The number of payment transactions in the US has grown by 5.1% per year, on average, over the past 20 years. Through recessions and a pandemic, the payments market has proven to be remarkably resilient, easily outpacing GDP growth. This point-of-view explores what’s powering this incredible payments engine.
We discuss four important considerations with respect to the overall US payments market:
It’s easy to forget just how far the industry has come. Less than 20 years ago, paper checks were the country’s most prevalent payment method (in 2003 Congress passed the “Check 21” legislation to create the legal basis for processing check images). From 42.6 billion checks in 2000, today fewer than 11 billion checks are written. Yet, despite dropping by 74%, the total number of payments expanded.
Similarly, 20 years ago, few people would have predicted the runaway success of debit cards, growing from 8 billion transactions in 2000 to almost 88 billion transactions in 2021, and now representing the most commonly used payment method, by far.
Source: 2022 Federal Reserve Payments Study, Initial Data Release, April 21, 2023
While there’s a fascinating story behind every line on this chart, that’s not the focus of this article. Instead, here we take a step (or two) back from individual payment products and year-over-year trend lines in order to look at the macro picture. The overall message over the past two decades boils down to:
A twenty-year period of uninterrupted growth is pretty remarkable. Which raises the question, what’s driving this growth? Does population growth or economic growth explain the expansion of the payments market, or are other factors at work?
Source: BPG Analysis
The change in these macroeconomic factors is shown in Exhibit 2. Our analysis suggests that economic growth accounts for about two-thirds of the growth in the number of payment transactions. In the next section, we discuss three multipliers that have contributed to payments’ outsized growth.
Payments’ outsized growth is broadly explained by three multipliers: cash-to-card migration, two-stage wallets and the rise of commerce platforms.
A. Cash-to-card migration
The most important contributor to the industry’s growth over this time period is a payment method that’s not included in Exhibit 1, namely cash.
The Fed’s payment survey is of all non-cash payment types. All non-cash payments go through (at least one) an intermediary, simplifying the market sizing effort.7 Cash, on the other hand, does not have any such intermediary – person A gives cash to person B who pays company C – none of which is easily tracked. Nevertheless, the migration of cash-to-card is evident from multiple vantage points:
Exhibits 3 illustrates how cash is steadily coming out of the system, helping to propel growth within the processed retail payments ecosystem. While the ‘average’ purchase made with a debit card is for $43, this average hides the reality of actual use. Today, one-third of all debit card transactions are for purchases of less than $10 – a purchase that historically would have been made with cash (or not at all).
Source: BPG Analysis
B. Two-stage wallets
The second factor contributing to payments’ above-market growth rates is wallets. Not leather wallets with plastic payment cards, but digital and mobile wallets with tokenized payment credentials. Visa reports issuing over six billion unique payment tokens and the rate of issuance is accelerating.
The most commonly used general purpose mobile wallet, in the US, is Apple Pay. A consumer registers their payment card, the card number is converted into an encrypted payment token, and this token is stored locally on the phone. Whenever the consumer uses their iPhone at the point-of-sale, the terminal and the phone utilize near-field communication (NFC) technology to transmit the token from the phone to the POS – and then the transaction is processed from acquirer-to-network-to-issuer as any other transaction (with the added step of a secure token vault).
In other words, a card-based credit or debit card purchase and a phone-based wallet purchase are each counted as one transaction. Changing the form factor, from card to phone, does not alter the underlying trend line in the number of payment transactions.
But some digital wallets, namely “two-stage wallets,” function differently. PayPal is a prime example of a digital wallet where one purchase can produce two transactions. Two-stage wallets generate two transactions:
C. Commerce platforms
The past decade has seen incredible growth in the number of commerce platforms – the rise of the gig economy (e.g., Uber, Lyft, DoorDash, Instacart and many more) and marketplaces (eBay, Etsy, Poshmark, etc.) has transformed the traditional buyer-to-seller model.
Historically, card payments at a particular retailer are processed one-by-one but settled into the merchant’s account as a batch. However, in the world of marketplaces, the default model is one payment from the buyer to the platform, plus one disbursement from the platform to the seller (in other words, two transactions for one purchase).
The best platforms make the payment experience as seamless and frictionless as possible. In the process, it’s easy to overlook just how many payment transactions have been created out of what was previously a singular purchase. Two examples illustrate how easily payment transactions can multiply:
As digital commerce continues to grow, we are likely to see even more use cases for how money is moved into or out of the system. Each represents a distinct payment transaction, further expanding the overall payments universe.
Payments have had an incredible run, with the total number of transactions almost tripling from 2000 to today. As we look forward, product managers and investors are asking, will this growth continue?
At least for the foreseeable future, we believe the answer is yes. Our confidence in the sector’s growth prospects reflects: strong industry fundamentals, a return-to-basics for established payment methods, and market expansion with the rollout of new payment technologies.
