Fed IDs shifts in consumer payment preferences

Since the onset of the COVID-19 pandemic, consumers have been using credit, debit and prepaid cards less frequently, but when they do pay with cards they tend to spend more. They also have been using low-contact payment methods, like ecommerce, digital wallets and the automated clearin house (ACH), a lot more. These are key findings contained in a report just released by the Federal Reserve Board.

The board, working with the Federal Reserve Bank of Atlanta, regularly collects data from large financial institutions and payment networks to help guage usage of various noncash payment types. It publishes a comprehensive payments study report every three years detailing its findings. The most recent report covered 2019 and was released in 2020. Between reports, the Fed publishes updates; the latest of these was released on Dec. 23, 2021, and covers 2020.

Between 2019 and 2020, card payments declined from an estimated 74.64 percent of all noncash payments to 74.25 percent. At the same time, card transaction values grew from 7.45 percent of all noncash payments to 7.84 percent. (The Fed's interim lists group credit, debit and prepaid debt card payments under the "card payments" moniker.) Despite the decline in number, cards remain the most popular form of noncash payment used by U.S. consumers, the Fed reported.

The biggest gains recorded for noncash payments were in ACH transactions, which grew by both number and value between 2018 and 2019, and substantially accelerated in 2020. The total number of ACH payments grew from 17.56 percent of all noncash payments in 2018 to 19.24 percent in 2020, the Fed said. ACH payments by value were 69.25 percent of all noncash payments in 2020.

"ACH has long dominated the core payment systems by value, but recent increases in the ACH share by number were unusually rapid," the Fed wrote. The Fed said the increases were due in part to more consumers and businesses moving bill payments to the ACH, higher adoption of payroll direct deposit, and an increase in the number of P2P payments settled using the ACH.

The biggest loser in market share was checks, which fell from 8.55 percent of all noncash payments in 2018 to 6.51 percent in 2020. The total number of commercial checks fell 14.2 percent, "substantially faster by number and value in 2020 compared to other recent years," the Fed wrote.

Value of CNP payments exceeded in-person in 2020

Not surprisingly, the Fed found a precipitous drop (11.76 billion) in credit and debit card payments at in-person environments, following an increase in 5 billion the year before. By contrast, the number of card-not-present payments rose 8.7 billion in 2020 after registering a 2.8 billion increase in 2019. The value of CNP also outstripped in-person transactions. In all, $3.85 trillion was spent last year in CNP environments compared to $3.20 trillion for in-person card payments, the Fed reported.

The Fed attributed the swing to multiple factors, including the shift to online purchasing, reductions in the use of public transportation and gasoline, and widespread adoption of order online for curbside pickup. And then there were the social distancing protocols ushered in by the pandemic. In fact, the greatest shift to remote payments occurred in the second quarter, immediately following the declaration of the pandemic, the Fed's data shows.

"Driven by the substantial and unprecedented shift from in-person to the remote channel from 2019 to 2020, the value of remote card payments exceeded the value of in-person card payments for the first time in 2020," the Fed stated.

But the average value of CNP payments actually fell, from $96 in 2019 to $86 in 2020. This suggests "the massive shift to remote payments in 2020 was driven at least in part by consumers purchasing lower-cost everyday items via the remote channel that they would have otherwise bought in person," the Fed wrote.

Ecommerce registered the biggest gains among CNP merchants. In 2020, ecommerce comprised more than two-thirds (67.67 percent) of CNP card payments by number and 59.16 percent by value, according to the Fed's data.

Continued adoption of new ways to pay

In keeping with the desire to minimize physical contact and cash usage, consumers also stepped-up usage of digital wallets and person-to-person payments across electronic networks in 2020. However, contactless card payments remain rare, the Fed said, with just 3.7 billion contactless card payment made in 2020. By total value, contactless card payments increased from 20 billion to 50 billion.

Use of digital wallets, which allow consumers to make payments using card information stored in mobile devices rather than using plastic cards, has been growing significantly, although these remain a small percentage of total noncash payments. The share of all credit and debit card payments involving digital wallets reached 2.60 percent last year; those transactions represented just 1.47 percent of the value of all card payments made, the Fed said.

The Fed reported that the number of accounts at financial institutions that recorded first-time activity using digital wallets increased 11.05 percent in the second quarter of 2020, suggesting the pandemic has been a big driver of electronic P2P payments.

P2P network schemes, like Venmo and Zelle, registered the biggest gains in first-time users in the second quarter. "A potential explanation is that when the shock of the pandemic was most acute, individuals adopted P2P to pay others remotely, perhaps as they sought ways to avoid the need for exchanging cash or checks," the Fed wrote.

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