Information Technology and American Business - It And Currency

IT has not just changed how people pay for merchandise, but also how people make and receive payments in general. Credit cards, debit cards, electronic bank transfers, and online banking have eliminated much of the need to carry cash and personal checks. In The Future of Banking in America: The Effect on U.S. Banking of Payment System Changes (Washington, DC: FDIC, 2004), Neil B. Murphy reported that nearly 88% of households in the United States used some from of electronic payment. The advantages of a cashless system are undeniable. With credit cards and debit cards people always have buying power at their disposal, they can make purchases instantly, and they can access and transfer money online. Banks and businesses are no longer required to spend money moving paper bills and checks all over the country. Store owners do not have to worry about the security risks inherent with keeping large amounts of cash on hand.

Credit and Debit Cards

The most firmly established of these electronic payment methods is the credit card. The first general purpose credit card was issued in 1950 by Diners Club. This credit card allowed restaurant patrons in Manhattan to charge a meal at any restaurant that participated in the program. While credit card use has increased almost every year since then, credit card transactions took place entirely on paper at first, which kept some people away. In the 1980s a computerized, networked credit card system was put into place using modems and other networking technologies. Credit card use skyrocketed. In his report for the FDIC, Murphy estimated that in 2004 there were more than 1.2 billion credit cards in the United States. A little under half of these (552 million) were issued directly by retailers (for example, Banana Republic or J.C. Penney). The rest were issued by banks or as travel and entertainment cards. Murphy reported that between 1997 and 2001 the number of credit card transactions grew from 12.9 million to seventeen million.

A U.S. Census survey of credit card holders painted a slightly different picture. As can be seen in Table 3.10, the U.S. Census Bureau counted 1.4 billion credit cards in the United States in 2002. They projected that this number was likely to drop a little by 2005. As to annual spending, $1.6 trillion was spent using credit cards in 2002, and this number was projected to increase to $2 trillion by 2005. Table 3.11 shows credit card use by age and income, and provides information on median account charges, balances, and payments.

Since their introduction into the U.S. market in the early 1990s, debit cards have also become a very popular method of payment for most Americans. Debit cards, unlike credit cards, automatically remove existing money from a money market or bank account when used. The person paying does not owe money after the transaction. Debit cards grew out of the ATM system that became widespread in the early 1980s. Some ATM networks such as Cirrus, which were originally constructed to allow bank cards access to ATMs at multiple banks, expanded their networks to grocery stores and select mainstream retail stores such as Wal-Mart. Customers could then use their ATM cards to buy groceries or merchandise at the register without first having to get cash at a machine. When this debit card system appeared as if it might become widely used in many venues, VISA and MasterCard

TABLE 3.10

Credit card use, 2000 and 2002, and projections, 2005
[159 represents 159,000,000]
	Cardholders (mil.)			Number of cards (mil.)			Credit card spending (bil. dol.)			Credit card debt outstanding (bil. dol.)
Type of credit card	2000	2002	2005, proj.	2000	2002	2005, proj.	2000	2002	2005, proj.	2000	2002	2005, proj.
1Cardholders may hold more than one type of card.
2Visa and MasterCard credit cards. Excludes debit cards.
3Includes Universal Air Travel Plan (UATP), automobile rental, and miscellaneous cards. Except for cardholders, also includes Discover, American Express, and Diners Club.
SOURCE: "No. 1190. Credit Cards—Holders, Numbers, Spending, and Debt, 2000 and 2002, and Projections, 2005," in Statistical Abstract of the United States: 2003, U.S. Census Bureau, Economics and Statistics Administration, U.S. Department of Commerce, 2003, http://www.census.gov/prod/2004pubs/03statab/banking.pdf (accessed November 11, 2004)
Total1	159	163	173	1,425	1,452	1,430	1,458	1,638	2,022	680	764	922
Bank2	107	112	120	455	525	580	938	1,095	1,359	480	560	683
Phone	125	126	128	181	182	184	21	20	22	3	2	3
Store	114	115	118	597	547	464	120	127	147	92	91	97
Oil company	76	75	73	98	97	90	50	54	71	5	5	7
Other3	7	7	7	94	100	111	330	342	423	101	105	133

