Americans kept their checkbooks in their pockets and instead flashed debit cards in record numbers last year, making 2003 the first time plastic and other electronic payment methods beat out paper, according to a survey released yesterday by the Federal Reserve.
A total of 44.5 billion electronic payment transactions crossed the wires in 2003, compared with 36.7 billion check payments. Those numbers marked a turnabout from 2000, when Americans wrote 41.9 billion checks, and electronic payments clocked in at 30.6 billion, the Fed said.
The trend toward electronic payments and away from paper checks has been in progress for many years. But it has been accelerated by especially strong growth in the popularity of debit cards, which can now be used to buy just about anything -- plane tickets or McDonald's Happy Meals. The Fed estimates that debit card payments are increasing at an annual rate of 23.5 percent, more than credit cards and other types of electronic payment.
"They're quick and easy," said Jean Ann Fox, director of consumer protection at the Consumer Federation of America. "You don't stand there and hold up everybody in line behind you. Plus, folks are moving toward electronic banking and paying bills electronically."
The increased popularity of electronic payment, however, has spawned questions about whether the systems for processing transactions adequately protect consumers and whether they're fair to retailers.
Fox said different rules governing different payment methods have made consumers uncertain about their rights when it comes to contesting purchases. She said, too, that the prevalence of electronic payments has opened the door for sophisticated crooks to get at people's money. A 2003 Federal Trade Commission study found that more than 3 million U.S. consumers' personal financial information is used fraudulently each year.
"It's getting very confusing for consumers, and companies have not upgraded their protections," Fox said.
Retailers, meanwhile, say they're pleased to see the growth of electronic payment and are doing what they can to encourage it. But they aren't happy with the higher charges they incur from banks when consumers use debit cards and elect to sign the receipt rather than enter a personal identification number.
Transactions involving signatures are considered more susceptible to fraud, so banks charge more to cover the higher risk.
"If you use a PIN debit and compare it with a check, they are very close [in terms of the charges to merchants]," said Mallory Duncan, senior vice president and general counsel at the National Retail Federation. "But if you use signature debit, it's many, many times more. It's about what it costs with a credit card."
Duncan said those higher charges ultimately get passed on to consumers.
John Hall, spokesman for the American Bankers Association, said retailers get something in exchange for the charges, notably a guarantee that they'll be paid. He said, too, that consumers are in general no more vulnerable with electronic payments than they are with more traditional methods.
"The fine print may be a bit different, but if there are unauthorized transactions, the bank is required to make you whole," he said.
While the popularity of checks is waning, they've been around in one form or another for centuries, and they're unlikely to disappear just because a magnetic strip can now move money faster, experts say. In 2003, checks were still used to pay for $39.3 trillion worth of goods and services, compared with $27.4 trillion with electronic methods. That's because electronic purchases tend to be less than check purchases, according to the Fed survey.
Hall said that while banks are doing their best to move consumers to electronic payment by dangling sweepstakes or airline miles as incentives for consumers to switch over from paper, checks will still have their place. He noted that when credit cards were first becoming popular several decades ago, an ABA commission predicted checks would be eliminated within eight years.
"They'll be around for a long time," he said. "But I think we'll see fewer and fewer of them."
