to 12%.

Direct deposit activity, transactions that are electronic from start to finish, such as Web-based bill payments, and other ACH traffic account for the other 88% of the network’s transaction volume.

The Fed report also shows on-us activity picking up steam on the ACH. On-us volume, which represents cases where the bank controlling the sender’s account and the institution controlling the recipient’s account are one and the same, has steadily climbed from 14% of ACH transactions in 2003 to 24% in 2012.

McKee attributes the on-us growth to increasing merger activity among financial institutions. “Consolidation in the banking industry is going to create larger payment processors within the banks,” he says. “It’s just a natural phenomenon.”

U.S. consumers and businesses wrote 21 billion checks last year, the report estimates, but because 2.7 billion were converted to ACH e-checks, some 18.3 billion were paid as checks. That volume of paid checks is slightly less than half the volume measured in 2003, the first year for which the Fed conducted its payments study

The impact of Check 21, a 2003 law that encouraged the exchange of check images rather than the original paper, continues to be felt. Nearly all banks now are capable of receiving check images, but what is less well documented is how many checks arrive at the bank of first deposit as an image. Some 17% of all checks deposited in 2012 came as images, compared with 13% in 2009, the report says.

For this latest edition of its payments report, the Fed includes data on unauthorized transactions, which is fraud committed when a payment instrument is used without the authorization of its owner. These data show that, while card transactions are the growth champion among payment types, they also carry the most risk. Some 3.6 out of every 10,000 general-purpose credit card transactions are unauthorized, compared to rates of 0.72 and 0.45 for ACH and checks, respectively.

The report also includes numbers for card-present versus card-not-present (CNP) transactions, of particular interest as battles over interchange continue, and for chip-based transactions, again of interest as the industry struggles to introduce chip cards on the EMV standard in the U.S.

CNP transactions now account for nearly one-quarter of all general-purpose credit card transactions, up from 19% in 2009, or 5.8 billion vs. 3.8 billion transactions. Merchants pay higher interchange rates for CNP transactions because they are seen as posing higher fraud risk.

As for cards embedded with contactless chips, there were 29.8 million chip-based general-purpose debit transactions last year, along with 13.4 million chip-based general-purpose credit card transactions. Prepaid cards with chips generated 50,000 transactions.

The Fed report, the fifth produced so far, is based on two surveys covering financial institutions, networks, processors, and issuers, and a third survey that looks at check samples from 11 banks. A more detailed report is expected to be released in the spring.