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Retail Payments in the United States
Current period is one of transition and fast-pacedchange toward electronic payments
Long promised check-less age arriving soon but not yethere
Consumer behavior and preferences are changing
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Federal Reserve Retail Payments Research Studies
2001 Study (2000 data)
41.9 billion checks paid 30.6 billion electronic payments
2004 Study (2003 data)
36.7 billion checks paid value of checks paid - $39.3 trillion 31.5 billion checks in 2005 (estimate)
44.5 billion electronic payments value of electronic payments - $27.4 trillion
New 2007study in
development
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Distribution of Non-Cash Payments
2000
72.5 billion transactions
Check
57%
EBT
1%
Credit Card
22%
ACH
9%
Online Debit
4%
Off line Debit
7%
2003
81.2 billion transactions
Check
45%
Credit Card
23%
ACH
11%
Off line Debit
13%
Online Debit
7%
EBT
1%
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Payments Markets Trends
WHILE USE OF CHECKS IS ON THE DECLINE, USE OF ACH IS ON THE RISE
0.00
2.00
4.00
6.00
8.00
10.00
12.00
2002 2003 2004 2005 2006 2007 2008 2009 2010
Cash
Check
Money Order
Credit Card
PIN-Less Debit
Debit Card (Sig)
ACH
Source: Celent and BearingPoint Analysis
Total Number of Consumer to Business Recurring Payments by Instrument
(Billions)
ACH
Check
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Strategic Outlook
ACH projected to overtake check payments during 2007
Focus on end-to-end electronics
Movement to full electronification will continue to evolve
Electronifying the check as early in the collection process as is possible
ACH offers several options for electronifying checks (ARC, POP,
RCK, BOC)
As paper check volume continues to decline, increasing pressure
on all participants to manage costs
Transition solutions to support the migration from check toelectronic payments will be vital
Enable end-to-end electronics while allowing for paper where needed
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Checks
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Electronification of Paper Checks
Check electronification is necessary Decline in paper check volume coupled with the fixed costs associated
with transportation of paper checks
Yet more payments are made by check than any other medium
While in decline, checks are still at volumes impossible to shiftfrom in the near future
Checks account for 46% of PCE (Personal ConsumptionExpenditures) in the US
Continued popularity of checks with consumers forces merchants toevaluate business case for check electronification as a way ofcontinuing to accept checks profitably
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Check 21
The Check Clearing for the 21st Century Act, or Check 21, was
effective October 28, 2004.
To make check collection process more efficient, Check 21
authorized use of new negotiable instrument called a substitute
check. Provides for substitute check to be a paper reproduction of the original
check and to be processed just like the original check
Improves payment process by reducing:
Reliance on physical transportation of checks
Number of times physical checks must be handled
Costs through expedited handling within bank or customer operations and
quicker collection and return of checks
Same legal standing as original paper check
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Check Processing/Clearing Flow
Payees DFIPayors DFI
FLOW: Payor (Maker),Payee (Party due payment),Payees DFI (Collecting bank),Clearing House, Payors DFI
Federal Reserve Bank OR
Correspondent Bank OR Local
Clearing House
Payee Company/Individual
(Receives Check)
Payor (Writes Check)
Deposited
Cancelled
Forwarded
Presented for Payment
Payment
through a
debit topayment
account
Payment through a
debitPayment through a
credit
