Over the past five years, the U.S. payments landscape has changed as main payments channels accelerated their long-term shift from cash to digital payments.
Access to the internet and open banking technology enabled fintechs and mobile apps to dominate. Customer behavior and the macro-economic environment also contributed to the adoption of digital payments.
Below we analyze the shift to different payment methods, prompted by the rise of digital payment channels, e-commerce and the COVID-19 pandemic. We also discuss what the future payments ecosystem looks like and how businesses need to evolve to meet the rise in consumer demand.
Share of Different Payments Methods
Payments data from the Fed’s Diary of Consumer Payment Choice (Cubides & O'Brien, 2022)1 show the changing dynamics of the payment ecosystem and the establishment of new and innovative modes of payment.
The share of cash transactions has declined while the share of card payments has increased by 12% over the five years, with a major jump in credit card transactions.1 Mobile payment apps have also started to gain hold of the market. These transactions comprised 3% of the market share in 2021, an increase from below 1% before 2020.1 ACH transactions have remained consistent, ranging from 10 to 12%.1
Fig 1. Share of payments use1
Increased Payments Digitalization
Digital payments such as eChecks, mobile payment apps, contactless payments, peer-to-peer bank transfers, and BNPL (Buy Now, Pay Later) solutions bring convenience and efficiency to users. Advanced security measures (e.g., EMV chips and 2-factor authentication) also enable user adoption. In addition, these digital payments have implemented rewards and cashback programs to incentivize people to use them over cash, contributing to an increase in the share of card payments from 45% in 2016 to 57% in 2021 (see Fig. 1). The total value of card payments soared significantly from $5.46 trillion in 2016 to $9.77 trillion in 2021.2
The rise of e-commerce, which grew by 22.7% in revenue in 2020, also plays a key role in contributing to the growing usage of online payment solutions, as more merchants have integrated digital wallets and cards into their end payments.3 Many businesses that had relied on physical stores pre-pandemic, closed some of their retail stores to adopt an e-commerce model.
Impact of Pandemic and Lockdowns
The pandemic brought lockdowns in the U.S. and consumers shifted away from in-person purchases. In-person cash usage fell by 7% in 2020 while mobile payments rose by 3% in 2020 and 2021.4 This was also aided by the increased use of contactless, near-field communication (NFC) payments.
At the same time, the user base of mobile payment apps increased from 92.3 million to 101.2 million.5 Top U.S. mobile payment apps saw a 22% YoY increase in downloads in Q1 2021.6 A similar growth trend is expected in the future as mobile payment companies expand their products and more competitors enter the market.
Venmo, one of the most popular mobile payment platforms, saw a sharp rise in TPV (Total Payment Volume) during the onset of the pandemic. From 2019 to 2021, Venmo’s TPV increased from $101 billion to $230 billion.7
Fig 2. Quarterly Total Payments Volume Growth of Venmo8
Fig 3. Yearly Total Payment Volume for Venmo9
Cash Remains Relevant
For transactions below $10, cash accounts for more than half of transaction volume.10 It is also a predominant method of payment for households with yearly income less than $25,000. In 2021, 47% of transactions from these households were made using cash.11
What does the future look like?
Payments are going digital. With consumers becoming more tech-savvy, this trend will accelerate. Digital payments are also becoming more convenient and efficient, rendering traditional payment methods antiquated.
However, as the digital payment landscape evolves, it brings new challenges.
A growing concern for security and privacy
Customers are becoming more concerned about data privacy and security, as their card information is stored online. New data security measures, along with new regulatory guidelines, will need to be implemented to address these threats. Fintech firms and the banking industry will also need to develop robust architecture such as advanced machine learning techniques to combat fraud.
A need for better infrastructure
Legacy infrastructure needs to be revamped. Digital payments bring a higher transaction volume and demand a higher standard for bookkeeping.
Digital payments add value but also increase the number of transactions required for a single payment. In a cash payment, a consumer provides the cash directly to a retailer in one transaction. A card payment typically consists of at least two transactions, from the issuing bank to the network’s bank and from the network’s bank to the merchant’s bank. Oftentimes there are more providers in the payment value chain (processors, PSP, payfacs, etc.) adding to the number of transactions required to complete a single payment.
With each additional transaction, increased capital or liquidity is required to complete the end-to-end payment to ensure speed is not sacrificed. With cost of funds increasing, faster payment rails become essential to avoid tying up additional capital. Payment companies and banks will need to update their infrastructure to both facilitate and record digital payment transactions.
Payments are going digital. Aided by the pandemic and the growth of digital payment solutions, the total transaction value (TTV) for digital payments in the U.S. is expected to grow at a rate of 14.7% over the next four years, reaching $3,527 billion by 2027.12 To position themselves for a better digital future, financial players would need to innovate their systems to ensure security, convenience, and access to all.