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Retail Payments: Fact or Fiction?

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Retail Payments: Fact or Fiction?

In the Spring 1999 issue of Payments Quarterly, we announced that the Federal Reserve System is in the midst of an extensive market research project exploring payment usage rates and attitudes toward a variety of traditional and emerging retail payment methods.

The first phase of the project--a comprehensive search for public and proprietary studies on retail payments--has recently been completed. While work on the next phase of research has already begun, some of the conclusions reached in the first phase provide useful insight into the retail payments industry.

What Did We Learn?

One of the most notable conclusions derived from the literature search is that the total number of retail payments is growing. Each payment mechanism explored in the literature--including checks, ACH transactions, credit cards, debit cards, stored value cards and electronic cash--has grown over the last five years.

Another finding confirmed what many already suspected: the use of electronic payment options is growing rapidly. Even though the base, or total, number of electronic payments made in a year remains significantly less than the total number of checks written, electronic payment growth rates are impressive.

For example, credit card payments grew 48 percent between 1992 and 1997; offline debit card transactions grew almost 30 percent between 1994 and 1998; and electronic data interchange (EDI) and financial EDI transactions have grown 40 percent since 1997.

Furthermore, studies seem to show that while the number of electronic payments is growing, most checks are moving out of the payment stream at the point of sale. Strong growth in both credit and debit card transactions appears to be responsible for the decline of point-of-sale check use; however, no studies have been conducted to prove this assumption.

The conversion to electronic payments may be a slow progression. One study showed that although many consumers are using electronic payment options more often, individuals who prefer to write checks are not likely to change their payment behavior. Another study revealed that consumers have concerns about the safety of making payments on the Internet. And despite projections for strong growth in electronic bill presentment and payment, some data indicate that widespread consumer acceptance does not yet exist.

More Work to Do

The literature search produced volumes of useful information; however, researchers also found several gaps in the data. For example, there is little information available on the cost of various retail payment transactions or consumer attitudes toward these payment options. And because few retailers monitor or track cash transactions, it was difficult to determine the number of these transactions conducted at the point of sale or elsewhere.

According to Hank Bourgaux, senior vice president of the St. Louis Fed's Operations Division and coordinator of the research project, these gaps will be addressed in the second phase of the project.

"We're going to try to break down the composition of retail payments at the point of sale, and cash represents a large portion of these transactions," said Bourgaux. "It's very difficult to have a clear vision of the aggregate retail payments market unless you have an understanding of how cash fits into the picture."

The next phase of the project, which will involve written surveys of businesses and financial institutions, is expected to begin in the first quarter of 2000. Results of that project will be made available to the industry, so stay tuned for more information.

 

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