Increased use of electronic payment methods predicted by BAI

Northwestern Financial Review, May 23, 1998

Dramatic changes in consumer behavior will be a major factor in transforming the payments system over the next several years. As the year 2000 approaches, consumers will increasingly adopt electronic payment media and increase their use of credit and debit cards, while decreasing their use of cash and checks, a study by the Bank Administration Institute concludes.

According to the study, consumer, business and government capabilities to conduct electronic commerce are growing at a rapid pace. Nearly 20 percent of U.S. households subscribe to some type of online service, including direct Internet access. This number is expected to grow to more than 40 percent of households by the year 2000, BAI said.

The study predicts that by 2000, 65 percent of U.S. households will use some form of electronic bill payment, a dramatic increase from the 38 percent of households reporting involvement in electronic payments in 1995.

"The shift we are seeing from paper-based payments to electronic commerce presents serious implications for banks," said BAI's Rick Hartnack. "The growth of this industry has brought many non-bank providers into the payments business. Unless banks meet the marketing and brand awareness challenges to remain players in the payments industry, non-bank providers will carve into their market share."

With 57 percent of U.S. paymentsrelated revenue, the banking industry currently has the largest market share of any stakeholder - including technology vendors, third-party service providers and the Federal Reserve - in the payments industry. Shifts in consumer, business and government payments usage patterns away from bank providers can significantly alter existing revenue streams.

"Banks have a truly outstanding opportunity through the payments business to further consolidate customer relationships by folding all types of products and delivery channels into packages that meet the modern consumer's needs for a full and easily accessible array of financial products and services, BAI's David Taylor said.

The research identified several marketplace trends that indicate the growth of electronic commerce and the decline of cash and check usage among consumers and businesses. These indicators include:

Continued growth in the number of consumers and businesses with access to personal computers and the Internet. Since 1993, the number of households with personal computers equipped with modems rose to 30 percent from 12 percent. The BAI study predicts the number will grow to 47 percent by the year 2000.

Growing numbers of utility companies are offering direct debit payment options. While the response rate is currently only 3 percent of households, some utility companies are reporting response rates as high as 12 percent.

Supermarkets have expanded card acceptance and are reporting dramatic increases in the use of debit and credit cards for grocery purchases. Four years ago, few supermarkets accepted cards of any kind in checkout lanes.

More households are electing to file their taxes electronically. According to the Financial Management Service, an arm of the Treasury Department, last year 20 percent of households chose this option, and one-fifth of all refunds were paid through direct deposit.

Among small business' treasury personnel, 60 percent are equipped with computers with modems and 18 percent are using online banking applications or planned to begin using them by this year. This is up from 1995 when just 41 percent used computers with modems and just 2 percent were using the equipment for online banking.

The survey, titled "Profiting from Change in the U.S. Payments System," was based on a mailed survey of 2,500 U.S. households. The research also included in-depth interviews with a representative sample of stakeholders in the payments business. PSI Global of Tampa, Fla., conducted the survey with BAI. Survey sponsors were Comerica, Diebold, NationsBank, and SunTrust Service Corp.