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The Way We Pay in America – Most Popular Payment Methods, Federal Reserve Payments Study 2010


What’s the first thing you look for when you get to the cash register and dig into your purse or pull out your wallet? Are you still writing personal checks, do you whip out a plastic card, or is it cold hard cash?

If you’re like the majority of Americans, you probably pay with some type of electronic payment. According the Federal Reserve, more than three-quarters of all non-cash payments are now electronic. That includes credit, debit, prepaid cards, ATM and Automated Clearing House (ACH) payments.

That information comes from a study the Federal Reserve conducts every three years to track the way we pay in America. Initial findings from the latest study, which was conducted between 2006 and 2009, were released in December 2010. By looking at the results of the study, you can see our habits as consumers and where things are heading in the future in terms of how we pay.

Below is the breakdown of non-cash spending in 2009:

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noncash payment spending breakdown

Debit Cards

The debit card was a big winner in this study. For the first time since the Fed started tracking payment trends, debit cards surpassed checks as the most used non-cash payment option in America. Debit card usage increased by 14.8% per year over the course of the study and accounts for nearly 35% of all non-cash payments. That represents an annual increase of 12.8 billion transactions from the last study, which was released in 2007.

Number of Debit Card Payments by Type (billions)

debit card usage

It’s easy to see the benefits of using a debit card to pay. You’ve got all the convenience of a credit card, but you’re using the money that’s actually in your bank account, not getting into debt. Plus, you get identity theft protection when using your debit card. When the recession hit, many of us started using debit cards more often.

As we focused on paying down our credit card debt, more Americans said no to credit cards and attempted to live within their means. For more, read up on the difference between credit cards vs debit cards.

What the Future Holds for Debit Cards

Future Holds Debit Card

The debit card could have some problems maintaining its double digit growth. It’s all because of a couple new rules that mean big changes for the banking industry.

The first concerns bank overdraft fees. In August of 2010, all financial institutions were required to start asking customers if they wanted to opt-in to overdraft protection on everyday use of their debit and ATM cards. If you refused overdraft protection, your card would simply be declined at the point of purchase, but if you accepted the protection, your bank would cover the cost and charge you an overdraft fee.

According to the Government Accountability Office, the amount banks collected from overdraft fees jumped nearly 50% over the last decade. It’s estimated that financial institutions collected $38.5 billion in overdraft fees in 2009 alone.

The other big change hasn’t been put into place just yet, but the banking industry is already bracing for its impact.

Last month, the Federal Reserve proposed slashing debit interchange fees by as much as 90%. Interchange fees, or swipe fees, are what credit card companies charge merchants every time a consumer decides to pay with plastic. That money is passed on to banks, which issue debit cards backed by Visa, MasterCard and others.

The Fed wants to cap debit swipe fees at a maximum of 12-cents per purchase. That’s good news for merchants, but bad news for banks. The advocacy group, Consumers for Competitive Choice, estimates banks collected around $48 billion in overdraft fees in 2008 alone.

So it’s obvious that banks and credit unions will lose a huge source of revenue because of these new rules. They’re going to have to make up that money somewhere – and like it or not, it’s probably going to come from you.

The rules are meant to help people like us. You wouldn’t want to pay a $25 overdraft fee on a $5 purchase with your debit card, and lower interchange fees could lead to lower prices for consumer. But there’s another side to this story.

You can expect to see higher fees and new fees connected to your checking account and your debit card. BankRate’s 2010 checking study indicates the number of fee-free checking accounts in the U.S. is already dwindling – dropping from 76% of accounts in 2009 to 65% this past year. It’s the first time since 2003 that there’s been a decline in free checking accounts. Some of the ones we recommend are ING Direct, Ally Bank, and PerkStreet Financial.

If you have a debit card that offers rewards, it’s also likely you’ll see those disappear. Some of the most negative predictions include the possibility that banks may charge you every time you use your debit card since they can no longer charge merchants as much.

Credit Cards

credit card receipts

The results of the Federal Reserve study weren’t so positive for the credit card. They were the only form of electronic payment that actually saw a decline during the period. However, at just -0.2% per year, the decline was relatively small. The 21.6 billion credit card payments made in 2009 represented a drop of about 151 million payments from 2006.

But you have to wonder why credit card use shrank while debit card use skyrocketed in the last three years. The Fed study attributes the shrinkage to the nation’s economic troubles. “This decline in credit card usage may reflect the economic recession and may not represent permanent changes in the financial behavior of consumers and businesses.”

Plus, you have to remember that during the credit crisis of the Great Recession – while consumers were less likely to use their Visa or MasterCard – the credit card companies were also less likely to extend credit to consumers with a questionable financial history.

What the Future Holds for Credit Cards

TransUnion recently reported that 8 million Americans stopped using their credit cards in 2010. The Federal Reserve’s study only tracked payment trends through 2009, so if the trend of ditching credit cards continues, the plastic payment method could continue to decline.

