Take On Payments

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.

By Claire Greene, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

• February 27, 2023 in
  • ACH
  • cards
  • cash
  • financial inclusion
  • payments
  • payments studies/research
  • TOP payments inclusion
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February 6, 2023

Driving a Resurgence in Black Banking

Editors' note: Today's post was written by guest blogger Megan Houck, senior business analyst in the Atlanta Fed's Research Division, in honor of Black History Month.

The number of Black-owned financial institutions in the United States had shrunk from more than 50 in the 1970s to just 20 by 2020, according to the National Black Bank Foundation (NBBF). Many were forced to shutter during the savings and loan crisis of the 1980s. Even more closed during the Great Recession of the 2000s. What efforts are being made to ensure that Black-owned businesses receive equitable access to credit?

Historically, minority depository institutions (MDIs) formed to serve the needs of various ethnic populations denied credit by other institutions. The Small Business Administration  has noted that Black-owned businesses typically face higher interest rates and more loan denials. According to the 2021 Small Business Credit Survey, 16 percent of Black-owned firms received the full amount of the financing for which they applied, compared to 35 percent of White-owned firms. While both demographics saw their ability to secure a loan erode during the pandemic (these numbers were 26 and 54 percent, respectively, in 2019), the low number of approvals for Black-owned businesses in the current climate is concerning. Ensuring that MDIs have capital to offer loan seekers is one way to address this issue.

In addition to providing business credit, MDIs offer banking services to individuals in disadvantaged communities. When banks provide services to their own communities, they help alleviate many of the trust issues that practices like redlining and predatory fees created, practices that have led many people to avoid traditional banking.

Founded in Atlanta in 2020, the NBBF and its investment unit, the Black Bank Fund, aim to empower Black-owned financial providers and their communities. Since its creation, the NBBF has formed syndicates of Black-owned banks to underwrite two multi-million-dollar loans: a $35 million loan to the Atlanta Hawks in 2020 for an updated practice and sports medicine facility and a $25 million loan to Major League Soccer in 2022. These loans have helped participating financial institutions diversify risk and, with the resulting earnings, strengthen their capital position. In turn, these banks are better positioned to support the communities they serve, offering low-cost home and business loans to people and businesses who might otherwise not have access to them.

Robert James II is CEO of Carver Financial Corporation and a board member of NBBF. His bank, Carver State Bank, was the lead originator on the Hawks transaction. He told the National Bankers Association, "Black history, sports history, business history, and American history was made through the hard work, perseverance, expertise, and most of all, the spirit of collaboration of the Black banks." James also sits on the Atlanta Fed's Community Depository Institutions Advisory Council and provides our president and economists with insights into his experiences at the local level for his own bank and nationally with the NBBF.

In honor of Black History Month, we celebrate the spirit of collaboration.

By Megan Houck, a senior business analyst in the Atlanta Fed's Research Division

• February 6, 2023 in
  • financial inclusion
  • TOP payments inclusion
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December 19, 2022

Our Payments Wishes and Resolutions for 2023

In our year-end webinar last week, the Retail Payments Risk Forum team provided our perspective on several major developments and issues in payments in 2022. Since our time was limited, we wanted to share some additional thoughts and wishes for payments in 2023.

Nancy Donahue: Earlier this year, the Board of Governors finalized guidelines for evaluating nontraditional financial institutions' requests to be granted master accounts and access to the Fed's payment services. Fintech firms have held the promise of greater financial inclusion and wider access to financial services, so it will be interesting to follow this space in 2023.

Scarlett Heinbuch: I am intrigued by cash acceptance in the United States and efforts being made to require brick-and-mortar merchants to accept cash for payment. It will be interesting to see what happens with cash access for people nationwide. I wish for people to be able to pay for goods and services in a way that meets their needs and choices.

Dave Lott: I am especially interested in seeing the uptake by financial institutions and consumers of instant payments with the introduction of the FedNow service. I wish that the issue of consumer liability for electronic peer-to-peer, or eP2P, in cases where the legitimate accountholder initiates the transaction is quickly resolved.

Claire Greene: Like Dave, I'm excited to see the product innovations that I hope will result from the widespread availability of instant payments. The information that must flow with B2B (business-to-business) payments and the plethora of business accounting systems used to record payments and receipts make innovation in this space challenging. These challenges, however, also make B2B payments ripe for change. Let's see what happens.

Catherine Joseph: Although check usage has declined, I plan to continue to follow trends in both consumer and business checks, particularly trends in check fraud, and what actions the industry is taking to increase security and help curb check fraud.

Jessica Washington: My hope is that we can take steps as an industry to improve payments data collection, analytics, and sharing so that we can better inform policy and business decisions. I especially look forward to seeing improvements in fraud and threat data sharing so that we have the room to innovate and improve payment systems.

We want to wish our readers all the joy of the holiday season and best wishes for 2023. Our Take on Payments blog will resume on January 9.

By the Retail Payments Risk Forum Team: Jessica Washington, Dave Lott, Scarlett Heinbuch, Claire Greene, Nancy Donahue, and Catherine Joseph.

• December 19, 2022 in
  • cash
  • financial inclusion
  • TOP payments inclusion
  • supervision and regulation
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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.

By Claire Greene, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed

• December 12, 2022 in
  • financial inclusion
  • payments studies/research
  • TOP payments inclusion
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