Evolving Payment Systems

Rapidly advancing structures and technology force providers to keep up.

Market demand, technological developments and legal and regulatory structures have led to the transformation in payment systems in recent years, including new ways of making payments and the enhanced visibility of service providers other than banks. Stuart Weiner, vice president of the Federal Reserve Bank of Kansas City in the March 2004 Payments System Research Briefing explains that this new environment "in which financial institutions and nonbanks operate is evolving rapidly, as evidenced by such events as the Wal-mart lawsuit against Visa and MasterCard and the merger of First Data Corporation and Concord EFS."

According to the Federal Reserve 2002 Electronic Payment Instruments Study, the total number of non-cash retail payments has nearly doubled from 38 billion to 72 billion, translating into an average compound annual growth rate (CAGR) of 2.9 percent for non-cash retail payments from 1979 to 2001. Automated clearinghouse (ACH), credit card, debit card and EBT payments have led this growth and taken together, these four electronic retail payment types have grown at an average CAGR of 8 percent, increasing from an estimated $5 billion to $6 billion in 1979 to $29.5 billion, according to the results of the study.

This increase in electronic payments has developed from an increase in the use of traditional electronic payments methods and the introduction of new uses of existing electronic methods, including credit cards, debit cards, and the ACH for Internet payments, as well as the use of the ACH for check conversion at the point of sale. Also contributing to this growth are advances in hardware technology including stored-value cards and contactless payment devices.

The check process is becoming more electronic as truncation and imaging become more commonplace. According to Payments System Research Briefing, in 2003 more than 845 million checks were truncated in the Federal Reserve System as a whole, and images were created for nearly 86 percent of those items. With the enactment of Check 21 in late October 2004, technology will progress more rapidly to electronic check process because of additional options and incentives for processing image-based payments. Check 21 represents the new technological direction in which payment systems are headed.

Evolving pricing agreements, sharp consolidation and an increase in nonbank participation are each major forces in the changing payment systems market. As consumers and retailers continue to increase their use of electronic payments, movement will continue toward expanding the range of options and techniques for making electronic payments in the United States and increasing the overall efficiency of the payments system. Weiner states, "The U.S. payments system has entered a new era — one that is witnessing a marked decline in the use of paper checks and a sharp increase in the use of electronic payments."