Related Links

• FedNow Instant Payments
• The Fed Enters the World of Real-Time Payments
• The Fed's Role in Payments Innovation
• The Rise of Buy Now, Pay Later Plans

Transcript

Tim Sablik: My guests today are Vanity McDaniel and Jennifer Stadler. Vanity is a senior payments business advisor in the payments outreach team at the Richmond Fed and Jennifer is the executive vice president for marketing and membership at PaymentsFirst. Thank you both for joining me.

Vanity McDaniel: I'm happy to be here and thank you for inviting me back.

Jennifer Stadler: Thank you for the kind invitation and I am so happy to be with you both today.

Sablik: Vanity, as you've discussed on the show in the past, providing payment services is one of the core functions of the Federal Reserve System, so we're keenly interested in following any developments in the payment space. I'm glad to have you both on the show today to discuss some of the top trends impacting electronic payments in 2025.

Vanity, could you start by explaining what counts as an electronic payment?

McDaniel: Electronic payments allow us to pay for goods and services without the use of a physical check, cash, [or] coin. Electronic payment rails that the Federal Reserve provides to financial institutions include things like ACH, wires, and FedNow. Your audience might be more familiar with the different types of electronic payments such as bill pay, mobile payment apps, bank transfers, etc., which all use the electronic payment rails I just mentioned behind the scenes to clear and settle those transactions.

Sablik: How has the popularity of electronic payments relative to other forms of payment changed in recent years?

McDaniel: Yes, payment trends have changed over time.

The Diary of Consumer Payment Choice study is an annual study conducted by the Federal Reserve Banks of Atlanta and Boston and our FedCash Services team. Back in 2017, the most used payment method for consumers was cash. Over the years, consumer habits have changed so [that] between about 2018 and 2021, debit cards were the most used payment methods by consumers.

However, in recent years, consumer habits have changed again. Credit cards are the most used payment method between 2022 and 2023. In my opinion, this is probably due to the benefits offered by credit cards such as reward programs, cash back incentives, [and] unauthorized transaction protection. There are "buy now, pay later" features on some credit cards as well.

I also want to highlight [that] in 2023, cash was noted as the third most used payment method. Consumers reported making seven cash payments per month on average in the last three years, even as the payments pie continues to grow year over year.

Additionally, cash is often used as a store of value. Per the most recent diary study, consumers held on to cash more so in 2023 than in 2019. And, cash continues to be used as a backup payment. Last year, there was a massive tech outage that caused worldwide disruptions, and during that time, many businesses couldn't accept electronic payments because their systems were down. But they could accept cash.

Sablik: Thanks for that overview. I'll definitely echo your recommendation that people interested in payments trends should check out that diary of consumer payments. It's always a really interesting study.

McDaniel: The information I mentioned is based on the details from the 2024 study. There is a lag, so the 2024 study is using data from 2023 and the 2025 study should be released sometime between maybe Q2, Q3 of this year.

Sablik: Let's dig into some of the trends related to some of these newer types of electronic payments that you were alluding to. From my experience, I've noticed that it has become more common for merchants to accept contactless payments since the COVID-19 pandemic. Jennifer, what are you seeing and what seems to be driving this trend?

Stadler: Tim, you are correct in what you've noticed. The behavior of payment acceptance has definitely shifted.

Contactless payments have actually been around since the 1990s, which is kind of shocking to a lot of people. Contactless cards and contactless point-of-sale technology was actually available and sold to some in 2015 when EMV [a global standard for secure payment cards created by Europay, MasterCard, and Visa] shifted to the United States. But many U.S. financial institutions decided not to purchase the cards that were contactless enabled. The cost of a contactless card in 2015 was much higher, so some of the retailers were set up to accept contactless cards but not all.

The emergence of COVID-19 drastically changed the way life was lived worldwide, and it made contactless interactions the preferred method of doing business. Use of cash at point-of-sale terminals in the brick-and-mortar retail stores has become less preferable because of the physical nature of holding and passing a card. Retailers have also been encouraging contactless payment to avoid touching cash, which we experienced through COVID-19. Banks have also been making such payments more convenient.

Sablik: Yeah, and it seems like not too long ago here in the U.S. that banks and merchants were rolling out chip-enabled payment cards and readers. So how do contactless payments compare to chip payments?

Stadler: We were behind here in the United States rolling out the technology. The U.S. was incurring more in-person fraudulent transactions, more than in Europe [and] Canada, actually more than most countries in the entire world. The fraudsters were having a ball making a lot of money because we didn't have the software and we didn't have the right hardware in place to stop them. We also have a lack of education here in the United States on how chip-enabled technology actually works.

