Welcome » IT Booklets » Retail Payment Systems » Retail Payment Systems Overview
Retail payments usually involve transactions between two
consumers, between consumers and businesses, or between two
businesses. Wholesale payments are typically made between
businesses. Although there is no definitive division between
retail and wholesale payments, retail payment systems generally
have higher transaction volumes and lower average dollar values
than wholesale payment systems. This section provides
background information on payments typically classified as retail
payments. The following are examples of typical retail
payments. These retail payments may involve the use of
various retail payment instruments or access devices (e.g., checks,
ACH, card, phones, etc.).
Purchase of Goods and
Services-Purchase of goods and services can occur at
the point-of-sale (POS) (e.g., in person at a merchant location,
through the Internet, or by telephone). These payments
include attended POS payment transactions for goods or services,
such as with traditional retailers, and unattended payment
transactions, as with vending machines. Increasingly,
traditional retailers such as grocers and home improvement stores
are using unattended payment systems at the POS as well. As
technology advances, the consumer can purchase goods and services
remotely without physical presence at the POS, such as via the
Internet or a telephone/mobile phone. Payment instruments for
retail purchases of goods and services have expanded beyond
traditional vehicles (i.e., cash, checks, and credit and debit
cards) to prepaid cards, contactless debit and credit cards, and
other contactless devices such as key fobs, mobile phones. In
addition, merchants may convert checks to electronic form at the
POS, and use the ACH system for clearing and settlement.
Bill Payment-Consumers may elect to
pay (or provide payment instructions for) recurring or nonrecurring
bills and invoices via electronic bill payment. A particular
biller's periodic recurring invoices can be electronically paid
individually or set up to be paid automatically to a payment
schedule. In recent years, there has been a growing trend
toward payment of recurring and nonrecurring bills using
Internet-based bill payment services.
P2P Payments-The vast majority of
consumer-to-consumer payments are conducted with checks and cash,
with some transactions using electronic P2P payment systems.
The expansion of systems that permit customers to conduct P2P
payments is anticipated through account-to-account (A2A) transfers,
which use either the ACH or Automated Teller Machine (ATM) networks
for movement of funds.
A2A Payments-With A2A payments, the
consumer moves funds from his or her account at a financial
institution to the account of another individual or business at the
same or a different financial institution. The emerging use
of the ATM networks for movement of funds may allow same day
availability of funds at a cost far less than traditional wire
Cash Withdrawals and
Advances-Consumers use retail payment instruments to
obtain cash from merchants or ATMs. For example, consumers
can use a credit card to obtain a cash advance through an ATM or an
ATM or debit card to withdraw cash from an existing account.
Consumers can also use personal identification number (PIN)-based
debit cards to withdraw cash at an ATM or receive cash back at some
Retail payment systems continue to evolve with advances in
technology. These advances enable financial institutions to
develop new products and services, lower the barriers to business
entry for smaller institutions, and exploit economies of scale.
Recent changes in payments technology have influenced three
important trends in retail payments. First, as firms seek
economies of scale, the banking industry has witnessed the rapid
consolidation of retail payment service providers, credit issuers,
merchant acquirers, processing companies, and check
processors. As a result, some small and mid-sized financial
institutions have exited the business and outsourced certain
functions of the retail payments process to larger financial and
non-financial institutions. Nonbanks, in particular, are
assuming more roles in retail payment systems such as the clearing
and settlement payment functions and the issuance and processing of
electronic payment cards and other devices.
The second trend is the shift from paper to electronic payments
as technology has converged with the change in consumers' and
merchants' preferences for convenient and low cost payment
alternatives. The most significant growth is seen in debit
and prepaid cards (stored value cards), followed by the increased
use of Internet services like online banking and bill pay.
The volume of checks and cash payments continues to decrease, with
cash usage declining at a much slower rate. The emergence of
new electronic payment vehicles in the U.S. is anticipated as they
are adopted in the global market.
Use of automated bill pay is a third important trend.
Although consumers traditionally used checks for a large portion of
bill payments in the U.S., direct bill payment through the ACH
system are increasingly popular. More recently, retail firms
have used check-to-ACH conversion processes to allow electronic
settlement, thereby reducing the number of checks that flow through
the payment system.
International retail payments are relatively new in the ACH
industry and are largely driven by businesses and consumers seeking
cost reductions for funds transfers across borders. Several
financial institutions maintain their own proprietary systems, and
more recently the Reserve Banks began offering FedACH International
Services. FedACH International provides a means of
transmitting funds between the U.S. and other countries using NACHA
- The Electronic Payments Association (NACHA) rules. NACHA is the body that establishes the rules and
procedures governing the exchange of automated clearinghouse
Beginning September 18, 2009, a new Standard Entry Class (SEC)
code became effective that is expected to facilitate compliance due
diligence with the use of the ACH system for international
payments. The International ACH Transaction SEC code (IAT)
will enable financial institutions to identify international ACH
payments and perform the due diligence required by the U.S. Office
of Foreign Assets Control.
Consumer and merchant acceptance of all the technological
changes has been vital to the success of emerging retail payment
systems and products. Consumers have shown willingness to
accept new retail payment technologies more quickly because of the
convenience afforded by these new services.