TABLE 3.11

Use of general purpose credit cards by families, 1992–2001
[General purpose credit cards include Mastercard, Visa, Optima, and Discover cards. Excludes cards used only for business purposes. All dollar figures are given in constant 2001 dollars based on consumer price index data as published by U.S. Bureau of Labor Statistics. Families include one-person units.]
			Median new charges on last month's bills (dol.)	Percent having a balance after last month's bills		Percent of cardholding families who—
Age of family head and family income	Percent having a general purpose credit card	Median number of cards			Median balance* (dol.)	Almost always pay off the balance	Sometimes pay off the balance	Hardly ever pay off the balance
— Represents zero.
*Among families having a balance.
SOURCE: "No. 1191. Usage of General Purpose Credit Cards by Families: 1992 to 2001," in Statistical Abstract of the United States: 2003, U.S. Census Bureau, Economics and Statistics Administration, U.S. Department of Commerce, 2003, http://www.census.gov/prod/2004pubs/03statab/banking.pdf (accessed November 11, 2004)
1992, total	62.4	2	100	52.6	1,200	53.0	19.6	27.4
1995, total	66.5	2	200	56.0	1,700	52.4	20.1	27.5
1998, total	67.5	2	200	54.7	2,000	53.8	19.3	26.9
2001, total	72.7	2	200	53.7	1,800	55.3	19.1	25.6
Under 35 years old	64.2	2	100	68.2	1,800	40.6	24.1	35.4
35 to 44 years old	76.9	2	200	62.9	2,000	47.0	22.8	30.2
45 to 54 years old	80.0	2	200	57.3	2,000	54.3	19.3	26.4
55 to 64 years old	76.0	2	300	48.2	2,000	59.8	17.8	22.3
65 to 74 years old	76.5	2	200	30.0	1,100	75.8	11.0	13.2
75 years old and over	59.7	2	200	24.2	700	81.2	9.3.0	9.4
Less than $10,000	28.5	1	—	67.4	1,000	45.3	23.0	31.7
$10,000 to $24,999	56.1	2	100	57.0	1,000	49.5	19.9	30.6
$25,000 to $49,999	76.1	2	100	61.3	1,700	46.7	19.7	33.6
$50,000 to $99,999	87.9	2	200	53.9	2,000	55.2	20.8	24.0
$100,000 and more	95.8	2	1,000	36.1	3,000	75.2	13.9	10.9

went into the business and opened up their extensive networks to banks and debit card users. Since 1995 the use of debit cards has grown at a rapid pace. According to Murphy in The Future of Banking in America: The Effect on U.S. Banking of Payment System Changes, from 1995 to 2001 the percentage of American households with a debit card grew from 17.6% to 47%. In 1995 there were 1.4 billion debit card transactions. Table 3.12 shows that this number jumped to 8.3 billion in 2000 and 13.3 billion by 2002. In 2005 the number of debit card transactions was expected to be 22.7 billion, which was just two billion shy of the projections for credit card transactions.

Electronic Transfer of Money

Another type of paperless monetary transaction that has grown in popularity is the electronic transfer of money, formally known as the automated clearing house (ACH) system. Electronic transfer is an electronic form of the checking system. When making an ACH transaction,

TABLE 3.12

Consumer payment systems by method of payment, 2000 and 2002, and projections, 2005
[112.3 represents 112,300,000,000]
	Transactions					Volume
	Number (bil.)			Percent distribution		Amount (bil. dol.)			Percent distribution
Method of payment	2000	2002	2005, proj.	2000	2005, proj.	2000	2002	2005, proj.	2000	2005, proj.
1Excludes consumer check repayments and prepayments involving other payment systems as well as all commercial and government checks.
2Official checks include cashier's checks, teller checks, and certified checks purchased from financial institutions. Excludes those purchased by businesses.
3Credit cards include general purpose cards usable at all kinds of merchants and proprietary cards usable only at selected outlets. Includes some purchases on personal cards for government, commercial, and business-related spending. Cash advances are excluded.
4Debit cards include general purpose cards carrying the Visa or MasterCard brand, electronic funds transfer (EFT) brands of regional EFT systems, proprietary commercial cards issued by private firms to drivers in the long-haul trucking and business aviation industry, and proprietary consumer cards issued by supermarkets. Cash withdrawals at ATMs and cash back over the counter are excluded.
5Stored value cards are used primarily for gift certificates and telephone calls.
6Electronic benefits transfer cards are replacements for paper script food stamps.
7Preauthorized payments are handled electronically "end-to-end" through an automated clearing house.
8Remote payments are made using a telephone or a computer and include point-of-sale check conversions and utility-bill payments made at ATMs, self-service clerk-assisted electronic banking machines kiosks and clerk-assisted machines at supermarkets.
SOURCE: "No. 1187. Consumer Payment Systems by Method of Payment, 2000 and 2002, and Projections, 2005," in Statistical Abstract of the United States: 2003, U.S. Census Bureau, Economics and Statistics Administration, U.S. Department of Commerce, 2003, http://www.census.gov/prod/2004pubs/03statab/banking.pdf (accessed November 11, 2004)
Total	112.3	120.7	132.4	100.0	100.0	5,183	5,660	6,465	100.0	100.0
Paper	80.2	80.7	76.0	71.5	57.4	3,371	3,439	3,180	65.0	49.2
Direct check payments1	30.2	29.5	28.2	26.9	21.3	2,276	2,206	2,081	43.9	32.2
Cash	48.8	49.9	46.4	43.5	35.0	978	1,103	947	18.9	14.6
Money orders	0.9	1.0	1.1	0.8	0.9	82	94	114	1.6	1.8
Travelers cheques	0.2	0.2	0.2	0.2	0.1	13	12	12	0.3	0.2
Official checks2	0.1	0.1	0.1	0.1	0.1	22	23	26	0.4	0.4
Cards	30.0	37.0	50.2	26.7	37.9	1,593	1,904	2,570	30.7	39.7
Credit cards3	19.9	21.2	24.4	17.7	18.5	1,238	1,361	1,683	23.9	26.0
Debit cards4	8.3	13.3	22.7	7.4	7.1	309	477	801	6.0	12.4
Stored value cards5	1.3	1.8	2.0	1.1	1.5	31	48	59	0.6	0.9
EBT cards and food stamps6	0.6	0.7	1.0	0.5	0.8	15	18	27	0.3	0.4
Electronic	2.1	2.9	6.3	1.8	4.7	219	317	715	4.2	11.1
Preauthorized payments7	1.5	2.0	3.2	1.4	2.5	166	229	379	3.2	5.9
Remote payments8	0.5	0.9	3.0	0.5	2.3	53	88	337	1.0	5.2

