Consumer Payment Choice: A Central Bank Perspective Scott Schuh Federal Reserve Bank of Boston October 1, 2013
Originally presented to PULSE Financial Institution Oversight Committee, Washington, DC The views expressed in this presentation do not necessarily represent the views of the Federal Reserve Bank of Boston or the Federal Reserve System. Results from the 2011 Survey of Consumer Payment Choice (SCPC) and 2012 Diary of Consumer Payment Choice (DCPC) are preliminary and subject to change. 2
Agenda Payments Transformation Recent Consumer Payment Choices Consumer Assessments: Security Example Understanding Consumer Payment Behavior Debit vs. Prepaid Looking Ahead Policies and Predictions 3
Noncash payment trends Number of U.S. payments by all sectors (household, business, government) 60 50 Checks Billions per year 40 30 20 10 0 Credit Debit Electronic (ACH) EBT cards 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Source: Federal Reserve Payment Study (FRPS) 4 4
Consumers have more payment options Number of payment instruments 12 10 8 6 4 2 Pre-existing 1. Cash 2. Checks 3. Money orders 4. Travelers' checks 1950 5. Credit cards 1977 Number held, out of 9 instruments 6. Debit cards Number used, out of 9 instruments Number held, out of 4 instruments (Check, CC, DC, 1983 7. BANP 8. Prepaid cards 2009 10. Mobile account payments? 1997 9. OBBP 0 1939 1941 1943 1945 1947 1949 1951 1953 1955 1957 1959 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Source: 2008-2012 Survey of Consumer Payment Choice, 2011-2012 results unofficial and preliminary; CPRC research 5 5
New payments policies were enacted 2010 2011 2012 2013 CARD Act of 2009 (Fed, Congress) Opt-in overdraft protection (Fed) Dodd-Frank Act 2010/Durbin (Fed) V/MC Settlement: discounts, fee disclosure (DoJ) New fees on debit cards, accounts (Banks) Proposed rules for prepaid cards (CFPB) Strategic plan for payments (Fed) Proposed rules for student cards/accounts (CFPB) V/MC/bank Settlement: CC fee rebate, surcharging (US District Court, NY) Regulation II rejected (US District Court, DC) 6
Agenda Payments Transformation Recent Consumer Payment Choices Consumer Assessments: Security Example Understanding Consumer Payment Behavior Debit vs. Prepaid Looking Ahead Policies and Predictions 7
Consumer payments data program Year Survey (Boston Fed) 2003 524 2004 4,631 2005 --- 2006 1,500* 2007 --- 2008 1,010 2009 2,169 Diary (3 Fed Banks) 2010 2,102 353 2011 2,151 389 2012 3,176 2,547 Transactions Data (TBD) 2013 2,100 e ---? Notes: * Sponsored by the AARP; e is estimate. Red indicates pilot studies. All samples are U.S. consumers except in 2003 (Boston Fed employees) and 2004 (all Fed employees). 8
Comparison of Survey and Diary Feature Financial responsibility Assess payment instruments (PI) Survey (monthly activity) X X Diary (3-day activity) Adoption of PI X X (implied) Incidence of use of PI X (month, year) X (3-day) Cash activity X X Frequency of use of PI X X Dollar value of payment activity X Note: Diary data can be linked to Survey panel data from 2008-2012 (and beyond) for each individual respondent. 9
Consumer payments and consumption Dollars Per Month 3,500 3,450 3,400 3,350 3,300 3,250 Real consumption per capita (left scale) NOTE: Estimated number of payments for 2011-2012 is currently in production. Number of payments per capita (right scale) 76 74 72 70 68 66 Number of Payments Per Month 3,200 Q4/2005 Q4/2006 Q4/2007 Q4/2008 Q4/2009 Q4/2010 Q4/2011 Q4/2012 64 Notes: Consumption is the inflation-adjusted value of goods and services bought. Payments is the number of times consumers made a payment for consumption and non-consumption transactions. Sources: Haver Analytics; 2008-2010 Survey of Consumer Payment Choice. 10