A. Strong industry fundamentals
The vitality of the US payments market is reflected in the Federal Reserve’s payments data. Between 2018 and 2021, the industry added 30.7 billion payment transactions, up slightly over the growth from the previous three-year period (see Exhibit 4).
A maturing industry would begin to show signs of tapering growth, as adoption and usage reach saturation points. The data give no indication of this dynamic. In fact, despite the headwinds created by the pandemic, while usage of some payment methods slowed (notably credit cards), utilization of other payment methods accelerated (ACH and prepaid cards) as vehicles to distribute various forms of government stimulus.
Source: BPG Analysis
B. A return-to-basics
At different times over the past twenty years, there’s been lots of noise about the potential for significant disruption. Will merchant wallets cannibalize issuers’ card volumes? Will decoupled debit cards restructure the prevailing transaction flow? Will blockchain and distributed ledger technology eliminate the need for centralized payment networks? And many more. Yet, none of these potential challengers to the status quo gained any traction.
Perhaps learning from these lessons, today the focus within payments is USE – Ubiquity, Simplicity and Embedded.
Business-to-business payments will be a major beneficiary of this renewed focus. Younger employees increasingly expect the same speed, security and convenience for B2B payments as they enjoy as consumers. This latent demand is supported by the rollout of Request For Payment (RFP) functionality. As a result, batch AP processes for B2B are shifting toward Purchasing and general purpose card payment, while vertical market payment networks build out for supply chain and embedded payments.
C. Rollout of new payment technologies
Last month (July 2023), the Federal Reserve launched FedNow, a new real-time payment system. Aside from the card and ACH networks, the US now has two dedicated faster payment rails: FedNow (operated by the Federal Reserve) and Real-Time Payments or RTP (operated by The Clearing House).
These are capabilities; it will by the network participants, and their customers, that determine uptake and usage. That said, there are already early signs that these new payment technologies are opening up new use cases and, in the process, further expanding the addressable payment market size.
Better products and services that deliver more value, more quickly, inevitably win in the marketplace. This truism certainly holds in payments where, over the past 20 years, the speed, convenience and superior economics of electronic payments over paper payments has powered the great payments engine. Nowadays, younger consumers rarely write checks or carry much cash, preferring payment cards. These consumers, together with more tech-savvy businesses, will drive the next wave of industry growth, utilizing a range of newer payment technologies. It should be an exciting ride.
Tony Hayes is the Founder and Managing Partner of Banking & Payments Group. He can be reached at tony.hayes@bankingandpaymentsgroup.com
1 A number of organizations estimate the size of the US payments market but the Federal Reserve is generally regarded as “the gold standard” in terms of accuracy. The Federal Reserve began collecting these data via triennial surveys, contracting with Global Concepts for the check sizing and Dove Consulting for all of the electronic payment methods (ACH, debit, credit and prepaid cards). The authors previously worked at Dove Consulting.
2 Note (directly from the Federal Reserve): “All estimates are on a triennial basis, except that card payments were also estimated for 2016, 2017, 2019, and 2020. Credit card payments include general-purpose and private-label versions. Prepaid debit card payments include general-purpose, private-label, and electronic benefits transfer (EBT) versions. Estimates for prepaid debit card payments are not available for 2000 or 2003. The points mark years for which data were collected and estimates were produced. Lines connecting the points are linear interpolations.”
3 An alternative methodology is to measure the market size in dollar terms, not the number of transactions. By this measure, the total value of non-cash payments made in 2021 was $128.5 trillion. In most cases, we prefer the ‘number of transactions’ approach since (a) one transaction reflects one payment made/one payment received, thereby removing the effects of inflation and (b) most entities pay on a per-transaction basis (with the notable exception of cards where interchange and network fees typically utilize ad valorem pricing).
4 For this article, we consider check, ACH debit and ACH credit to be “batch” transactions. While in the vast majority of cases, the transaction is processed electronically end-to-end, at the time of payment initiation, the parties do not have visibility into funds availability and the transactions are therefore not “pre-authorized.” By contrast, card transactions are processed individually and, in most cases, the balance or open-to-buy is verified at the time of purchase.
5 As a sidenote, population growth is the primary driver for retail banking growth (at an industry level). Since the percentage of the population that is unbanked or underbanked is reasonably stable, the only source of new consumer customers for a retail bank is net population growth. Banks that are growing their customer bases faster than population growth are gaining share at the expense of competitors.
6 Another measure is Personal Consumption Expenditures (PCE). PCE is the component of GDP that tracks spending by households. Over time, the growth rates for PCE and GDP generally move in lockstep.
7 Payment cards (general purpose open-loop payment cards and most ACH transactions) are processed by a network, providing a defined entity for data collection. Private label cards, and check and ACH transactions that are processed on-us, introduce additional complexity and necessitate some level of sampling and estimation.
8 PayPal processed 22.3 billion transactions in 2022, up 188% over the past five years (7.8 billion transactions in 2017)