Chip-enabled cards were issued post-COVID. Most have been enabled with contactless technology due to the demand. Contactless payments remove a card from actually being inserted into an ATM or a point-of-sale terminal. The magnetic stripe on the back of the card contains sensitive data. Once an individual inserts a card into the machine, that card data could be skimmed.

A long-range RFID reader used to extract the data from contactless cards is actually impossible. Let's just say a fraudster was sitting next to you. They can't pull that information out of the contactless card in the same way. Contactless cards use what's called near field communication. This technology uses radio frequency technology that only transmits digital data within a concise range. If a fraudster was able to get between you and a contactless device, that data that is transmitted cannot be replicated to create a transaction.

Sablik: Related to this contactless technology, what trends are you both seeing around the use of digital wallets?

McDaniel: I've recently listened into a few payments roundtable discussions, and I will say the use of digital wallets continues to increase.

I'll also mention it is important for consumers to at least educate themselves before tapping into newer or different payment methods. I don't think many realize the funds in their digital wallet may not be insured. Typically, if a consumer has a digital wallet that is offered by a fintech, if anything happens to that fintech — maybe it goes out of business, etc. — those funds may not be insured. I will also note that consumers using a debit card or credit card or a prepaid card that's stored in their mobile wallet, those funds are protected.

Stadler: E-wallets [or] digital wallets empower individuals using their smartphones, computers or any other form of electronic devices. Unlike traditional cash or payments with cards, the digital wallet can store one's payment information, allowing one to make payments quickly and contactless. Examples include Apple Pay, Google Wallet and PayPal. Security is enhanced by encryption, biometric authentication, and tokenization.

Recent trends do show that use of digital wallets has been fueled by digitalization, increased accessibility of smartphones and other devices, and the need for security within transactions. The COVID-19 pandemic did increase the usage of digital wallets, both from the financial institution making those available and by the consumers using them.

Statista's study shows that the global mobile wallet transaction volume could reach in the United States $1.8 trillion in 2025. That's huge.

Sablik: Another type of electronic payment that's getting a lot of attention lately is buy now, pay later. Jennifer, what are you sharing with your members about BNPL?

Stadler: This is a trend that I saw coming for some time now, working on both the credit card side and then working within the payment association. I've watched fintech companies over the last 15 years make their way into historically traditional financial banking services.

Credit cards are very expensive for merchants to offer. They're becoming an expensive form for consumers to make purchases. So, [with] the widespread usage of smartphones and growing consumer confidence in digital transactions, you're seeing a heightened awareness of financial management that's driving forces behind the demand for flexible payment methods. Merchants are increasingly offering installment payment solutions, and the number of e-commerce platforms is definitely on the rise, further boosting the adoption of online payments.

Sablik: Vanity, is the Fed also studying buy now, pay later?

McDaniel: Yes, I think it's safe to say the Federal Reserve is definitely staying aware of what's happening in this space. Specifically, we had a few individuals from the Federal Reserve Financial Services team talk to our payment council membership about this very topic.

People don't realize, buy now, pay later is not a new concept. It's [been] very popular outside of the United States for many years, and adoption in the United States has seemed to spike significantly during the pandemic. It appears to me that buy now, pay later is here to stay.

Sablik: Shifting gears a little bit from buy now, pay later — which is payment by installments — to look at faster payments, as I mentioned at the outset, Vanity, you were on the show in spring of 2023 to talk about FedNow, which is the Fed's new instant payment platform. FedNow has been operating for a little over a year now. Can you give us an update on the rollout?

McDaniel: Sure. The FedNow team has accomplished some major milestones. Since its launch back in July 2023, the network has grown significantly. Now we have over 1,200 participating financial institutions, headquartered in all 50 states, and about 37 service providers who are certified to support payment processing for financial institutions.

The FedNow network is diverse. Participants range in size from under $500 million to over $3 trillion in assets. Key transaction types include things like sending microdeposits, account verification, digital wallet defunding, emergency payroll, real estate escrow payments, marketplace seller payouts, etc.

Late last year, FedNow reported the network's transactional data, which is available for anyone to view on frbservices.org. As of Q4 2024, more than 915,000 transactions were settled on the FedNow service, with consumers [and] businesses sending an average of $219 million through the service each day.

Not surprising, the dollar value and volume of transactions are expected to accelerate over time as more financial institutions join the network, implement new instant payment capabilities for their consumer, business, [and] government customers.

For your audience to stay up to date on what's happening with FedNow, I encourage them to visit http://explore.fednow.org or frbservices.org, to sign up for those FedNow emails.