Transaction values by instrument, 2012 300 300 250 $241 250 Dollars per transaction 200 150 100 50 $21 $171 $44 $56 $22 $182 $117 200 150 100 50 0 Cash Check* Debit Credit Prepiad OBBP BANP Other 0 Notes: *Checks and Money Orders. Other does not include unreported and text messages. Source: 2012 Diary of Consumer Payment Choice, unofficial and preliminary. 11
Consumer payments by instrument, 2012 100% 90% Electron 100% 90% Percent share of value 80% 70% 60% 50% 40% 30% 20% Cards Paper 80% 70% 60% 50% 40% 30% 20% Percent Share of number Other BANP OBBP Prepaid Credit Debit MO and TC Check Cash 10% 10% 0% Number per consumer Value per consumer 0% Source: 2012 Diary of Consumer Payment Choice, unofficial and preliminary. 12
Consumer adoption of payment instruments 100 90 Checking Account Cash 100 90 Percent of Consumers 80 70 60 50 40 30 Solid Line = SCPC Dashed Line = SCF Credit Debit OBBP BANP Prepaid Blank Checks 80 70 60 50 40 30 20 Money order 20 10 Travelers check 0 1989 1992 1995 1998 2001 2004 2007 2008 2009 2010 2011 2012 2013 10 0 Source: 2008-2012 Survey of Consumer Payment Choice, 2011-2012 results unofficial and preliminary; 2013 Prepaid Survey, results unofficial and preliminary; Survey of Consumer Finance 13
Consumer use of payment instruments Percentage share of monthly payments 35 Debit 30 25 20 Cash Credit 15 Check 10 BANP 5 OBBP Money order Travelers check Prepaid 0 2008 2009 2010 2011 2012 35 30 25 20 15 10 5 0 Source: 2008-2012 Survey of Consumer Payment Choice, 2011-2012 results unofficial and preliminary 14
Number of instruments held by consumers 6 5 Solid Line = SCPC Dashed Line = SCF Number held out of 9 (SCPC) 6 5 Number Of Instruments 4 3 2 Number held out of 4 means of payment (Check, CC, DC, and Automatic ACH bills) 4 3 2 1 1 0 0 Source: 2008-2012 Survey of Consumer Payment Choice, 2011-2012 results unofficial and preliminary; Survey of Consumer Finance 15
Consumer portfolios of instruments Percentage of consumers holding various numbers of payment 14 27 26 17 136 The total number of unique wallet portfolios 2 4 7 3 0 1 2 3 4 5 6 7 8 9 Number of Payment Instruments Adopted Source: 2010 Survey of Consumer Payment Choice 16
Number of payment cards held by adopters 60 60 Percentage of adopters 50 40 30 20 50 40 30 20 Debit Prepaid Credit 10 10 0 1 2 3 4 5 6+ Number of cards 0 Source: 2012 Survey of Consumer Payment Choice, results unofficial and preliminary 17
U.S. domestic currency in circulation 2600 2500 2400 Average Consumer Cash Holdings (right scale) $132 $147 $138 180 $158 $164 160 140 120 Dollars 2300 2200 Total U.S. Currency per Capita (left scale) 100 80 Dollars 2100 60 40 2000 20 1900 0 Note: Capita is defined as 18+ non-institutionalized civilians. Cash holdings exclude large values. Source: (Left) Federal Reserve Statistical Release; (Right) 2008-2012 Survey of Consumer Payment Choice, 2011-2012 results unofficial and preliminary 18 18
Cash withdrawals by location Source: 2012 Diary of Consumer Payment Choice, unofficial and preliminary 19
Mobile banking and payments 40 40 35 30 Mobile banking adoption (new definition) 35 30 Percentage of consumers 25 20 15 10 Mobile banking adoption (old definition) Mobile banking use (new definition) Mobile payments any type* Mobile banking use Mobile payments by 5 (old definition) contactless Mobile payments by text 0 2008 2009 2010 2011 2012 25 20 15 10 5 0 Source: 2008-2012 Survey of Consumer Payment Choice, 2011-2012 results unofficial and preliminary; *Consumers and Mobile Financial Services, Federal Reserve Board. 20
Agenda Payments Transformation Recent Consumer Payment Choices Consumer Assessments: Security Example Understanding Consumer Payment Behavior Debit vs. Prepaid Looking Ahead Policies and Predictions 21
