New Fed Research Highlights COVID’s Impact on Payments

We’re all aware the pandemic has altered Americans’ shopping and payments behavior- the remaining questions are how, and by how much. There are plenty of good sources to track pockets of data- the PSCU Payments Index and Mastercard’s SpendingPulse immediately come to mind. For an authoritative and comprehensive view, however, the Federal Reserve remains the gold standard.

In late December the Fed quietly released a pair of reports that shed valuable light on the behavioral changes underway- one gathering data from financial institutions, the other polling consumers themselves. Their findings aren’t jaw-dropping, but this research lends important credibility and context to trends we’ve been observing with our own eyes.

The big headline from the Federal Reserve Payments Study is that the number of card transactions declined in 2020- the first time this has ever happened in the two decades the Fed has tracked data. The value of card payments made continued their upward trend, however, indicating a higher average transaction value.

A closer look reveals that a significant drop in in-person payments was the sole source of the decline- growth in remote (often e-commerce) payments offset much of the gap. Given the lockdowns and store closures of mid-2020 this outcome is hardly surprising. However, despite the highly publicized shift toward e-commerce being well underway before COVID, the number of in-person payment transactions had continued to grow annually until 2020- remote activity was merely growing faster, leading to a share shift.

Will this in-person transaction decline prove to be an enduring trend? Time will tell. The second quarter of 2020 saw a dramatic shift to remote payments, concurrent with the height of stay-at-home orders. As businesses reopened in Q3/Q4, the share of in-person payments clearly rebounded. Ironically, just before the pandemic delivered its shock to the system, 2019 saw the slowest increase in remote payment share since the Fed began tracking this metric.

The Fed’s quarterly data reveals two other interesting tales of adoption. The reopening of storefronts in Q3/Q4 was accompanied by the long-awaited surge in contactless payments adoption (including digital wallets)- a sign of consumers embracing more “hygienic” ways to interact. Much was also made of the broader adoption of mobile P2P services like Zelle and PayPal during the pandemic. Sure enough, the number of accounts showing first-time P2P activity surged in Q2. However, this effect quickly receded and by the second half of the year growth in ongoing P2P activity had returned to solid but relatively historical levels. The digital wallet trend, by contrast, appears to be more resilient.

A separate Fed research paper focused on COVID’s impacts found that cash usage was the pandemic’s real payments casualty. Interestingly, check usage essentially continued on its existing declining trend but did not accelerate. The Fed’s consumer survey found that bill payment behavior- which continues to be a common use case for consumer checks- was unchanged. This seems logical since such routines were largely unaffected by the pandemic. Further, the P2P growth noted earlier seems to be driven mostly by new activity rather than cannibalization of check usage in this arena.

The paper also finds notable differences in payment behavior for consumers working from home as compared to those venturing out to an office. Naturally, payments dynamics do not exist in a vacuum. The jury remains out on the extent to which the pandemic has permanently altered existing payment trajectories. The form in which the broader economy emerges in the coming months and years will certainly play a role in that outcome.