"We Have Already Seen Dramatic Changes in Consumer Payment Behavior": A Conversation about How People Pay


Tom Heintjes: Hello, and welcome back to the Economy Matters podcast. I'm Tom Heintjes, managing editor of the Atlanta Fed's Economy Matters magazine and your podcast host. Today I'm sitting down with Dave Lott, who works in our Retail Payments Risk Forum, which works with financial institutions, regulators and law enforcement officials to research issues and help reduce risks in paper, plastic and digital payments. Welcome back to the podcast, Dave. It's been a while since we had you on, and it's good to have you back in the studio.

Dave Lott: Thank you, Tom, for the invitation. I've been looking forward to our conversation.

The Atlanta Fed's Dave Lott. Photo by David Fine
The Atlanta Fed's Dave Lott. Photo by David Fine

Heintjes: Great. Dave, before we start, can you tell us a little bit more about the work that the Retail Payments Risk Forum does?

Lott: I'd be happy to. I describe our work in two different categories, the first one being research and the other one being educational outreach. The audience that we have is not just financial institutions but all the stakeholders in the payments industry, whether that be merchants, consumers, processors, the card networks, technology providers, law enforcement, academia—all of those folks have interest in the payments system, and we support them in terms of that research and education effort there. We oversee, directly, some research projects, and I know we're going to talk about a couple of those later on in our conversation today, and all of our team has a voracious appetite for reading industry publications and other research that has been done. So research is a very critical part of the work that we do. The other side of it is our educational outreach. We have a weekly blog, we do quarterly webinars, we also write white papers, and occasionally we'll host a conference here at the Atlanta Fed as well—and we speak at many payment conferences, and before industry groups.

Heintjes: Dave, you just mentioned the blog you write—the weekly blog called Take On Payments, which has been running for a number of years—and recently you wrote a post saying that the past year has finally been the year of the mobile payment. What is it that led you and your group to call it that?

Lott: Our team has been involved in mobile payments really since the beginning—not just from a research standpoint, but also proactive in the evolution of the payment method itself. Back in January 2011, we convened—along with the Payment Strategies group from the Federal Reserve Bank of Boston—a group of stakeholders that were critical in the mobile payments business at that point in time. Our purpose for that meeting was to determine if it would be beneficial to create a working group to address the challenges and the barriers that were facing mobile payments.

Heintjes: Can you talk a little bit more about the work of the payments group, the Mobile Payments Industry Workgroup?

Lott: Sure. The MPIW, as we like to call it for short, grew to about 40 to 50 companies—again, all major players in various capacities in the mobile payments group. We would meet two to three times a year, and in addition to that we would be producing white papers, educational papers—covering things such as technology standards and best practices, concerns that consumers and other stakeholders had about mobile payments, and trying to address those from an education standpoint—and also the identification of security issues, and potential solutions for that.


Heintjes: That's quite a heady mandate.

Lott: Well, it was a lot of work. The group sunset after 10 years. We finished up in January of 2021, in that we kind of felt that we had run the gamut of the effort—and as we'll talk about in just a minute, we felt mobile payments had overcome many of those barriers and challenges that we saw in the early days.

Heintjes: Right, and we will touch on more of these topics, but first, let's listen to this important message from the Atlanta Fed.


Heintjes: And we're back with Dave Lott, talking about trends in mobile payments. Dave, you have observed trends in payments closely, and as we know for a long time. What do you think took it this long for the "year of the mobile payment" to finally arrive?

Lott: I think there were a number of factors. Technology was one, the market readiness was the second—and concerns from consumers over the technology and the process for the transactions as well. We did research going back to 2012 that showed that consumers had rapidly adopted online banking services—that is, to access their accounts at their financial institution, whether it be through their desktop or even their phone or tablet. And I think many people felt that consumers were going to be just as quick to adopt mobile payments, but that was not the case. As I said, several reasons for that. First of all, the penetration of smartphones was still growing, but it was very low in those early days. The pay wallets—the Apple Pay and the Google Pay that came about in the 2014–15 timeframe—merchants were still having to go through a hardware and software upgrade of their point-of-sale equipment in their stores to be able to accept mobile payments, so that was an ongoing process. And then there was the education gap with consumers, who were concerned about the security of a payment made with a mobile phone in terms of the ability for a criminal to somehow or another intercept that transaction between the phone and the store's terminal and create unauthorized transactions. And so, that was the mission of the MPIW—to address all of those issues and help find solutions for them.

