Electronic Payments in the U.S. Economy: An Overview.

• Author: Weiner, Stuart E.

Editor's note: This article originally appeared in the Fourth Quarter 1999 issue of Economic Review, copyrighted by the Federal Reserve Bank of Kansas City, and is reprinted and adapted with permission. To view the full article, visit www.kc.frb.org.

Business publications are filled these days with stories about the digital or electronic economy. One routinely reads about e-commerce, 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 fundamentally transformed and is entering a "new age" 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 economic activity is taking place on the Internet, directly or indirectly impacting households and businesses throughout the economy. Less visible, but also significant, are changes involving "e-payments." Although the U.S. payments system continues to rely heavily on paper-based methods (cash and checks) for conducting transactions, electronic payments are steadily gaining a greater presence.

This article provides an overview of e-payments (i.e., "no paper" payments) as they currently exist in the United States. Although, cash and checks remain the dominant forms of payment in the U.S., the nation's payments system is becoming more electronic, principally through traditional means. While new instruments are beginning to emerge, it is the traditional e-payment types--credit cards, debit cards, and ACH transactions--that are driving the U.S. payments system forward.

Credit Cards and Debit Cards

The first major category of electronic payments 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. 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 cardholders, merchants, card-issuing banks, merchants' banks, and the credit card companies.

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 definitive data are lacking, available information suggests that a large majority of Internet purchases are currently conducted via credit card.

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 Exhibit 1, annual debit card transaction growth has averaged 53 percent in recent years, and debit cards now account for more than 4 percent of total transactions. The number of debit cards in circulation has reached some 250 million (Bank Network News). A recent Federal Reserve Bank of Kansas City survey reflects these trends: 77 percent 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 present a credit card. But debit card transactions do not involve credit. Instead, as with ATM transactions, debit card transactions are linked to a customer's bank account. On-line debit transactions require the customer to enter a PIN number, and the amount of the transaction is immediately debited from the customer's account. Off-line debit transactions...