Federal Reserve releases initial findings: What does this mean for the future of payments?

The Federal Reserve recently released its 2022 Federal Reserve Payments Study (FRPS) initial findings, which collected data for 2021. The initial findings of this triennial study share the top-line figures for non-cash payment methods, ACH transfers and checks. Further findings will be released later in the year.

As we look at the FRPS, we’re pleased to see how the data aligns to the Deluxe view of emerging payment trends, dynamics and solutions. The shift toward Business to Business (B2B) digital payment options is one of the most significant trends we have seen in recent years, and it is important for both financial institutions and corporations.

Deluxe, a leader in providing business solutions, has conducted extensive research on the continued use of paper checks through the "jobs to be done" theoretical framework, written by Harvard’s Professor of Business Administration Clayton M. Christensen.

The study highlights that while digital payment platforms have grown in popularity, they have not been able to accommodate certain attributes that keep checks in use. 

• First, many people sending payments are hesitant to store sensitive financial information, such as credit card, ACH, or wire transfer details for the recipient.
• Second, some industries, such as healthcare or legal, need to include additional information, such as an explanation of benefits or invoice details, along with the payment.
• Third, some homeowners lack joint accounts, resulting in a need for a check with dual endorsement in certain situations, such as sharing an insurance policy. 

Digital payments continue to rise

The trend toward digital payment options has accelerated, and many new innovative solutions are being developed to address these concerns. For instance, some companies offer digital solutions for making payments via check, while blockchain technology and smart contracts offer secure and traceable payment options with embedded information. As businesses continue to adapt to changing consumer needs, we can expect to see continued innovation in the payment space.

According to the FRPS, the value of core non-cash payments (ACH, card and check) in the United States grew faster from 2018 to 2021 than in any previous FRPS measurement period since 2000.[1] The number of core non-cash payments grew by 30.7 billion, increasing to 204.5 billion in 2021. Within non-cash payments, ACH transfers have surpassed check in value and grown to $91.85 trillion, making up 72 percent in 2021.

While Deluxe has made significant strides in replacing paper checks with digital payment options, we recognize that the current system still has its limitations, particularly regarding the reconciliation process. When payees opt for different payment channels such as PayPal or Venmo, ERP systems and payers may not know how to process the payment, creating challenges in reconciling payments with the correct payee. To address this issue, Deluxe is focused on delivering B2B digital solutions that enable ERP systems to recognize payment types and reconcile them accurately.

Paper checks decline but the values increase

While paper checks are becoming increasingly obsolete in consumer-to-business transactions, their decline in the business-to-business (B2B) space has been relatively slow. However, this trend is rapidly changing, with more businesses transitioning to digital payment options. This shift is driven in part by the staggering amounts of money conveyed through B2B payments, with approximately $16 trillion going through B2B rails.

However, it’s interesting to note that the average value of check payments increased substantially from 2018 to 2021, despite a drop in the number of check payments. It’s possible to infer that while fewer check payments are being made, the overall higher value is a result of B2B check payments vs. consumer-to-business payments.

Where is Deluxe going next?

Deluxe recognizes the growing need for faster and real-time payments in B2B transactions. As the payments ecosystem continues to evolve, we work closely with our customers to understand use cases where we can digitize payments and data. Currently, these transactions account for 5% of payment volume but have grown by over 50% in the past four years.² As emerging payment platforms like FedNow and RTP gain traction and evolve, we remain committed to leveraging innovative technology to deliver secure, reliable and efficient payment solutions for our customers.

We understand the challenges that new digital payment options such as Zelle and Venmo pose, particularly in differentiating between personal and business payments. Our team is actively exploring innovative solutions to these challenges to ensure accuracy and efficiency in payment processing and reconciliation. By staying at the forefront of changes in the payment ecosystem and overcoming obstacles, we strive to provide a seamless payment experience for all. At Deluxe, we are dedicated to delivering the most secure, efficient and reliable payment experiences for our customers.

Sources:

1. The Federal Reserve Payments Study: 2022 Triennial Initial Data Release

2. Boston Consulting Group internal content interview, April 2023.