Payment
through acredit to
payees
account
account
http://images.google.com/imgres?imgurl=http://www.computer.org/history/development/graphics/check.jpg&imgrefurl=http://www.computer.org/history/development/1959.htm&h=264&w=500&sz=66&tbnid=E1jSBHpjqcAJ:&tbnh=67&tbnw=126&start=2&prev=/images%3Fq%3Dcheck%26hl%3Den%26lr%3D%26sa%3DNhttp://images.google.com/imgres?imgurl=http://www.computer.org/history/development/graphics/check.jpg&imgrefurl=http://www.computer.org/history/development/1959.htm&h=264&w=500&sz=66&tbnid=E1jSBHpjqcAJ:&tbnh=67&tbnw=126&start=2&prev=/images%3Fq%3Dcheck%26hl%3Den%26lr%3D%26sa%3DNhttp://images.google.com/imgres?imgurl=http://www.computer.org/history/development/graphics/check.jpg&imgrefurl=http://www.computer.org/history/development/1959.htm&h=264&w=500&sz=66&tbnid=E1jSBHpjqcAJ:&tbnh=67&tbnw=126&start=2&prev=/images%3Fq%3Dcheck%26hl%3Den%26lr%3D%26sa%3DNhttp://images.google.com/imgres?imgurl=http://www.computer.org/history/development/graphics/check.jpg&imgrefurl=http://www.computer.org/history/development/1959.htm&h=264&w=500&sz=66&tbnid=E1jSBHpjqcAJ:&tbnh=67&tbnw=126&start=2&prev=/images%3Fq%3Dcheck%26hl%3Den%26lr%3D%26sa%3DNhttp://images.google.com/imgres?imgurl=http://www.computer.org/history/development/graphics/check.jpg&imgrefurl=http://www.computer.org/history/development/1959.htm&h=264&w=500&sz=66&tbnid=E1jSBHpjqcAJ:&tbnh=67&tbnw=126&start=2&prev=/images%3Fq%3Dcheck%26hl%3Den%26lr%3D%26sa%3DN8/13/2019 Retail Payments System
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Check Collection: The Future Environment
Where possible, originate all transactions electronically
Business SolutionsACH, Wire Transfer
Consumer SolutionsDebit cards, credit cards, online bill payments,
gift cards
If it starts as a check, capture and convert to electronics asearly as possiblecorporation, branch, ATM, lockbox
Goal: No movement of physical paper
By 2010, clearing paper will be expensive, slow, and with poor
availability
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Check 21 Statistics
Check 21 Total Volume By Month
0
50
100
150
200
250
300
350
400
450
500
May
(22)
June
(22)
July
(20)
Augu
st(24)
Septembe
r(20)
Octobe
r(21)
Novembe
r(21)
Decembe
r(20)
Janu
ary(21)
Febr
uary
(19)
March(22)
April
(21)
Millions
Month (Business Days)
Source - DASy
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Check 21 Statistics
Substitute Check Volume As % of Total Volume
2006-2007
75.0%
77.5%
80.0%
82.5%
85.0%
87.5%
90.0%
92.5%
95.0%
97.5%
100.0%
December (20) January (21) February (19) March (22)
Source - CORE and DASy
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ACH
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ACH
Continued migration of a large number of cash and check
transactions to electronic payments
ACH growth has shifted from recurring to one-time payments including
debit (WEB, TEL) & Check-to-ACH conversion payments (POP, ARC,
RCK) Acceleration of electronic check processing (via check image exchange
and back-office conversion)
Non-bank service providers are riding ACH rails, largely to
leverage its low cost (PayPal; Pay By Touch; Debitman;
Fastlane)
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ACH
Banks will continue to wrestle with customers expectations for
the privacy and security of their personal, account and
transaction information
Continued emphasis on risk management
Wider use of ACH debit payments, especially one-time options with
limited ability to know your customer, may increase risk of fraud
Other initiatives to look at credit push and EBPP services arebeing pursued but business case is unknown
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ACH Network Volume Growth
0
2000
4000
6000
8000
10000
12000
14000
16000
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
(Items Processed: Millions)
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Present DayWho Is Using ACH?