Security seems most important to consumers Security Payment records Cost Convenience Acquisition and setup Acceptance for payment 0 10 20 30 40 50 60 70 80 90 100 Percent of Consumers Most important 2nd most Source: 2011 Survey of Consumer Payment Choice, results unofficial and preliminary 22
Ratings of payment instrument security Cash Check Debit card Credit card Prepaid card Bank account number payment Online banking bill payment 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percent of Consumers Very risky Risky Neither risky nor secure Secure Very secure Source: 2011 Survey of Consumer Payment Choice, results unofficial and preliminary 23
Security ratings are rising over time Source: 2008-2012 Survey of Consumer Payment Choice, 2011-2012 results unofficial and preliminary 24
In-person payments are rated most secure In-Person By Mail By Phone By Mobile Online 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percent of Consumers Very Risky Risky Neither Secure Very Secure Source: 2011 Survey of Consumer Payment Choice, results unofficial and preliminary 25
Consumers prefer PIN debit payments Pin 55 Signature 22 yet usage is almost even Either 23 Pin debit 12.3% Signature debit 12.1% All other payment instruments, 75.7% Sources: 2012 Survey of Consumer Payment Choice; 2012 Diary of Consumer Payment Choice, unofficial and preliminary 26
Agenda Payments Transformation Recent Consumer Payment Choices Consumer Assessments: Security Example Understanding Consumer Payment Behavior Debit vs. Prepaid Looking Ahead Policies and Predictions 27
Grocery payments, then and now Probability of using payment instruments correlates with $ value 2001 2012 (in $2001) Notes: Graphs include same four payments instruments. Credit card includes signature debit. Source (left): Klee, E. (2008). How people pay: Evidence from grocery store data. Journal of Monetary Economics, 55, 526-541 Source (right): 2012 Diary of Consumer Payment Choice, results unofficial and preliminary 28
Nonbill payments, 2012 Source: 2012 Diary of Consumer Payment Choice, unofficial and preliminary 29
Bill payments, 2012 (Not automatic) Source: 2012 Diary of Consumer Payment Choice, unofficial and preliminary 30
Consumers benefit least from prepaid cards Table 6: Relative Utility by Context and Payment Instrument (1.00 = most preferred by consumers) Automatic bill pay Online bill pay In person bill Online pay pay Essential retail Nonessential retail Other nonretail cash 0.63 0.97 0.78 0.88 check 0.90 0.71 0.69 0.63 0.83 debit card 0.71 0.69 0.66 0.74 1.00 0.82 0.86 credit card 0.67 0.64 0.64 0.72 0.89 0.78 0.83 online banking bill pay 0.87 electronic bank account deduction 0.84 0.78 0.74 store value card 0.50 0.53 0.64 0.56 0.57 direct deduction from income 0.85 Source: Sergei Koulayev, Marc Rysman, Scott Schuh, and Joanna Stavins (2012), Explaining Adoption and Use of Payment Instruments by U.S. Consumers, Federal Reserve Bank of Boston Working Paper No. 12-14. 31
Agenda Payments Transformation Recent Consumer Payment Choices Consumer Assessments: Security Example Understanding Consumer Payment Behavior Debit vs. Prepaid Looking Ahead Policies and Predictions 32
Comparison of money and instruments Feature Assets Cards Cash Checking Account Debit Prepaid Medium of exchange (GP > other) Unit of account X X Store of value X X Fees Non-network ATMs Some accounts Few Many 33
Consumers prefer debit to prepaid Economic Theory High Low Opportunity Cost Cash, Prepaid, TC, MO [Negative] < OBBP, BANP [Zero] < DC, Check < CC, Mobile Text/SMS Transaction Cost Prepaid < Cash < All Other Instruments Consumer Assessments, Survey Data Worse Better Acceptance BANP < Check, Prepaid, OBBP < DC, CC, Cash Cost Cash < DC, Check, BANP, OBBP, Prepaid < CC Records Cash, Prepaid < BANP < DC, Check, CC, OBBP Security BANP, Cash, Check, Prepaid < OBBP, DC, CC Convenience BANP < Cash, Check, OBBP, Prepaid < DC, CC Get/set up Prepaid, OBBP, BANP < DC, CC, Check < Cash 34
