Trends in the use of payment instruments in the United States

Federal Reserve Bulletin, Spring, 2005 by Geoffrey R. Gerdes, Jack K. Walton, II, May X. Liu, Darrel W. Parke, Namirembe Mukasa

An efficient payments system is important for the smooth functioning of the large and complex U.S. economy. As the availability and use of technology evolves, the payments system adapts to the changing needs and expectations of individuals, businesses, and governments. In the United States, many payments traditionally made with paper instruments--checks and cash--are now being made electronically--with debit or credit cards or via the automated clearinghouse (ACH).

Until recently, paper checks accounted for the majority of noncash payments. (1) A Board of Governors study published in 2002 concluded that the number of checks paid annually in the United States likely began to decline during the mid--1990s (chart 1). (2) A more recent study conducted by the Federal Reserve System, which estimated and compared the number of checks paid in 2000 with the number paid in 2003, showed that the decline in the number of checks paid may have accelerated over the past few years. (3) The average annual rate of decline in the number of checks paid is estimated to have been 3.3 percent between 1995 and 2000 and 4.3 percent between 2000 and 2003. (4) Although growth rates for electronic payments have been high for decades, the cumulative effect of this growth has only recently become large enough to substantially affect the number of checks paid. By 2003, led by rapid growth in debit card payments, the number of electronic payments exceeded the number of check payments for the first time in U.S. history (chart 1, table 1).

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The large number of electronic payments generally indicates growing efficiency of the payments system. The processing of paper payments typically requires extensive physical handling. Automation has created opportunities for depository institutions and other payments processors not only to introduce new payment instruments, but also to reduce their costs in processing paper and electronic payments. Future innovations are expected to continue to help decrease costs and add value and functionality. (See box "Changes in the Processing of Payments.")

This article analyzes the results of two payments surveys conducted in 2004, one of depository institutions (the 2004 depository institution survey) and one of electronic payments networks, processors, and credit card issuers (the 2004 electronic payment survey). It also draws on the results of two similar surveys conducted in 2001. The primary purposes of the 2004 surveys were to estimate the number and value of payments made by means of several types of noncash payment instruments in 2003 and to estimate rates of change from 2000 to 2003. (See the appendix for details on the surveys.)

The 2004 depository institution survey allowed for comparisons among different types and sizes. It also made possible an analysis of regional differences in the number and value of check, ACH, and debit card payments and automated teller machine (ATM) withdrawals. The 2004 electronic payment survey provided additional information on the use of ACH, cash back from debit cards, and different types of credit cards.

The surveys have focused on the amount of and trends in noncash payments. Indirect evidence discussed later, however, suggests that the use of cash has declined as a share of all payments in recent decades. (5) Whether the total number of cash transactions has begun to decline, as has the number of checks, is less clear.

TRENDS IN PAYMENT INSTRUMENT USE

Checks

The total number of checks paid annually in the United States is estimated to have declined from 41.9 billion in 2000 to 36.6 billion in 2003 (table 1). (6) As noted earlier, the annual rate of decline was 4.3 percent, compared with an estimated 3.3 percent between 1995 and 2000. (7) Although the use of checks declined, checks remained the most commonly used type of noncash payment in 2003.

Checks also continued to be the largest noncash payment type by value. (8) In fact, the value of checks exceeded the combined value of all the other noncash payment types. The value of checks was an estimated $39.0 trillion in 2003, compared with $39.8 trillion in 2000, indicating an annual decline of 0.8 percent. In constant (2003) dollars the value of checks declined almost 3 percent annually. (9)

The average value of checks increased slightly, reaching $1,065 in 2003, up from $951 in 2000 ($1,009 in 2003 dollars). This small change in average value suggests that the use of smaller-value checks (for amounts less than $1,000) declined more rapidly than the use of larger-value checks. Indeed, calculations show that at least 87 percent of the decline in checks paid, by number, resulted from a decline in the number of checks for less than $1,000. (10) The greater decline of smaller-value checks suggests that checks involving an individual and a business--checks written by individuals to pay businesses and by businesses to pay individuals--were being replaced by other types of payments in substantially greater numbers than checks written by businesses to pay businesses. (11)