Consumers143 Million
Corporations4.8 Million
Federal Government Employees99.8 Percent
Private Sector Employees
71.0 Percent
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2006: 4thQuarter StatisticsCommercial Debits vs. Commercial Credits
Commercial Debits
1,925,318,112 (64.1%)
Commercial Credits
1,078,026,550 (35.9%)
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2006: 4th Quarter StatisticsCommercial Volume vs. Government Volume
Commercial Volume
3,003,344,662 (92.5%)
Government Volume
242,766,839 (7.5%)
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0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Total ACH Network Volume Commercial Comm less on-us
Total ACH Network Volume - 1992 to 2012(Actual volume through 2006, projections 20072012)
Item volume (in millions). Network volume excludes on-us items
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Network Volume: eCheck2001 to 2012
-
500
1,000
1,500
2,000
2,5003,000
3,500
4,000
4,500
5,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
ARC POP RCK TEL WEB BOC
Item volume (in millions). Network volume excludes on-us items
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-
2,000
4,000
6,000
8,000
10,000
12,000
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
CCD PPD eCheck
Traditional ACH vs. eCheck
2001 to 2012
Item volume (in millions). Network volume excludes on-us items
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ACH Processing Flow
Customer (Receiver)
Authorization
ORIGINATORCompany/Individual (CIE)
ODFI(Originating Depository Financial Institution)
Federal Reserve OR
Private Sector OperatorPSO
ACH OPERATOR
RDFI(Receiving Depository Financial Institution)
ACH Transaction Flow
(Picture shows five (5) participants)
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Electronic Bill Payment
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Key Trends On-Line
Internet initiated consumer payments:
Three broad categories
Bill-payments
Ad hoc purchases
Account to account & person to person (A2A & P2P)
Four types of payment methods
Signature-based payment cards
PIN-based network settlement of ATM/debit cards (PIN-less debit)
Intermediaries such as PayPal, Bill Me Later
Direct DDA transactions via ACH (e-checks) & checks (demand drafts)
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New Entrants Growing Fast
PayPal account growth continues (100 million+ accounts in 1Q06 & 40% annual transaction
volume growth) along with service offerings (PayPal MobileText to Buy) & international reach
(55 countries)
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Trends in Electronic Bill Payment
Biller survey suggests the credit and debit card share of billerdirect payments will grow from 14% in 2004
Meanwhile, the share of biller direct payments processed bythe ACH will decline from 85% in 2004
Billers tend to be satisfied with the current level of adoption ofEBPP However, there is a gap between the goals billers have set and their
current level of success
Particularly paper and postage savings
Call center deflection Customer satisfaction and retention
Still a number of major billers that do not support online billpayment via bank Web sites, nor bill presentment through bank
Web sites
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EBPP Forecast: 2006 to 2011Forrester Research, 01/27/2007
The number of EBPP users will grow by 66% during thenext 6 years
In 2005, 38% of online households paid bills online
By 2011, 63% of online households will pay bills online
Households paying bills online will grow to more than 59 million
Growth NOT spread evenly across generations Gen Yers (19761990) will propel EBPP adoption growth
Gen Xers (19641975) will provide sizable adoption growth
Boomers (19461963) will be a smaller portion of the EBPP pie
Seniors (19001945) will supply a paltry portion of EBPPadoption growth
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EBPP Forecast: 2006 to 2011 Forrester Research, 01/27/2007
US online households that pay bills online
A c t u al Fo r ec as t
# of households (millions) 5 year2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 growth rate
Gen Y 0.9 1.2 2.4 4.1 6.2 8.2 10.6 13.6 16.5 19.2 21.2 157%Gen X 3.7 4.8 6.4 7.6 10.1 12.3 14.3 15.5 15.8 16.6 17.4 42%
Boomer 4.5 5.9 7.0 8.5 10.7 12.0 13.1 13.9 14.5 15.7 16.8 39%Senior 1.7 2.1 2.2 2.5 3.5 3.9 4.2 4.3 4.1 4.0 4.1 3%
Total 10.9 14.0 18.0 22.7 30.5 36.4 42.2 47.3 51.0 55.5 59.4 63%
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ATM & Cards
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Cards
Fastest growing U.S. payment method
Debit card volumes have eclipsed credit cards
Stored value is fastest growing type of debit card
P-Card growing in B2B
Significant innovation in features & functions
Supports other front-end payment methodse.g., on-line bill
payment, PayPal, etc.
