Federal Reserve Releases Payments Studies

Navigator Edition: March 2017
By: Bob Rohr and Chris Razzano

Recently released studies by the Federal Reserve Board show that card payments continue to increase their share of noncash transactions and that issuers continue to reduce third-party costs. In the last quarter of 2016, the Federal Reserve Board (FRB) published a brief on its triennial Payments Study, which aggregates noncash payment trends in the United States, and its biennial Debit Issuer Study summarizing debit transactions volume, issuer interchange revenue, and issuer costs. These reports continue to provide rich insight into payment trends and the effect of Regulation II.

The Payments Study estimates that total noncash transactions grew by 5.3% annually (20.6B transactions) between 2012 and 2015 (see Figure 1), with growth driven primarily by increased debit and credit card transaction volumes.

Figure 1: 2012 – 2015 Incremental Transactions by Payment Type
(in billions)

Source: FRB 2016 Payments Study.

Electronic payments continued to gain ground, while checks continued their well-documented decline, however, the 2.5 billion decline in check transactions between 2012 and 2015 accounted for only 12% of the increase in electronic payments. This discrepancy suggests that the growth in electronic transactions is likely coming from 1) the displacement of smaller-value cash-based transactions and/or 2) net-new transactions due to overall market growth or new channels/use cases (mobile, P2P). This dynamic is likely reflected in the decreased average ticket sizes between 2012 and 2015: the average debit purchase declined $1.15, from $39.60 to $38.44, while the average credit purchase declined $1.41, from $94.86 to $93.45.

The Debit Issuer Revenue & Cost Study found that total interchange revenue for exempt and non-exempt issuers totaled $18.4 billion in 2015. Covered issuers forfeited an estimated $10.6 billion in additional interchange revenue due to the cap.

The Study also showed that total ACS costs (transaction-monitoring, in-house, costs, third-party processing fees, network processing fees) rose by ~$100MM between 2013 and 2015. Per transaction costs for covered issuers decreased by 4% between 2013 and 2015, however, and issuers continue to benefit from lower network and processing fees (see Figure 2). In-house costs have leveled off around $0.015 per transaction for covered issuers, while per-transaction costs for third-party and network have continued to contract, likely due to ongoing issuer pressure and third-party vendors reducing prices to secure long-term volume.

Figure 2: Average Debit ACS Costs for Covered Issuers, Excluding Issuer Fraud Losses
(cost per transaction)

Source: FRB 2015 Interchange Fee Revenue, Covered Issuer Costs, and Covered Issuer and Merchant Fraud Losses Study.

For more information about the study, or to become a participant, please contact Bob Rohr, Manager, bob.rohr@firstannapolis.com, or Chris Razzano, Senior Analyst, chris.razzano@firstannapolis.com. Both specialize in Payments Strategy & Innovation.

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