Sablik: Yeah, I'm sure we'll probably have you on the show again to update us on FedNow as we go along.

Jennifer, what are you seeing when it comes to the adoption and use of instant payments?

Stadler: We work with the U.S. Faster Payments Council. They just came out with their report on the state of where 25 of the leading banking providers and payment processors are with instant payment activation. They predicted that by 2028, 70 to 80 percent of the financial institutions within the U.S. will be able to receive instant payments. They also projected that 30 to 40 percent will be able to send instant credits by 2028.

With so much movement, many financial institutions are waiting to see how things trend. The cost to implement this technology for a financial institution, it's not inexpensive.

Sablik: Another trend in technology that's gaining a lot of interest right now is AI or artificial intelligence. That's a field that's developing rapidly. How might AI or machine learning impact electronic payments in 2025 and beyond?

Stadler: I love, when I talk about AI, to talk about getting past your fears of Terminator and the movie "Minority Report." Fantastic movies. But the more you learn about AI, it's really nothing to be afraid of. The more you take time to learn it and to understand how it works and the benefits it could provide within your job alone, it's tremendous.

Our company spent the last few years working with virtual bots and just learning how to create them, how to implement them. It's been very, very interesting.

As it pertains to electronic payments, AI is going to transform payments, in my opinion. Key impacts of AI on payments would include fraud prevention. AI algorithms can analyze large volumes of transaction data in real time to identify suspicious patterns and reduce fraudulent activity. It can also help with faster transactions. AI automation could streamline payment processing, reducing transaction times and enhancing efficiency. This will lead to a faster, safer experience for both businesses and consumers.

Then, there's the personalized payment options, which consumers love. By analyzing customer data, AI can tailor payment methods to their individual preferences. We all pay for things differently.

Then, there's customer service. AI-powered chatbots provide instant support. There's not dialing hit two, hit four, hit five, hit six. You actually can get some of the information that you need answered quickly. AI could develop advanced credit scoring models, potentially extending credit to those previously deemed high risk.

McDaniel: I think our group always gets a chuckle when Jennifer mentions "The Terminator" or "Minority Report."

As she just mentioned, there are many benefits to using AI in the payment space. However, I think we all have heard many stories of AI being misused for fraudulent transactions.

I was facilitating a webinar session a few weeks ago and the presenter mentioned a scenario with deep fakes being used for fraudulent wire transactions — for those who are unaware, a deep fake is an image or a video or audio recording that has been edited using an algorithm to replace the person in the original with someone else in a way that makes it look authentic. In this scenario, allegedly, an individual was on a virtual video call with their boss and other colleagues and was instructed to send a $26 million wire. The individuals on the call sounded like the person's team. The video looked like them as well. However, it was all fake and essentially a $26 million wire was sent to a fraudster.

AI is developing rapidly. It can be helpful and useful, but people have to be vigilant and aware of some of the bad actors as well.

Sablik: Wow, that's a wild story.

Are there any other big trends in electronic payments that you'll both be watching in 2025? Vanity, why don't you go first.

McDaniel: I will say hot topics for our payment council discussions this year include FedNow and fraud trends. We will continue to collaborate with key stakeholders by providing an opportunity for them to share how they've used FedNow to address payment challenges for their customers. I think sharing such experiences allow organizations to be better informed as they determine the best approach to payments for their customer base. I do partner with Jennifer a lot on a lot of those conversations.

Regarding fraud, we jokingly say instant payments means instant fraud. However, based on recent payment conferences and discussions I've attended, a lot of fraudsters are reverting back to old school check fraud. It seems like those trends have increased significantly. So, this is something we will continue to discuss throughout 2025, amongst other things like financial crimes that use deep fakes for fraudulent transactions, which I just mentioned earlier.

Stadler: Vanity, you definitely hit on some great trends.

We're going to definitely continue to see growth with real-time payments. Payments will be processed instantly and consumers will be able to schedule future payments. Artificial intelligence will help secure, improve and detect fraud more effectively. Biometrics and passkeys will be used to authenticate and help with digital identities that will be used in healthcare, education, [and] public services.

When I think back to training folks back in the '90s on ATMs [and] how to fill out their checkbooks and avoid taking off their fingers using the old "knuckle busters" — the old way to accept a credit card — it is really a great time to be alive to see how technology has enhanced our daily lives. Education is key in that because knowledge is power.

Sablik: Our younger listeners can go ask somebody over 40 what a knuckle buster is [laughs].

Vanity and Jennifer, thank you both for joining me today.