Intro to United States

Most American consumers carry several types of payment cards in their wallets.

They typically have several credit cards which allow them to revolve payments on the charges they have made over the course of the month.  Most of their spending on credit cards takes place on cards that carry the brands of one of the major card networks: Visa, MasterCard, American Express, or Discover (ranked in order of purchase volume).  They also have store cards issued by retailers such as Sears.  (Companies such as GE Capital often work with stores to make these cards available and finance the receivables.)  A 2006 Gallup poll indicated that three-quarters of American adults carry a credit card and each carries on average 2.9 of these; that’s the latest data available but it probably isn’t too much different today.[1]

Consumers also have debit cards which they obtain from the bank where they have their demand depository account (checking account). Most consumers just have one debit card.  When they pay on that card the money is taken directly from their checking account usually on the same day they make a purchase.  A typical debit card issued by a bank will have a Visa or MasterCard brand on the front of the card and the brand of one or more debit-card networks on the back of the card.  American debit cards are unusual in that they can be used in either of two ways at the point of sale.  The consumer can enter a personal identification number (PIN) in which case the transaction takes place over one of the debit-card networks such as Star. Or they can sign for the transaction just as they do with a credit card, and in which case the transaction takes place over the major card network whose brand is on the front of the card.  About 61 percent of debit card transactions are signature (i.e. branded card network, known as “offline debit”) and the remaining 37 percent are PIN (i.e. debit-card network, or “online debit”) and 2 percent are prepaid.[2] Prepaid cards include general purpose cards, gift cards, as well as ones that serve more specific markets such as payroll cards.  Some of these have the brand of one of the major card networks and work at any location that take those cards while others are issued by the store.

Virtually all of the cards in the wallet of Americans have magnetic stripes which carry the pertinent account information for the consumer. About 4 percent of these magnetic stripe cards also have RFID chips in them—that is they are contactless cards—which allow consumers to wave the card at merchants that have contactless accepting point-of-sale terminals.[3] [4] Consumer usage of contactless is estimated at no greater than 5 percent (awareness at less than 50 percent) and merchants report these transactions represent 2 percent of their card traffic. [5] 120,000 retail locations (of which 30,000 are vending machines and 13,000 are taxi cabs) accept contactless payments, meaning contactless touches just 1.5 percent of all card accepting merchant locations in the U.S. [6]

Consumers can pay with cards at virtually all online sellers and most retailers. They can also often pay telephone and other utility bills, their taxes, sometimes their rent, and various other charges.  Still, cash and checks are widely used in the United States. A Federal Reserve Study published in 2007 found that 33 percent of non-cash payments by number in the U.S. were by check, 27 percent on debit cards, 23 percent on credit cards, and 16 percent over ACH (automated clearinghouse). In total, electronic payments accounted for two-thirds of non-cash payments by number and 45 percent by value. [7]

Merchants that take cards typically have a contract with an acquirer who often works with them to obtain point-of-sale equipment and is the entity they deal with on a day-to-day basis.  That acquirer will usually get them set up for all the different electronic payment solutions including the major card networks as well as the PIN-debit networks. After a consumer uses their card to pay at a merchant that transaction will typically be switched to a merchant processor which will switch the transaction in a way that ultimately gets to a network which takes charge of clearing and settlement. The network will pass the transaction on to the issuer that is responsible for the card or to a card processor acting on its behalf. For most transactions at the point of sale this process is complete in a matter of seconds.

As of today, very few transactions take place on mobile telephones in the United States, but the onset of more advanced operating systems on these devices could work to rapidly change this. There are several point-of-sale applications that allow merchant accountholders to accept credit card payments from these mobile devices such as Intuit’s GoPayment application.

Significant changes have taken place in the business organization of the U.S. payments industry in part as a consequence of antitrust litigation.  American Express and Discover which were historically closed-loop networks (they acted as issuer, acquirer and network) have solicited banks to issue their cards.  MasterCard and Visa underwent a transformation as well. They had been governed as associations in which banks had voting interests and paid fees to a network entity that more or less operated on a break-even basis.  They both did IPOs in which they became publicly traded for-profit companies. 

[1] Gallup Poll (May 2006).

[2] The Nilson Report, Issue 923 (April 2009).

[3] Digital Transactions, Volume 5, Issue 12 (December 2008).

[4] The Nilson Report, Issue 924 (April 2009).

[5] Digital Transactions, Volume 5 Issue 12 (December 2008).

[6] Digital Transactions, Volume 5 Issue 12 (December 2008).

[7] Federal Reserve System, “The 2007 Federal Reserve Payments Study” (2007).