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Financial intermediaries such as banks and credit card companies are developing products that will enable consumers and businesses to pay for small-dollar purchases electronically. The new payment methods have been made possible by advances in computer and data communications technology. This Congressional Budget Office (CBO) study examines how the new forms of electronic payment will affect the market for retail payments and the implications they will have for federal policy. CBO prepared this study at the request of the Senate Committee on Banking, Housing, and Urban Affairs. In keeping with CBO's mandate to provide objective and impartial analysis, this report makes no recommendations.

Judith S. Ruud and Philip Webre of CBO's Natural Resources and Commerce Division wrote the report under the supervision of Jan Paul Acton and Elliot Schwartz. The staffs of the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the General Accounting Office provided many helpful suggestions and comments. CBO analysts Mark Booth, Matt Eyles, Kim Kowalewski, and Mary Maginniss provided valuable comments and assistance. The authors also wish to thank Mark Bernkopf, Nolani Courtney, Robert Ledig, John Lewis, Herbert Lin, Thomas Vartanian, and John Wenninger for their useful reviews.

Sherry Snyder edited the manuscript, and Christian Spoor provided editorial and production assistance. Angela Z. McCollough typed the many drafts, assisted by Rae Wiseman. Kathryn Quattrone and Jill Sands prepared the study for publication.

SUMMARY

ONE  - INTRODUCTION AND BACKGROUND

Forms of Money and Payments
Consumer Transactions and the Payment System
Issues Surrounding the Development of New Electronic Payment Systems
Major Policy Issues

TWO -  STORED-VALUE CARDS

Stored-Value Card Systems
Experience with Stored-Value Cards
Current Market Developments
Potential Markets for Stored-Value Cards
Developments in the Technology of  Competing Methodsof Payment

THREE  - ON-LINE PAYMENT SYSTEMS

On-line Use of Credit Cards
Electronic Checking Accounts
On-line Scrip
Development of Markets for On-line Payments
Competition from Home Banking Systems

FOUR  - POLICY ISSUES

Regulation of Current Payment Methods
Regulation of the New Electronic Payment Methods
Other Legal and Policy Concerns
Evaluation of Major Policy Issues
Conclusions

GLOSSARY

TABLES

S-1. Regulation of Existing and Emerging Payment Methods
1. Selected Pilot Programs for Stored-Value Cards in the United States
2. Composition of U.S. Currency Outstanding as of  December 31, 1995
3. Regulation of Existing Payment Methods
4. Regulation of Emerging Payment Methods

FIGURES

1. Payments Made with a Debit Card
2. Payments Made with a Credit Card
3. Payments Made with a Stored-Value Card
4. Revolving Debt Owed by U.S. Consumers
5. Sales at Fast-Food Restaurants
6. Sales at Convenience Stores
7. Number of Automated Teller Machines in Use
8. Shipments of Vending Machines That Can Incorporate Dollar-Bill Acceptors
9. Number of Domains Registered on the Internet as of January Each Year
10. Use of Checks in the Economy
11. Percentage of Private-Sector Workers Whose Salary Is Directly Deposited
12. Catalog Sales by U.S. Companies

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