Heintjes: You've described a very robust and evolving payments ecosystem, so let me ask you: are payments, in your view, a zero-sum game? In other words, did the increase in mobile payments come at the expense of another payment that declined, or does the tide of all payments lift all boats—in this case, payment methods?

Lott: That's a fascinating question, and I think that the research has shown some mixed results. For example, if we go back to the rollout of ATMs back in the mid- to late '70s, before ATMs, if a consumer wanted to get their pocket money for the week they would either have to go into the branch and cash a check, or go to a merchant, back in the days when merchants cashed checks for consumers. And let's say that they would go in there and get $100 a week. Well, with the advent and the convenience of ATMs, now they could stop by the ATM and just pull out $20, $30 at a time. And so, with ATMs there was a multiplier effect of two to three transactions for every transaction before. With regard to mobile payments, I think it's more of a one-to-one trade-off. We have certainly seen, in some aspects—particularly transactions under $25, that previously were handled primarily by cash—with technology changes—now with vending machines, parking garages, and parking spaces being able to handle mobile transactions—you've had that transfer. For the larger dollar transactions, again, I think it's a cannibalization of payment cards, either debit or credit cards, so I think it's more of a one-to-one as opposed to a multiplier effect there.

Heintjes: Well, in following your blog and the RPRF's research, I know that you've been expecting to see this tipping point reached for some time, haven't you?

Lott: Well, I always thought that it was going to be a steady but slow increase in adoption. We jokingly talk about the proponents of mobile payments declaring "this is the year of mobile payments" going back all the way to 2015, and it's taken a little while. And I think that that increase in adoption, again, was because those issues that I identified on the front end were being addressed. From a technology standpoint, smart card penetration was extremely high, and merchants were ready to be able to accept those transactions, so when a customer went to the store, they could readily identify whether or not a mobile transaction was able to be performed, rather than just hope. And then with all the consumer education with regard to the increased security that a mobile transaction actually provides, there was a lessening of concern by consumers with regard to that. But in my personal opinion, the major factor that hindered mobile payment adoption was the convenience factor. Consumers had gotten used to paying at the point of sale with either a debit or a credit card. Whether back in the earlier days you had to swipe the card because of the magnetic stripe, or you were inserting the card once the chip was placed on the card, or today with so many contactless debit and credit cards, simply tapping the card or waving the card for those transactions—it's very, very convenient. Whereas with a mobile transaction—not that it's terribly inconvenient—but you have to unlock your phone, then you have to open up the application, then you have to verify the amount and hold your phone, make sure that it's in the right position with regard to the terminal. So, it's a little bit more difficult, I think. So I think that has been one of the hindrances. Not a horrendous process, but I don't think that it was quite as convenient as a payment card.

Heintjes: Right. Dave, could you pinpoint any one factor or change that finally brought about this tipping point in the year of mobile payments?

Lott: Well, I think there was the confluence of the solutions with regard to consumers' acceptance of new technology. But I think that the driving force, certainly over the last two years, was the COVID pandemic.

Heintjes: I thought you would say that.

Lott: Yes. I just believe that was the major factor in changing people's behavior. At the start of the pandemic, contactless payment cards had reached a very strong level of penetration. But for health reasons, people were warned about being in groups, about touching things—things of that nature. So, they liked the idea of the mobile payment with regard to that contactless aspect. Literally, the phone was in their hands, and so there was less of a wellness issue there.

Heintjes: Dave, the Federal Reserve conducts a Survey and Diary of Consumer Payment Choice—which, as the name would suggest, summarizes consumer payments, how they‘re made, the amounts, and so forth. What did it show in 2021 that caught your attention—or was it maybe an outlier in some way from previous surveys and diaries?

Lott: Well, the Survey and the Diary of Consumer Payment Choice is one of the major research projects that our group oversees. We have support from the Cash Product Office at the San Francisco Fed, as well as from staff at the Board of Governors. But the project is conducted every October, and it tracks the share of payments made by consumers, no matter what payment method—cash, check, debit, credit card or other payment methods. And it's been tracking the share of mobile payments made by consumers since 2015. Just to give you an idea of that change in growth rate there: back in 2015, our research showed that 25 percent—one quarter—of the respondents to the survey indicated that they had made at least one mobile payment over the last 12 months. In 2019, four years later, that had jumped to 37 percent, a little bit over a third of the respondents. But the following year, in 2020, the share had increased to 46 percent, just under half. And in October 2021, it reached what I call the tipping point: 68 percent. Just over two-thirds of the respondents indicated that they had made a mobile payment.