Growth has stimulated fierce debate on interchange fees
Law suits ongoing & search for alternatives
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ATMs, Debit Cards and ACHFRB Kansas 2006 updated Guide to the ATM and Debit Card Industry
ATM use is declining and key players retrenching
Debit card use is rapidly expanding, with new players, products
and markets
Debit will become battleground between signature debit and PINdebit
Both types of debit face strong challenge from ACH, which is
developing numerous payment options as debit card substitutes
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ACH Debit Card Substitutes
NACHAs Online Payments Pilot Advantage: keeps the consumers account info between consumer and
bank
Consumers bank authenticates customer and guarantees payment to
merchant
Applications to initiate ACH at the Point of Sale (POS)
Debitman (Tempo) agreements with retailers (WalMart, Burger King, Best
Buy, Shell, Walgreens)
Retail private label credit cards issuing cards on behalf of merchants First Data testing ACH debit card with Stop and Shop grocery chain
Drivers licenses to initiate POS payments settled on the ACH system
Online retailers using e-check to allow consumers to make an ACH
payment (including Amazon.com)
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Trends in Cards
2010 Total = $543.1 Bil.
$124.2
$46
$68.2
$75.7
$211.2
$87.9
OnlineTelecom
Gift
Prepaid Debit
Employment-related
Restricted Use Sources: Pelorus Group, Mercator, Financial Insights, Tower;BBD Projections
2004 Total = $154.3 Bil.$20.1
$20.4
$32.0
$30.1
$27.5
$53.4
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Card Processing Flow
Consumer (Card-Holder)
National Credit Card Network
Merchant
Acquirer/Processor
(Merchant Bank)
Card-Issuing Bank
Card IssuerConsumers Acct
On-Line
Purchases Item
Sales Draft InfoSales Draft Info
Sales
Draft Info
Authorization Authorization
Authorization
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Payments
Risk
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Trends in Risk
Internet & other new technologies have enabled new types ofpayments fraud & other illicit activities:
Counterfeiting cash & checks
Cyber crimephishing, pharming, kiting, etc.
ID theft
Malicious hackingdenial of service
Global terrorism & other international crimes have led to new
laws & regulations affecting payments:
OFAC, AML, USA Patriot Act
Risk characteristics of emerging payment methods must be
assessed to ensure controls are effective & efficient
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Fraud and Risk in Retail Payments
ACH Returns reporting gives Originating Depository Financial
Institutions (ODFIs) a way to identify potential ACH fraud orproblem accounts
Risk origination monitoring service provides ODFIs withenhanced control, flexibility and automation in monitoring therisks associated with originating ACH payments
Check 21
FedReceipt/PlusSMreduces return risk by expediting items (forBOFD)
FedReturnSMimproves fraud mitigation through expeditedreturn item clearing
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Looking
Forward
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Convergence Business Issues
Which rule set will dominate? check law or ACH rules? How will business payments be integrated electronically?
Which emerging payments will prevail?
Are consumer needs and expectations being met?
Other variables:
Inter-bank fees and services
Ultimate cost benefit vis--vis other alternatives
Managing across silos
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Payment Types that Meet Criteria will Dominate
Productivity Efficiency, cost reduction, STP/fewer exceptions
Value
Mix of pricing, timing, settlement, high/low value will
determine which payment types prevail
Risk Mitigation Are the appropriate tools in place? Is the price right?