Consumer use of prepaid cards 60 50 Percentage of consumers 40 30 20 10 0 Percentage of adopters using prepaid cards in a year Percentage of consumers using prepaid cards in a year. Discard rate per year 2008 2009 2010 2011 Percentage of consumers reloading prepaid cards in a year. Notes: Prepaid use is defined as the share of consumers or adopters using a prepaid card in a given year. The above results are based on 4 card categories. Source: 2010 and 2011 Survey of Consumer Payment Choice, 2011 results unofficial and preliminary 35
Consumer adoption of prepaid cards 35 35 Percentage of consumers 30 25 20 15 10 5 Any type of prepaid: 62.2% 30 25 20 15 10 5 0 0 Source: 2013 CPRC Prepaid Survey, unofficial and preliminary 36
Agenda Payments Transformation Recent Consumer Payment Choices Consumer Assessments: Security Example Understanding Consumer Payment Behavior Debit vs. Prepaid Looking Ahead Policies and Predictions 37
Debit card fee cap estimated to increase fees paid by merchants with small-dollar transactions Fast food, food service, food trucks, snack bars $10.16 Post-Durbin change in interchange fee per transaction by merchant type Restaurants, bars $28.1 0 Department and discount stores $50.4 7 Gas station $42.58 Grocery, pharmacy, liquor stores, convenience stores $60.0 4-30 -25-20 -15-10 -5 0 5 10 15 20 Note: Selection based on most number of debit card payments. Dollar values are average transaction for merchant. Source: Oz Shy (2013), Measuring some Effects of the 2011 Debit Card Interchange Fee Reform, updated version of Who Gains and Who Loses from the 2011 Debit Card Interchange Fee Reform? Federal Reserve Bank of Boston Public Policy Discussion Paper No. 12-6 38
Is Durbin/RegII affecting consumers? POS: hard to see direct effects because consumers: Don t pay the merchant/interchange fee directly Are unlikely to perceive reductions in retail price (if any) May not have a choice between PIN and signature and may not care that much despite having preferences Don t know or influence merchant s routing decision Are unlikely to be aware of the issues And simply may not care especially if they don t see changes BANKS: some changes to accounts, cards, fees, etc. 39
Faced with fee for debit, consumers want to switch mostly to cash and check Source: Sergei Koulayev, Marc Rysman, Scott Schuh, and Joanna Stavins (2012), Explaining Adoption and Use of Payment Instruments by U.S. Consumers, Federal Reserve Bank of Boston Working Paper No. 12-14. 40
Faced with surcharge on credit cards, consumers want to switch to cash and check and debit Source: Sergei Koulayev, Marc Rysman, Scott Schuh, and Joanna Stavins (2012), Explaining Adoption and Use of Payment Instruments by U.S. Consumers, Federal Reserve Bank of Boston Working Paper No. 12-14. 41
Will U.S. merchants surcharge credit? Australian experience suggests yes (over time) Source: Reserve Bank of Australia, 2012 42
2012-13 CFPB proposed rules for prepaid General purpose reloadable prepaid cards (GPRPC) Should GPRPC be subject to Regulation E (electronic funds transfers)? Require standard disclosures? Protect consumers from unauthorized transactions? Regulate fees and information in GPRPC? Inform/teach consumers about GPRPC? Require deposit insurance on card balances? Regulate overdraft situations on card balances? Force provision of savings for card holders? 43
THANK YOU The views expressed in this presentation do not necessarily represent the views of the Federal Reserve Bank of Boston or the Federal Reserve System. Results from the 2011 Survey of Consumer Payment Choice (SCPC) and 2012 Diary of Consumer Payment Choice (DCPC) are preliminary and subject to change. 44