the person or business with the checking account provides the account and routing number to another party along with the authorization to wire money directly into or out of an account. For the most part, large corporations employ this method of payment and receipt more extensively than individual households. In his FDIC report Murphy noted that 97% of large corporations use the ACH system extensively, largely for business-to-business transactions involving substantial amounts of money.

Most individual households typically use ACH to receive regular salary or Social Security payments and to make regular monthly payments. According to Murphy, 3.8 billion direct deposit payments were made into individual accounts in 2002, and the number of direct payments by consumers topped 2.8 billion, which was a 10.1% increase from 2001. Table 3.13 displays the percentage of households that took advantage of direct deposit and automatic bill paying in 1995 and 2001. Over those six years the percentage of households using direct deposit increased from 46.8% to 67.3%, and the percentage of households using ACH for paying bills increased from 21.8% to 40.3%. Many adults also receive their tax returns through an electronic payment method. In 2004 more than sixty million tax returns were filed over the Internet either from home or through a tax preparer such as H&R Block. When the tax return is sent via Internet, the Internal Revenue Service (IRS) provides the option of either paying taxes or receiving taxes directly through a personal bank account, using the Electronic Federal Tax Payment System (EFTPS).

Despite all the electronic transfers that take place in and out of bank accounts each year, Americans still write a staggering number of checks. Murphy reported in The Future of Banking in America that in 2001 144.6 checks were written per person in the United States, which amounts to 41.2 billion checks total. While this number decreased from 42.5 billion in 2000, Americans still wrote significantly more checks than other industrial nations. (France was second to the United States, with 71.2 checks per capita, but countries such as Belgium, Germany, Italy, the Netherlands, Sweden, and Switzerland counted fewer than ten checks per person in 2001.) Since the cost of creating, mailing, and handling so many paper checks is enormous, the U.S. government has made efforts to reduce the number of paper checks in the system. Early in 2003 the Federal Reserve reduced what it

TABLE 3.13

Households that use selected payment instruments, 1995 and 2001
[In percent. Based on Survey of Consumer Finance conducted by the Board of Governors of the Federal Reserve System.]
	Any of these instruments		ATM*		Debit card		Direct deposit		Automatic bill paying		Smart card*
Age and education	1995	2001	1995	2001	1995	2001	1995	2001	1995	2001	1995	2001
*The questions on ATMs and smart cards asked whether any member of the household had an ATM card or a smart card, not whether the member used it. The other questions asked about usage.
SOURCE: "No 1186. Percent of U.S. Households That Use Selected Payment Instruments: 1995 and 2001," in Statistical Abstract of the United States: 2003, U.S. Census Bureau, Economics and Statistics Administration, U.S. Department of Commerce, 2003, http://www.census.gov/prod/2004pubs/03statab/banking.pdf (accessed November 11, 2004)
All households	76.5	88.4	61.2	69.8	17.6	47.0	46.8	67.3	21.8	40.3	1.2	2.9
Under 30 years old	75.2	83.0	71.1	78.1	24.5	60.6	31.1	48.8	17.9	32.1	1.8	2.6
30 to 60 years old	77.4	89.3	67.2	76.8	19.7	53.4	42.9	64.8	24.5	44.1	1.5	3.3
61 years old and over	75.2	89.2	43.1	48.9	9.6	24.6	63.2	83.2	18.2	35.9	0.3	2.1
No college degree	69.8	84.7	52.8	63.7	14.3	42.3	40.4	61.8	18.2	33.7	0.8	2.4
College degree	91.5	95.6	80.1	81.6	25.2	56.2	61.0	78.0	30.1	53.2	2.1	3.8

charges banks for processing electronic transfers (ACH) and raised the prices it charges banks for processing paper checks. Then on October 28, 2003, Congress passed and President George W. Bush signed the Check Truncation Act. The act, also known as Check 21, went into effect on October 28, 2004. Under the Check Truncation Act banks were no longer required to hold onto the original paper checks they received. Instead, when a payee deposited a check in a bank, the bank made a digital copy of the check and shredded the original. The bank then simply wired the payer's bank for the money, avoiding the postage and processing involved in sending the actual check to the payer's bank. If the payer were to need a copy of the check in the future, the stored digital image would be printed.