Electronic Payments and the U.S. Payments System

Publication Date: June 2002

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

The electronic and paper-based payments systems consist of the various means buyers and sellers use to transfer monetary value among themselves. Electronic payments have been playing a critical role on the wholesale side of the payments system for decades. Trillions of dollars per day have been transferred routinely and securely through the wholesale payments system among parties, such as banks, corporations, the Federal Reserve, the Department of the Treasury, and other government agencies. More recently, electronic payment technologies have migrated to the retail side of the system, to households and individuals. In retail, however, the most popular methods of payment remain the more costly paper-based cash and check payments. In 2000, by one estimate, paper-based transactions accounted for two-thirds of all consumer payments, despite the promise of cost savings and convenience.

Nevertheless, the volume of electronic retail payments has increased more rapidly during the last decade. The increase in the volume of electronic payments using credit and debit cards grew from 14% of total consumer transactions in 1990 to 31% in 2000. Still, by 2010 consumers will still be making about 50% of their payments with paper, according to the Nilson Report, an industry publication.

With the great majority of wholesale banking transactions (institution to institution) being conducted electronically, the cost savings and convenience of electronic payments are a normal part of wholesale banking. A major step towards widespread electronic retail payments was the evolution of the automated clearing house (ACH) system to process wholesale and retail payments. The prevalent deployment of automated teller machines (ATMs) and point-of-sale (POS) terminals has supported the progress. The Internet and other technologies have also encouraged the use of electronic banking by individuals and households.

The migration of electronic banking to the retail side of the payments system raises concerns about whether current laws and regulations will adequately cover new technologies and new payment methods. Current statutes address consumer protections in financial transactions involving credit cards and electronic funds transfer. The regulatory agencies have focused on fostering safety and soundness while minimizing their intrusion into the innovation process so as to allow the marketplace flexibility for product development. In November of 2001 federal regulators jointly issued a report, mandated by law (P.L. 106-102), that reviews regulations affecting the delivery of financial products and services including online delivery. However, the speed with which electronic payment technologies are being developed increases the danger of being unprepared with the appropriate regulatory and supervisory policy to protect electronic payments users and providers in time of crisis. This report will be updated as legislative and financial developments warrant.