U.S. Consumer Payment Choice Joanna Stavins Senior Economist and Policy Advisor Federal Reserve Bank of Boston Presented to Northeast Acquirers Association January 21, 2015
Disclaimers The views expressed here do not necessarily represent the views of the Federal Reserve Bank of Boston or the Federal Reserve System Results from the 2013 Survey of Consumer Payment Choice (SCPC) are preliminary and subject to change 2
Presentation Overview Overview of the U.S. payments U.S. Consumer payment choices 1. Adoption: What s in Your Wallet? 2. Use: How Do You Use It? What determines consumer behavior? Concluding remarks 3
U.S. Payments: Consumers, Businesses, and Government 4
% of GDP U.S. Currency in Circulation 7 6 5 4 3 2 1 Total Domestic (estimate) 7 6 5 4 3 2 1 0 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 0 Source: Bureau of Economic Analysis / Haver Analytics, Federal Reserve Board / Haver Analytics, authors calculations. 5
Billions per year Number of Noncash Payments 100 100 90 90 80 80 70 60 50 40 Checks Checks + Debit + ACH Debit 70 60 50 40 30 20 10 0 Prepaid Credit ACH 30 20 10 0 Source: Federal Reserve Payment Study (FRPS) 6
% of payments Share of Noncash Payments 90 80 70 60 Checks + Debit + ACH 90 80 70 60 50 40 Checks Debit 50 40 30 20 10 Credit ACH Prepaid 0 0 2000 2003 2006 2009 2012 30 20 10 Source: Federal Reserve Payment Study (FRPS). 7
What s in Your Wallet? U.S. consumers only 8
Cash Holdings (2013) Mean ($) Median ($) Total 508 65 On person (wallet, purse) 64 29 On property 461 9 9
Number of Instruments More Payment Instruments to Choose From 16 14 12 10 8 6 5 6 Charge cards 7 Credit cards 9 8 BANP Debit cards 10 Prepaid cards (closed-loop) 11 13 14 15 16 Virtual currencies 14 Virtual (open loop) currencies OBBP (closed loop) 12 Mobile text/sms Prepaid cards (open-loop) 10 8 6 4 2 Cash Checks Money order Travelers checks Prepaid paper (closed-loop) 4 2 0 1939 1943 1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 10 Source: Author s research. 0
% of Consumers Aggregate Adoption of Payment Instruments 100 90 80 70 60 50 40 30 20 10 0 Checking account Credit Debit Cash Checks BANP OBBP Traveler s checks Prepaid Money order 1989 1992 1995 1998 2001 2004 2007 2010 2013 100 90 80 70 60 50 40 30 20 10 0 Source: Survey of Consumer Payment Choice; Survey of Consumer Finance 11
How Do You Use It? 12
Use of Payment Instruments (2013) Electronic 9% Debit 31% Prepaid 1% OBBP 4% BANP 5% Cash 27% Paper 35% Check 8% Cards 55% Credit 23% Money order 1% Note: 1% are paid with Other 13
# of transactions per consumer Payments by $ amount 25 20 18% 15 10 5 0 10% 27% 19% 66% 33% 30% 31% 24% 18% 45% 24% 17% 24% 20% 16% $0 to $10 $10 to $25 $25 to $50 $50 to $100 over $100 Cash Check Credit Debit Electronic Other 14
Payments by Transaction Type (2013) Non-bills 45.7% Services Online payment (not bill) Person to person By mail or in person (bill) Bills 32.8% Automatic bill pay Retail goods Online bill payment 15 2013 Survey of Consumer Payment Choice
Credit Cards: Consumers 2013 % of households with credit cards 68.0% % of credit cards households carrying a balance 38.1% Median balance among households with a balance $2,300 Source: 2013 Survey of Consumer Finances (SCF) 16
Mobile Banking and Payments 100 90 80 70 60 50 40 Mobile phone adoption 100 90 80 70 60 50 40 30 20 10 Smart phone adoption Mobile banking adoption Mobile payments use 0 2008 2009 2010 2011 2012 2013 30 20 10 0 Source: 2008-2013 Survey of Consumer Payment Choice 17
What Determines Consumer Payment Behavior? 18
