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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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.
November 7, 2022
More Highlights from the CFPB BNPL Report
My October 3 post on the Consumer Financial Protection Bureau's (CFPB) 2022 report on the buy now, pay later (BNPL) industry highlighted some of the key metrics from the CFPB's data collection efforts of the five major BNPL operators in the United States. In this post, I review some of the benefits, concerns, and planned actions identified in the report.
The report acknowledges several financial benefits of the "pay-in-four" BNPL loans to the consumer—primarily that they don't charge interest, which makes them an attractive alternative to other forms of credit. For example, the report cites data from a 2021 report on the consumer credit card market : the cost of credit in 2020 for revolving cardholders using general purpose cards was 17.7 percent.
The main sales pitch that BNPL firms present to the merchant is that BNPL increases the potential for incremental sales; with this option, the customers may purchase a more expensive product or additional products. While the CFPB report does not have any specific metrics on incremental sales, it does cite a number of claims from the BNPL firms about how BNPL could increase average sales amounts and attract new customers. The report mentions another benefit for merchants: the BNPL firm providing the credit assumes all the risk of nonpayment. As I mentioned in my earlier post, the firms reported that 3.8 percent of loans were charged off in 2021—up from 2.9 percent in 2020.
Any extension of credit risks consumers assuming more debt than they can afford. In particular, the report cites "loan stacking" as a possible danger. Loan stacking occurs when the customer obtains multiple BNPL loans from different lenders, "stacking up" the payment obligations of each loan on top of one another. BNPL firms try to minimize this danger by limiting initial loan amounts. However, since most BNPL providers don't report loan activity to the major credit reporting agencies, they can't know how many BNPL loans the consumer may have gotten from other BNPL firms and, therefore, they have no knowledge of the consumer's full debt. This concern is increased by the trend shown in the data that the repeated use of BNPL has increased over the last three years. In the fourth quarter of 2021, the five lenders surveyed reported an average usage rate per unique customer of 2.8 loans used during the quarter. This figure only reflects the number of loans with a particular lender. In the first quarter of 2019, this average was 1.9 loans.
Besides the risk of credit overextension, the report details other potential harms, including:
- a lack of clear and consistent disclosures
- inconsistent practices regarding merchandise disputes
- mounting late fees and bank fees for multiple representments of returned payments
- the requirement to use autopay or the difficulty in selecting another payment method
- the use of customer data for purposes other than handling the transaction
The next question is this: With this data in hand, what does the CFPB plan to do about rules or guidance for the BNPL industry? In a prepared statement issued in conjunction with the report's release, CFPB director Rohit Chopra outlined several actions the organization would take immediately, including continually monitoring the BNPL industry. The CFPB staff will identify potential guidance or rules that will require the same consumer disclosures and protection that credit cards are subject to. The CFPB will continue to encourage the development of processes for BNPL firms to work with the credit reporting agencies so that loan experiences are reported regularly and accurately and a consistent methodology is used to estimate the debt burden of a household.
The execution of supervisory examinations has been inconsistent due to the variety of the business structures of the BNPL firms. The CFPB is encouraging voluntary examinations but is also looking into its authority to mandate examinations. Related to consumer data protection and privacy, the CFPB plans to work with the Federal Trade Commission on developing rules that will be applicable to all businesses regarding using data for something other than the BNPL transaction itself.
While the BNPL industry is in its early stages, it is becoming a major part of the retail credit landscape. We will continue to follow and report on developments in this industry.
August 29, 2022
Is There a Cost to Payments Exclusion?
Beginning in the mid-1990s, economists have pointed out that debit card and cash users subsidize credit card users at the retail point of sale. How's that, you say?
In most cases, everyone, regardless of payment method, pays the same price for eggs, milk, bread, movie tickets, shoes, a couch, or airline tickets. And even though we all pay the same at checkout, those of us who use a credit card to pay could get a bit of a discount—say 1 percent or so—later in the form of cash back, merchandise, miles or hotel rooms. What's that discount worth? And who benefits?
Researchers at the Bank of Canada estimate that consumers who have only cash and debit cards in their wallets have a cost of payments of $11 per month. Consumers who have these methods and also have credit cards gain about $48 per month in benefits. "The difference in results could be due to the cost of withdrawing cash or debit card or account fees while most credit cards may offer rewards," the researchers write.
Taking another angle, researchers at the Federal Reserve Banks of Boston and Kansas City and the Bank of Canada find that, in total, low-income consumers pay less in absolute terms to make payments compared to higher-income consumers. As a percentage of transaction amount, however, low-income consumers pay more, and the highest-income consumers pay the least. For this research, cost was the sum of rewards, the fees consumers pay to financial institutions, and the merchant cost passed through as higher prices at checkout.
The conversation about access to payment methods is often in the context of preserving access to cash or finding alternatives to cash. This research examines another aspect of payments access—that is, what it costs to make a payment depending on payment instrument choice or limitation.
For analysis of how consumers with different levels of card ownership make payments using data from the 2021 Diary of Consumer Payment Choice, see "Payment Card Adoption and Payment Choice," posted in the Atlanta Fed's Policy Hub in mid-July.
May 23, 2022
Vulnerable Populations and the Case for Cash
We recently wrote a post about communities not being able to access cash because of natural or man-made disasters. Severe weather and war, for example, may leave a bank branch inoperable. But even in "normal" times, access to cash remains an important consideration, especially for consumers who use it as their only or preferred means of payment. With this post, we look at how cash remains an important payment option and how accessing it may be becoming more difficult for certain vulnerable populations. These vulnerable populations—who tend to be low- to moderate-income households, rural communities, and recent immigrants—are more likely to be un- or underbanked (underserved) and often rely on cash to buy groceries and pay utility bills.
Even with an uptick in digital payment usage , cash remains a critical payment choice for many Americans. Some may be unable to use digital payment options because they lack access to broadband or a smartphone, for example. Others may not be able to access these options because they are unbanked. Data from the Federal Deposit Insurance Corporation's 2019 report How America Banks reveal that approximately 5.4 percent of households (7.1 million) were unbanked in 2019. Almost 14 percent of Black households are unbanked and presumably rely on cash or alternative payment options.
There are many reasons why cash can be a person's default method of acquiring goods and services, according to a forthcoming paper titled "Cash Is Alive: How Economists Explain Holding and Use of Cash" by Oz Shy, a senior policy adviser at the Atlanta Fed.
Unfortunately, recent data suggest that challenges to accessing cash existed prepandemic and accelerated during the pandemic. It may be especially difficult for the underserved, cash-reliant consumer, according to a report by the National Community Reinvestment Coalition:
- The number of banking institutions declined from approximately 18,000 in 1984 to fewer than 5,000 in 2021.
- The rate of bank branch closures doubled during the pandemic.
Rural areas tend to see the most bank branch closures, and those closures have contributed to a decline in ATMs as well. Adding to this, banks have been more cautious in providing accounts to independent ATM operators in part because of anti-money-laundering concerns. So some banks are adopting policies that prohibit business relationships with independent ATM operators or are charging much higher fees for their services—which means some ATM accounts with banks are closing and fewer ATMs are being established.
These closures matter, even to the unbanked consumer, who may need bank branches and ATMs, for example, to obtain cash from a prepaid benefits card for unemployment or social security payments, get a cash advance on a credit card, or cash a check at a bank where the check writer has an account.
As the digital economy expands, people in underserved communities and those who are cash reliant, whether by choice or lack of other options, are at risk for being further marginalized in the financial system. To help ensure that everyone, regardless of payments preferences, is included in this system, cash access and preservation in underserved communities across the nation remain important to maintain.
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