Covid-19 caused clear shifts in payments preferences, changes that continue to reverberate through both banking and the world of nonbank payments providers. The most recent Federal Reserve Payments Study, delving deeply into data from 2019 and 2020, shows clear evidence that the pandemic jump-started migration from traditional forms of payments to a myriad of remote and innovative forms of payments.
Two years into the Covid-19 era, the data shows consumers rapidly changed their behavior regarding noncash payments, with ACH transactions spiking upward, in-person card payments dipping, remote card payments increasing, and heretofore niche payment methods gaining wider acceptance.
Unlike most surveys that ask consumers and businesses what they might do, the Fed report is based on actual usage data from a group of large financial institutions as well as a more wide-ranging group of banks. That’s significant because people often say they will do such and such, but then when push comes to shove, they revert to existing habits.
Forward looking surveys are useful, however, as a leading indicator. Several that we looked at for this article indicate that the payment trends identified by Fed have continued and, in some cases accelerated.
With so many familiar routines upended, consumers found other ways to pay without personally interacting
“In 2020, the first year of the global pandemic, consumers and businesses adjusted their mix of card, ACH, and check payments in ways that are notable and that suggests some clear connections to the unfolding public health situation,” the Fed report concludes. It goes on to say that “although some of the changes observed in 2020 were at least partly a continuation of longer-term trends, the data show some early evidence of stronger behavioral shifts that may persist.”
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ACH Was a Clear Winner
Fed data shows that ACH was the only payment and settlement system among the three noncash payments categories that grew in both share and number in the 2018-2019 and 2019-2020 periods. By number, ACH grew .30 percentage points in 2018-2019, and 1.38 percentage points in 2019-2020. By share, the increases were steeper: 1.11 points in the first period, and 2.45 points in the second period.
“In 2020, many businesses and individuals turned to the ACH network to send and receive payments because of pandemic-related disruptions,” said Jane Larimer, president and CEO, Nacha, in a statement commenting on the Fed study. She cited a 12% increase in direct deposit payments, a 15% increase in internet-initiated consumer bill-pay payments, and a 10.7% increase in business-to-business payments in 2020.
Shot in the Arm:
Direct deposit, stimulus checks and bill payments all gave ACH a big boost.
“This momentum continued in 2021,” she said. “Through the third quarter of last year , there were 21.7 billion ACH payments, an increase of 9.6% compared to the same period of 2020. This growth included a dramatic 73% increase in Same Day ACH payment volume.”
Notably, Larimer announced that the Same Day ACH limit will increase from the current $100,000 to $1 million in March 2022.
Read More: Where P2P Payments are Heading
Mixed Picture for Card Payments
The total number of card payments increased 7.8 billion from 2018 to 2019, but then declined 3 billion in 2020 — the first such annual decline observed in two decades of the Fed collecting such data. However, the average value of card payments correspondingly increased from 2019 to 2020, due to consumers bundling more goods or services into fewer payments as part of reducing in-person shopping trips.
For the first time in two decades, card transactions declined, despite a huge bump in remote-card use.
Nevertheless, card payments account for a much lower proportion of transaction value compared to ACH and check payments, but are still predominant in terms of the number of transactions despite the overall decline in 2020.
“The arrival of the pandemic in 2020 … ushered in an unprecedented shift from in-person to remote card payments,” the Fed study says. From 2019 to 2020, the number of in-person payments declined 11.7 billion, while the number of remote card payments increased 8.7 billion — the largest one-year increase seen by the Fed in this series of studies.
E-commerce by far was the dominant contributor to the growth in remote card payments from 2019 to 2020, having increased 7.2 billion by number and $0.37 trillion by value over the period. “As a result, in 2020, e-commerce comprised more than two-thirds (67.67%) of remote card payments by number and 59.16% by value, compared with 63.96% and 54.78%, respectively, in 2019,” the study says.
New Payment Methods Take Hold
As the pandemic progressed through 2020 the Fed study confirmed that it helped to spur growth of innovative payments methods, such as contactless card, digital wallet, and P2P payments.
For example, first-time use of digital wallets was highest in the third quarter 2020, when some restrictions on in-person shopping were lifted. “When used with a mobile device, a digital wallet provides a low-touch option for in-person card payments,” the study points out.
To put that in perspective, digital wallet payments are still a small fraction of the larger card category, but they are growing. By 2020, as a share of all credit and non-prepaid debit card payments, digital wallet payments reached 2.6% by number and 1.47% by value, up from 0.50% and 0.23%, respectively, in 2017.
A deeper look at the data shows digital wallet payments climbing about twice as fast from 2019 to 2020, than from 2018 to 2019.
A Reason, At Last:
Digital wallet use, lagging for years, climbed rapidly as consumers looked for alternative ways to pay.
In another example, first-time use of bank-sponsored P2P payments spiked in the first full quarter of the pandemic — a time of business closures and stay-at-home orders. Early in 2020, the number of accounts with first-time P2P activity surged by 17.99% from the first quarter to the second quarter, just as the number of accounts with activity rose at the high rate of 112.44% over the period.
“A potential explanation is that when the shock of the pandemic was most acute, individuals adopted P2P to pay others remotely, perhaps as they sought ways to avoid the need for exchanging cash or checks,” the study says.
What Do the Trends Look Like Going Forward?
As technology continues to mature and consumers evolve their payments preferences, the hands-off nature of paying for goods and services appears to have not only continued, but increased in some instances.
As one example, Fiserv that found 68% of the 3,000 consumers it surveyed in August 2021 have used a digital wallet in the past 12 months, compared to 58% in 2020, and 51% in 2019. Although not directly comparable, still those figures are an order of magnitude higher than the data reported by the Fed through 2020, so it will be interesting to see if there is a sharp uptick in digital wallet transactions in the next Fed report. Clearly, though, the trend is up.
Meanwhile the increasing access to P2P services has raised consumer awareness — and desire for — rapid and even instant payments. In the second quarter of 2021, Insider Intelligence forecasted that Zelle would have 35.6 million users by the end of 2021, Venmo would have 77.8 million and Cash App would have 39.7 million.
Instant payments, also known as real-time payments, have become increasingly desirable. A separate Federal Reserve survey of 2,000 businesses in mid-2021 found that three of every four now consider it important to offer faster payments, and nine in ten expect to be able to make and receive faster payments within three years, including instant payments.
The Fed’s entry into real time payments, FedNow, is expected to launch in 2023, joining the fray with RTP, the real time payment service offered for several years by The Clearing House.
“Businesses’ appetite for faster payments has clearly accelerated due to growing acceptance of digital commerce during the pandemic,” said Shonda Clay, chief of customer and industry engagement at the Federal Reserve.
There surely will be more to come on this subject. A parting message in the Fed’s study promises “a triennial survey for 2021” to help determine whether the shifts identified in 2019 and 2020 “will continue in the long run.”