Over the holiday season the Federal Reserve released its annual update on US non-cash payments trends. A few months earlier it issued an inaugural study on the incidence of fraud in US payments. Both reports contain insights that deserve broader exposure, and several reflect data-driven confirmation of trends that industry observers already suspected. Others, however, are counter-intuitive and should re-orient the way we approach conventional payments wisdom.
Federal Reserve Payments Risk Expert Claire Greene and I will discuss these insights during a session at Deluxe Exchange 2019 in Miami on February 6. For now, here’s a preview of some that I believe deserve your attention- with an added emphasis on the check dynamics lurking beneath the surface.
First, the expected growth in US card payments continues at a remarkable clip. Taken together, the number of debit and credit card payments grew by more than 10 percent in 2017. This actually represents acceleration in the upward trend, which is pretty amazing given that it’s building off an already substantial base of card transactions (nearly 125 billion in 2017).
It’s also common knowledge that commerce continues to migrate online; however the degree of growth in that arena is striking as well. Remote payments, for which e-commerce is the primary driver, spiked by 22.8 percent in 2017, to nearly 28 billion. Two interesting side notes on this front:
- This is not a zero-sum game. Remote payment growth is not coming entirely at the expense of brick-and-mortar transactions. In-person transactions grew by 7.2 percent in 2017—a very impressive result in its own right.
- Across all categories, the dollar value conveyed by card transactions is growing at a slower rate than the number of transactions themselves. This implies an ongoing shift in shopping behavior toward more frequent, smaller purchases.
The Mixed Message on Check Payments
Recent Fed data has shown a subtle but notable shift in paper check usage. The 2015 triennial study revealed a marked slowdown in the rate of decline in checks written, halting a trend dating back to the mid-1990s. Results from 2016 confirmed that the check decline had indeed slowed. The 2017 figures muddy the waters, however. Checks written fell at an annual rate of 4.8 percent—still well below the 6–7 percent levels common from 2001–12, but up from the 3.0–3.5 percent rates of 2012-16. At the same time the dollar value being conveyed by those payments increased by 7.5 percent in 2017 alone.
The Fed offers no firm explanation for this turn of events, so allow me to float a few theories:
- The heady growth in card payments is coming at least in part at the expense of checks. This wouldn’t seem to be a major factor, however, since the main opportunity for substitution is at the physical point of sale, where check usage had already been largely eradicated.
- Growth in P2P services has made a dent in cash and check use, since both are traditional P2P vehicles. On the other hand such transactions would have migrated to ACH, which continues its steady mid-single digit growth curve and shows no offsetting bump.
- Consumers increasingly rely on checks for high-value transactions and are more inclined to switch to other instruments for small-ticket items.
- Consumer check use is declining more rapidly than business use; since business transactions tend to be larger, this would help explain the upward trend in average check value. It would not explain the overall growth in dollar value moved by check, however.
We’ll have to wait another year to better test these theories, as the next Fed payments release will include their more robust triennial data, including business/consumer segmentation.
Fraud: Be Diligent, Not Panicked
The Fed’s fraud study toes a fine line, making it clear that fraud prevention requires intense ongoing diligence while reassuring that fraud levels remain nominal in the grand scheme of things. Payments fraud across all non-cash instruments is estimated at 0.0046 percent of value conveyed for 2015, more than a fifth higher than in 2012 (unfortunately the data for this study is somewhat older). Interestingly, the number of successful attempts grew faster than the dollars impacted—implying either that fraudsters are targeting smaller transactions, or that the “good guys” are getting better at protecting the large ones.
Checks are a bright spot on this front—their fraud rate of only 0.0025 percent is not only well below the overall average but is on a declining trend. The average value of a fraudulent check—$1,250—is actually a bit lower than the average legitimate check. This is likely a function of the protections offered by bank products like “positive pay” on business checks.
By contrast, the fraud rate on card payments was 0.108 percent as of 2015—over 40 times that of checks!—and climbing. Once again, a bit more digging is in order. Card-not-present transactions are four times more likely to be fraudulent than card-present ones. Although fraud rates are increasing across all card categories, the shift in mix toward card-not-present is exacerbating the issue. It’s clear where the payments industry needs to focus its fraud-fighting attention.
I hope you’ll join Claire Greene and me at DX19 when we discuss these and other issues impacting payment behavior and how banks and credit unions can use this information to respond strategically.