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Introduction

swiping card on smartphone

From seashells to bytes
From using tiny seashells for barter to writing checks to sending data electronically, people have continually devised easier ways to pay for things.

The evolution continues. The nation's payment network includes an array of options for exchanging money for goods and services. The system encompasses any mechanism—from cash to paying with a smartphone—that allows buyers and sellers to transfer value.

One thing has not changed. Underlying the system is trust and reliability. Use a check, credit card, debit card, phone, or other electronic form of payment and the payment system makes sure money comes out of, and is put into, the proper financial accounts.

The Federal Reserve manages large parts of the payment system, as do other organizations. Through its processing, the Federal Reserve as the nation's central bank helps to ensure public confidence even as the system continues to evolve.

Technology brings change
The rise of the Internet, the proliferation of powerful mobile computing devices such as smartphones, and more secure and robust means of electronically exchanging financial data have fueled rapid growth in electronic payments. In the past decade, Americans began making fewer payments with checks and far more payments with debit and credit cards and other transactions that are either initiated or processed electronically. The share of noncash payments made by card has increased dramatically, from 43 percent in 2003 to 60 percent in 2009 and 67 percent in 2012, according to the 2013 Federal Reserve Payments Study. The Fed conducts the study every three years.

Payments made by debit and credit cards and automated clearinghouse (ACH) transactions, such as the direct deposit of paychecks, are common forms of payment that are processed electronically. ACH transactions, which also include preauthorized payments and many retail purchases and monthly bills paid over the Internet and telephone, grew 5.1 percent annually from 2009 to 2012, and accounted for 22 billion transactions in 2012.

Even as payments technology races forward, cash is still king by some measures. Currency and coins remained the most used retail payment instrument as recently as October 2012, according to a survey by the Federal Reserve Banks of Boston, Richmond, and San Francisco.

Identifying reasons why consumers use one method or another can be difficult, as trends in payments are shaped by myriad factors. Among the major factors: technological and financial innovations, changes in consumer and business behavior, the business cycle, the composition of economic activity, regulatory developments, and population growth.

The Fed's role in the payment system
In providing payment services to banks and other depository institutions, the Federal Reserve System has a broad set of responsibilities. Specifically, the Federal Reserve Banks distribute paper money, or currency, and coins to banks; collect and return checks; and facilitate the electronic transfer of funds and government securities, including the processing of ACH payments.

Consumers generally use Fed services indirectly as customers of banks, savings and loan associations, and credit unions. However, the Fed works with consumers directly to help resolve issues with some types of financial institutions.