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 transfer systems.
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 POS locations.
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 payments.
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.
Payment Instruments, Clearing, and Settlement