Heintjes: Wow. Well, I should note that this episode of the podcast is not about the Survey and Diary of Consumer Payment Choice—really, that deserves its own episode. But can you briefly tell us what it does and what it shows us, and how it might inform the work we do at the Bank?

Lott: This research is critical to our understanding, and the understanding of all the stakeholders in the payments industry, with regard to changes in consumer payments behavior, so that they can adjust their strategy to deal with that. One of the unique aspects of the diary is that it's the only nationally representative survey that tracks the use of cash. There are other surveys out there that look at debit and credit and ACH and check usage, but not cash—so this is very critical in capturing cash usage as part of a consumer's overall payment methods. It's a nationally representative sample, as I indicated. Approximately 4,100 respondents participated in the October 2021 survey. The participants are randomly selected using best practices for that selection, so that even people who do not have an online presence are still included in the survey. And we've already started work on the analysis of the October 2022 survey data.

Heintjes: Very good. Dave, we touched on this before but I'm going to drill a little bit more deeply into the question. Do you see this rise in mobile payments as having legs as we gradually re-enter the way it was before COVID, or do we need more time before we can make this sort of pronouncement? I realize I'm asking you to look into a crystal ball here.

Lott: That's the million-dollar question. As we've discussed, we have already seen dramatic changes in consumer payment behavior, driven primarily by the pandemic. The prime example has been the major shift that has occurred between in-store purchases versus the movement over to e-commerce—or online shopping, and purchases there. In the early days of COVID, that was expected because the physical stores were either shuttered or they were operating under reduced operating hours. Again, consumers were warned not to be in large gatherings and groups, so it was just natural that if they wanted to purchase things they would have to move over to the digital channel. So, the question has always been whether or not that behavior was going to stay. I think it's still too early to tell. We've seen some mixed results. One example is that online shopping in the food services business has continued to increase, albeit not at the same level of increases experienced in the early days of the pandemic. But delivery services have decreased—again, I think because people, one, are avoiding the fees associated with delivery services, as well as they're more comfortable now going to the curbside or going in the store to pick up their delivery. So, we've seen some bounce back in the in-person shopping. But then you look at the holiday sales, both during Thanksgiving and the Christmas period of time. Digital sales/e-commerce/online sales set records again, so there's still that very strong usage there. Again, in my personal opinion, elements of the COVID pandemic caused the pendulum to swing widely to one side, and it's started to come back. But again, the question is, how far is it going to come back? I don't think it's going to go back to where it was. I think that with online shopping, consumers have seen that level of convenience that it provides and they're going to continue to utilize that. The consumer penetration and security concerns that I've mentioned have pretty much gone away. I don't know how many people there are like me. My colleague Claire Greene keeps reminding me I'm a sample of one, so I don't know how many people that there are like me that view the payment card—credit or debit—as being more convenient than a mobile phone. We know from the research, again, that there's certain segments of the population—particularly younger people—that love utilizing their smartphone for pretty much everything, and they are very strong payment adopters there. So it's something that we will continue to research and look at through the consumer diary work, as well as other research projects.

Heintjes: Well, Dave, this has been a great conversation, and I really do appreciate your spending time with us today. I know you're retiring from the Bank soon, so I want to especially thank you for spending some of your remaining time with the Bank and the Retail Payments Risk Forum with us today, and I wish you the best in your retirement.

Lott: Thanks so much. It's been my pleasure.

Heintjes: And I encourage our audience to read the full report on the Survey and Diary of Consumer Payment Choice to better understand the trends of consumer payment behavior that Dave has been discussing today and how those trends have changed. And that brings us to the end of another episode of the Economy Matters podcast. Again, I'm Tom Heintjes, managing editor of Economy Matters magazine, and I hope you'll check out Economy Matters, as well as the entire Atlanta Fed website, at atlantafed.org. Thanks for spending time with us today, and let's get together again next month.