Similar to the debit card, credit card issuers also had to deal with new rules and restrictions in 2010. The Credit Card Accountability Responsibility and Disclosure Act of 2009, aka the CARD Act, puts a $25 limit on late fees, requires a review of any interest rate hike after 6 months, and includes other changes that were designed to benefit credit card holders.

But many feel that because of the changes, credit card companies have raised interest rates and created new credit card fees for many consumers in order to make up for lost profits.

You’ve probably heard a few news stories about how Americans are actively paying down their debt. The Fed’s report states that “consumer revolving debt in the United States increased in every month from January 2006 to its peek (sic) in August 2008 before declining in every subsequent month through September 2010.”

However, the picture isn’t quite as positive as it appears. Instead of actually eliminating their debt, many Americans are simply defaulting on it. reports that outstanding credit card debt dropped by about $93.2 billion dollars in 2009. Yet $81.6 billion of that was eliminated due to default. That means the amount of debt Americans actually paid down was only $11.6 billion.

Many financial experts are predicting that as the US economy improves, and consumers grow tired of trying to be frugal, people will return to using credit cards.


Credit Cards Positivity

Debit cards knocked checks off the throne in this study even though the paper payment was the most used non-cash payment option for many years. However, the decline in check usage was no big surprise to financial experts.

The number of both personal checks and business checks used to make payments declined by 7.2% per year. Analysts were expecting a decline between 5% and 10%. So while it wasn’t good news for checks, it wasn’t unexpected either.

Even with the decline, the Federal Reserve estimates there are still 24.4 billion checks written in the U.S. every year. While the biggest decline in check writing came from the number of checks written by individuals to businesses (10.6%), checks written from person to person actually increased by 3% per year and checks written between businesses only decreased by 2%.

What the Future Holds for Checks

You can’t deny the fact that check usage will continue to decline in the U.S. as time goes on. We are living in an increasingly paperless society. In the U.K. for example, checks (or cheques as they call them across the pond) will be phased out by 2018.

More and more of us are using online bill pay, and mobile banking will continue to gain popularity. But checks may take longer to go the way of the dinosaur than you’d expect.

Here in the U.S., a law called Check 21 has made it much easier for financial institutions to process and clear checks electronically. The use of electronic check processing more than doubled since the last Fed study. Just 43% of checks were cleared electronically in 2007 compared to a whopping 96% in 2009. That’s made the use of checks much more efficient for everyone involved.

Plus, many mobile banking applications for smart phones now allow consumers to deposit checks using the cameras on their phones. It’s obvious there is still a demand for paper checks.

Yet you have to admit that everywhere you go there are “No Checks Accepted” signs hanging in store windows. The bells are tolling for personal checks. Sooner or later they will become a thing of the past.

ATM and Prepaid Cards

Writing Knocked Checks

The fastest growing type of non-cash payment in America is the prepaid card.

The use of prepaid cards grew by 21.5% per year between 2006 and 2009. But the payment option still represents a small percentage of all non-cash payments.

ATM withdrawals increased by less than 1% each year, and the average withdrawal also increased modestly from $100 to $106.

What the Future Holds for ATM and Prepaid Cards

Prepaid cards have the more interesting story here. The allure of these cards is that you can load them with funds and use them like a credit or debit card without worrying about falling into debt or bouncing checks.

Many prepaid cards are targeted toward teens and young adults. It’s a way for them to have plastic payment option without having a credit card or checking account.

But fees connected to prepaid cards could still be an issue. If you aren’t careful, you might be surprised by charges for activation, monthly usage fees, fees to reload the card with money and more.

Some say banks may use prepaid cards as yet another way to make up for lost revenue from fewer overdraft fees and lower debit card swipe fees. You can expect to see charges for using out-of-network ATMs to jump in coming months as well.

What it All Means to You

Thankfully, you don’t have to pick your pony. Unless for some reason you are unable to get a credit card or checking account, you should be able to use whatever form of payment you want.

What’s important is that you stay educated. Each type of payment method has its own list of benefits and risks. For instance, security features on credit cards make it a better choice for shopping online than debit cards. Merchants are not charged any interchange fees when you use personal checks. But if you’re putting checks in the mailbox to pay your bills, you’re taking a bit of a risk. Checks can be stolen and used to commit identity theft and fraud.

How you spend your hard-earned money is your choice. Just keep informed by reading helpful blogs like Money Crashers, spend responsibly, invest wisely and don’t forget to wash behind your ears!

Kasey Steinbrinck is a writer for Check Advantage, an online printer of personal checks and business checks. Previously, Kasey worked as a TV news producer, as an entertainment reporter at a newspaper and as a producer of nationally syndicated radio. He regularly writes for various blogs on personal finance, the economy and small business marketing.