Academic journal article Economic Review (Kansas City, MO)

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

Academic journal article Economic Review (Kansas City, MO)

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

Article excerpt

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 as they currently exist in the United States. It shows that the U.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.(1)

The first section of the article reviews cash and check usage in the United States, noting that even these instruments are becoming more electronic. 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 in recent years has been bolstered, or at least supported, 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 traditional dispensers, such as bank tellers, automobile 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 withdrawal immediately debited from the account. ATM transactions rely on an extensive communications system that includes both regional and national networks that can interact with one another. The four participants in an ATM transaction include the customer, the card-issuing bank, the ATM owner, and the network or networks that the card-issuer and ATM owner join. Outwardly seamless and quick, an ATM transaction 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 "feel" despite being intrinsically linked to a core, paper-based payments method. …

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