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Contact Information
Jim McKee
Senior Vice President
Federal Reserve Retail Payments Office
E-mail:
Phone:
404-498-8894
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Additional Resources
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Payments Information On-Line
Federal Reserve Boardstudies and regulations
http://www.federalreserve.gov/paymentsys.htm
Federal Reserve Bank of Kansas
http://www.kansascityfed.org/home/subwebs.cfm?subWeb=9
Federal Reserve Bank of Chicago
http://www.chicagofed.org/emerging_payments_and_policy/emerging_p
ayments_and_policy_index.cfm
http://www.federalreserve.gov/paymentsys.htmhttp://www.kansascityfed.org/home/subwebs.cfm?subWeb=9http://www.chicagofed.org/emerging_payments_and_policy/emerging_payments_and_policy_index.cfmhttp://www.chicagofed.org/emerging_payments_and_policy/emerging_payments_and_policy_index.cfmhttp://www.chicagofed.org/emerging_payments_and_policy/emerging_payments_and_policy_index.cfmhttp://www.chicagofed.org/emerging_payments_and_policy/emerging_payments_and_policy_index.cfmhttp://www.kansascityfed.org/home/subwebs.cfm?subWeb=9http://www.federalreserve.gov/paymentsys.htm8/13/2019 Retail Payments System
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Payments Information On-Line
Noncash Payments Trends in United States: 2000-2003 Federal Reserve System, www.frbservices.org
Barriers to Acceptance of Electronic Benefits Payments U.S. Treasury, www.ustreas.gov
CyberAtlas http://www.clickz.com/stats/sectors/traffic_patterns/article.php/3446641
Business to Business Payments: 2004 Survey of Members and ElectronicPayments Study; 2006 Survey on Payments Risk Association for Financial Professionals (AFP), www.afponline.org
Grant-Thornton 2005 Survey of U.S. Community Banks http://www.grantthornton.com/
2005 Cash Management Middle Market Monitor and Fraud and Disbursement
PracticesPositive Pay Pays http://www.phoenixhecht.com/Publications.html
ICBA 2005 Community Bank Technology survey results
ICBA 2006 Community Bank Payments survey results http://www.icba.org/
http://www.frbservices.org/http://www.ustreas.gov/http://www.clickz.com/stats/sectors/traffic_patterns/article.php/3446641http://www.afponline.org/http://www.grantthornton.com/http://www.phoenixhecht.com/Publications.htmlhttp://www.icba.org/http://www.icba.org/http://www.phoenixhecht.com/Publications.htmlhttp://www.grantthornton.com/http://www.afponline.org/http://www.clickz.com/stats/sectors/traffic_patterns/article.php/3446641http://www.ustreas.gov/http://www.frbservices.org/8/13/2019 Retail Payments System
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Payments Information On-Line
Card-based Payment www.visa.com
www.mastercard.com
www.cardforum.com
www.cardweb.com
www.CardTechnology.com
Electronic Payments www.epnn.com
www.digitaltransactions.net
www.nacha.org
http://www.visa.com/http://www.mastercard.com/http://www.cardforum.com/http://www.cardweb.com/http://www.cardtechnology.com/http://www.epnn.com/http://www.digitaltransactions.net/http://www.nacha.org/http://www.nacha.org/http://www.digitaltransactions.net/http://www.epnn.com/http://www.cardtechnology.com/http://www.cardweb.com/http://www.cardforum.com/http://www.mastercard.com/http://www.visa.com/8/13/2019 Retail Payments System
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Federal Reserve Value-Added ServicesCheck
Check 21 Product Suite FedForwardSMsupports electronic clearing process
FedReceiptSMenables straight-through electronic check processingfor a portion of inclearings or returns
FedReceipt PlusSMpresents all eligible items in an image cash letter
in lieu of a paper cash letter presentment FedReturnSMhelps customers transform their outbound returns
processing operations
Fore more information:
http://www.frbservices.org/Retail/Check21.html
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Federal Reserve Value-Added ServicesACH
Risk Management Services: FedACH Risk Origination Monitoring Service
FedACH Risk Returns Reporting Service
FedACH International Services:
Canada ConnectionSM
Directo a MxicoSM
Transatlantic Service
New EDI conversion facility in development
For more information: http://www.frbservices.org/Retail/fedach.html
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