Take On Payments, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Take on Payments and look forward to collaborating with you.
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February 27, 2023
Are Digital Payments Failing the Unbanked?
Data from the 2021 Survey and Diary of Consumer Payment Choice (SDCPC) give some hints into how US adults without bank accounts manage their financial lives, particularly when it comes to methods of digital access outside of a bank account.
Most US adults these days receive income through digital means. For example, the US Treasury reported in 2021 that they used direct deposit to distribute more than 85 percent of the third round of economic impact payments. People with bank accounts can receive income directly into their account. People without bank accounts are more likely to use prepaid cards for this purpose. However, they tend to own different types of prepaid cards when compared to people with bank accounts. People without bank accounts are more likely to have payroll cards and government benefit cards that facilitate the receipt of income.
For people with bank accounts, apps facilitate digital pay. Adults without bank accounts are far less likely to be using a payment app compared to other adults: half as likely to have any sort of payment app, about a third as likely to have PayPal, and highly unlikely to have Venmo. People without a deposit account have no access to Zelle, the payment app exclusively accessed through a bank account. This slow uptake of payment apps is notable because many commenters have been expecting fintech to create new, cost-effective, and convenient avenues of access for people without access to traditional bank accounts.
Despite their use of prepaid cards, people without bank accounts make most of their payments in cash. Even in 2021, people without bank accounts were three times as likely as other consumers to have used a paper money order in the past 12 months. And using a paper payment instrument inhibits access to the digital economy.
In the 14 years since the Federal Deposit Insurance Corporation’s first National Survey of Unbanked and Underbanked Households, the central story in payments has been about the transition from paper to electronic ways to pay. As the SDCPC data show, unbanked consumers are not enjoying the full benefits of innovations in digital payments. The Cleveland Fed recently posted a review of the literature into the causes and consequences of not having a bank account, which you can read on its website.
As payment innovation continues to flow, how can the payment process become more inclusive? We would appreciate your thoughts and comments.
February 21, 2023
Consumers Who Forgo Payment Cards
In a recent paper coauthored with Oz Shy, I wrote about the payments behavior of US adults 18 and older who have neither a credit card nor a bank-account-linked debit card, although they may have a prepaid card. These adults could have a bank account, so they are not necessarily unbanked. They just do not have a credit or debit card.
As you might expect, people in this group make about seven of their 10 monthly payments using cash and are more likely than other consumers to pay bills with cash. What might surprise you is that they do report making a small number of payments either with a credit or bank-account-linked debit card. How can that be?
It turns out that, as a percentage share of all their payments, consumers without cards make more payments to other people (person-to-person payments, or P2P) than do consumers with cards. Although these consumers do not themselves have cards, they may have a spouse, partner, or other family member with a card who does most of the heavy lifting when it comes to financial matters. So their outsize share of P2P payments could be to repay with cash friends or family who help them gain online or mobile access with cash.
All this makes me think about the financial ecosystem surrounding each of us—the friends and relatives who lend a helping hand, as Michelle Singletary described in January in her Washington Post column. Consumer research has shed some light on informal friend-and-family financial arrangements. The Federal Reserve's 2021 Survey of Household Economics and Decisionmaking found that 8 percent of US adults would borrow from a family member or friend to meet an emergency expense of $400. Two books about research projects that deserve your attention, The Unbanking of America and The Financial Diaries, describe the financial trade-offs among family members in good times and bad.
Maybe today is a good day to say thank you to those who have extended you a helping hand. And to find a way to pass it on. Good wishes to you and your extended family.
December 12, 2022
Digital Divide Trickles Down to Payment Account Adoption
Four in 10 consumers with household income less than $30,000 did not have broadband access or a desktop or laptop computer in 2021, according to Pew Research Group. One-quarter with household income less than $30,000 did not have a smartphone. This digital divide trickles down to the adoption of payment accounts like PayPal, Venmo, and Zelle, which are predicated on either a computer and internet access or mobile access.
New data from the Survey and Diary of Consumer Payment Choice (SDCPC) show steady growth across all income categories in the use of these digital payment accounts, increasing from 43 percent of consumers using these accounts at least once in the 12 months leading up to October 2016 to 66 percent in 2021.
Diving deeper into use by income, consumers in high-earning households were most likely to use digital payments accounts and those in low-income households were least likely. Eight in 10 consumers with household income north of $125,000 a year used digital payment accounts in 2021, compared to about half of consumers with household income less than $35,000.
These relationships have held true over all the years from 2016 to 2021: members of all income groups became more likely to use digital payment accounts, and lower income groups were less likely than others to use them each year. A snapshot from 2021 illustrates the intra-year differences.
While payments innovation could end up helping lower-income US consumers, these data show that it's important to view payments as part of an ecosystem that includes digital access. As my Atlanta Fed colleague Oz Shy wrote back in 2020, "Low-income consumers are not only constrained with spending, but also with the type and variety of payment methods available to them." Despite the upheaval in the years of the COVID-19 pandemic, the 2021 results for consumers' use of digital payment accounts show that this constraint still exists.
I invite you to play around with the Survey and Diary data.
November 14, 2022
When Speed and Acceptance Collide
Sometimes a person gets cornered into writing a paper check. Today, that person is me.
My final payment for a vacation rental is due this coming Friday. The rental starts in five days, on Saturday. But since the payee is a person, my online banking bill pay won't get the check there until the following Monday: three days late and two days after my check-in.
I'm cornered because two circumstances are colliding. (1) I absolutely, positively have to get the payment there by Friday. (2) My longtime landlord doesn't accept payment via p2p apps or cards. My preference for speed is in conflict with my landlord's preference for paper. And in a two-sided market, like payments, each side has to agree on how to conduct a transaction.
These circumstances call for 18th century technology: it's time to write a paper check. Cue quill pen and ink bottle, cue envelope, cue sleeve protectors, cue stamp.
My initial choice of online banking bill pay is what you would expect given new data from the 2021 Survey and Diary of Consumer Payment Choice, released in mid October. These data show that while the prevalence of checks has declined, they are still used.
On the "decline" side:
- The shares of consumers who prefer to use checks to pay bills dropped from 17 percent in 2016 to 8 percent in 2021.
- In 2020, checks were 19 percent of bill payments by number and 23 percent by value. This dropped to 12 percent by number and 12 percent by value in 2021.
- In the past 30 days ending in October 2021, more consumers used online banking bill pay (51 percent) than used a paper check (46 percent).
On the "still used" side:
- The average dollar value of check payments per consumer in October 2021 was $550.
- The average consumer wrote about two checks in October 2021.
- The share of consumer with paper checks on hand—three quarters of all consumers—has remained constant since 2019.
In combination, these data say that, sometimes when you're cornered, nothing says speed and acceptance like a paper check.
So while I go off on vacation in my paid-off rental, you can investigate the adoption and use of other payment instruments, as well as consumer ratings and preferences, at the data release of the Survey and Diary of Consumer Payment Choice.
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