Card Transactions a Sure Bet for the Future

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With all the attention devoted lately to the Check Clearing in the 21st Century Act, a.k.a., Check 21, it's easy to forget that payments by physical check have been eclipsed for the first time in history by electronic payments. Yet that's exactly the case. According to statistics released by the Federal Reserve in December of 2004 for calendar year 2003, electronic payments - including debit and credit card payments, as well as ACH transfers - rose 13.2 percent from 2000, for 44.5 billion transactions annually.

This represents more than an overall increase in number of transactions. During the same period, physical checks experienced a 4.3 percent decline, from 41.9 billion transactions to 36.7 billion transactions. Granted, 36.7 billion checks hardly represents the death knell for the physical check, but this trend isn't expected to reverse itself, either.

"The balance has shifted from check writing to electronic payments, and we expect this trend to continue," said Richard Oliver, senior vice president of the Federal Reserve Bank of Atlanta and the Federal Reserve Banks' product manager for retail payments when the statistics were released.

Even more interesting, he added, "At current growth rates, credit cards and debit cards will both surpass checks in terms of total annual transactions in 2007." Thus it appears that in the years ahead, the paper check may truly become an endangered species in the overall payment instrument landscape.

Statistics tracked by support this growth scenario for card payments. For example, the company reports that in 2004, consumers spent approximately $686 billion dollars through 228.7 million debit cards transactions. This compared to 199 million transactions totaling $576.6 billion in 2003.

Likewise, despite widespread advice to the contrary, Americans don't appear to have any intention of reducing their credit card debt. reports that from 1993 to 2003 (the most recent year for which figures are available), total outstanding credit card debt nearly tripled from $232.3 billion to $683.4 billion. When the push to reduce credit card debt through other loan programs like HELOCs is factored in, these numbers becomes truly astonishing.

Paper or Plastic

Although many grocery stores have switched exclusively to plastic bags, shoppers are still faced with the "paper or plastic" question. However, now it's a question of payment options rather than bags.

Ironically, the seemingly inevitable adoption of Check 21 may actually fuel further increases in card-based payments. Consider the classic scenario. The consumer is getting paid on Friday, so he or she visits the grocery store on Tuesday, taking advantage of the so-called float inherent in check payments today. Because Check 21 promises to eliminate that float, consumers may be encouraged to use more convenient card-based payment options.

"The convenience of an electronic transaction over a paper transactions is certainly there," says Jim Park, president and CEO of Credit Union 24, a major provider of EFT network and processing services to credit unions. "When you take away the float, there's an even more compelling case for the consumer to use the electronic transaction."

The Big Reward

Park adds that he's also seen unexpected growth in the area of rewards programs for signature debit cards. Operating much like the more common rewards programs for credit cards, these programs offer yet another reason for consumers to move away from paper transactions.

However, Jim Hanisch, executive vice president for the Co-op Network, another major provider of EFT services to credit unions, doesn't necessarily agree on this point.

"The economic case for a rewards program in a signature debit environment versus a credit environment is declining," says Hanisch. He points out that interchange rates on PIN-based transactions have risen, while interchange rates on signature debit transactions have dropped. In fact, he sees possible convergence of these rates in the next three to five years. Since it's revenue from these interchange rates that fund rewards programs, their viability is in question.

"Credit card interchange rates will always be higher, because there's more risk involved," he concludes.

This means that rewards programs for credit transactions will continue to be more viable than those for debit transactions.

Credit Card Portfolio Sales Continue

The trend for credit unions to sell their credit card portfolios shows no sign of reversal. "Philosophically, I'm very uncomfortable with these transactions," says Hanisch, "but practically speaking, I can understand why credit unions look at these alternatives." While Hanisch expects the trend to continue, he says we may also see some anomalies.

According to Hanisch, the typical sales agreement includes a clause that precludes the credit union from reentering the credit card market for five years after the date of the sale. He adds that these clauses on some of the early portfolio sales will soon expire, and that it will be interesting to see how the affected credit unions react. "Some credit unions may choose to reenter the credit card market," says Hanisch.

Looking Ahead

It was in the early 70s that futurists first predicted the "cashless society," where all transactions are handled electronically. As farfetched as the idea seemed then, we're finally beginning to see signs that such a society is indeed inevitable. And it will be the ubiquitous plastic card that blazes the trail to this new frontier.

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