What Affects Demand for Payments? Demographics: Age Gender Race Education Income: individual and household Characteristics of payments: Security: risk of theft/loss Acceptance Cost Convenience Speed 19
% of consumers within each income group Credit Card Adoption Rises with Income (2013) 100 90 80 70 60 50 40 30 20 10 0 Under $25K $25 - $50K $50K - $75K $75K - $100K $100K - $125K Over $125K Income 20
Weighted Mean Share (%) Credit Score and Payment Card Use 45 40 35 30 25 20 15 10 5 0 Debit Credit below 600 600 to 640 650 to 699 700 to 749 750 to 800 over 800 FICO Ranges From Hayashi and Stavins (2012), Effects of Credit Scores on Consumer Payment Choice 21
Security Is Most Important! Ranking of all characteristics Characteristics SCPC survey year 2008 2009 2010 2011 2012 2013 Security 1 1 1 1 1 2 Convenience 2 2 2 2 2 1 Cost 4 3 3 3 3 3 Acceptance 5 4 4 4 4 4 Payment records 6 5 5 5 5 Set up 8 6 6 6 6 Control of timing 3 Speed 7 22
Importance of Payment Characteristics (2012) Most Important Important Security Convenience Cost Acceptance Records Set Up 0 20 40 60 80 % of consumers 2012 Survey of Consumer Payment Choice 23
Security Ratings by Payment Instrument Very risky Risky Neither risky nor secure Secure Very secure Cash Check Debit Card Credit Card Prepaid Card 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% % of consumers 24
Security by Payment Location In Person By Mail By Phone Computer Internet Mobile Text 0% 20% 40% 60% 80% 100% % of consumers Very Risky Risky Neither Secure Very Secure 25 Source: 2012 Survey of Consumer Payment Choice;
Security by Type of Debit PIN Signature Neither Online 0% 20% 40% 60% 80% 100% % of consumers Very risky Risky Neither Secure Very Secure 26
Payment Method Adoption and Use Higher debit and credit security higher use, BUT: small effect Adoption Debit Credit Prepaid Acceptance * * *** Cost *** *** Convenience *** *** Set up *** *** Records *** *** Security of financial wealth ** * Security of personal information * Security of transaction information Use Debit Credit Prepaid Cost * *** Convenience *** *** Records * Security of financial wealth *** *** ** Security of personal information * Security of transaction information * 27
Merchant Steering Merchants are now allowed to discount or surcharge based on payment method BUT: still very rare, only selected markets % transactions with discount or surcharge: Cash Discount Debit Discount Credit Surcharge 1.7 1.8 1.2 Source: 2012 Diary of Consumer Payment Choice 28
% Discounted % Cash Transactions with Discount Transactions over $20 more likely to get cash discount 8 7 6 5 4 3 2 1 0 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40+ $ Value 29
Concluding remarks 30
Major trends Cash is alive and well, checks declining Transformation in payment markets Paper electronic Consumer preferences, technology, coordination Technology is changing fast but payments are not Battle over payment card revenues Credit CARD Act of 2009 Interchange fee regulation for debit cards (Reg II) Merchants can steer consumers to cheaper payments 31
Federal Reserve 2012-2016 strategic plan Planned improvements to U.S. payment system Faster: deduction and notification time Safer: less fraud, loss, and data breaches EMV finally implemented? Improved cyber security? More attention to end users Consumers, businesses, nonprofits 32
Consumer Payments Research Center (CPRC) Find papers, articles, and data on consumer payments http://www.bostonfed.org/economic/cprc Joanna Stavins Senior Economist and Policy Advisor Federal Reserve Bank of Boston joanna.stavins@bos.frb.org 33