Financial Update (Fourth Quarter 2008)

Fed Report Says Paper Checks Increasingly Becoming Electronic

photo of check being written An analysis in the latest issue of the Federal Reserve Bulletin explores the Fed's findings regarding trends in payment methods in the United States.

Checks' decline goes on
Consumers and businesses are writing far fewer checks each year, and the number of electronic payments continues to rise. It is also becoming clearer in recent years and months that consumers' checks are increasingly being converted into electronic payments made via the automated clearinghouse, or ACH, system.

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In 2006, about 8 percent of all checks written were converted to ACH payments, compared with less than 1 percent in 2003. The interbank check-clearing system itself is also rapidly becoming more electronic as original paper checks are increasingly being "truncated," or replaced with electronic images during the check clearing process. The apparent catalyst for the dramatic change in how checks are cleared was passage of the Check Clearing for the 21st Century Act (Check 21).

Reserve Banks Restructure Check Processing

By the end of 2009, the Cleveland Fed alone will process paper checks for the Federal Reserve System, the Reserve Banks announced in early November. The Fed's Financial Services Policy Committee also said that the Atlanta Fed will serve as the single processing site for electronic checks.

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As the number of paper checks being written continues to decline, the Reserve Banks also announced that they will use a flexible restructuring schedule that scales back or shifts operations at their other processing sites when paper check volumes no longer justify the existing operation until those operations are consolidated in Cleveland.

"This more rapid transition effort, while difficult on our staff, is a clear measure of success in terms of the industry's efforts to move to a more efficient electronic solution for clearing checks," said Gary Stern, chairman of the policy committee and president of the Minneapolis Fed.

These changes reflect the ongoing evolution of the U.S. payment system. The number of checks written in the United States has fallen from 42 billion in 2001, to 37 billion in 2003, to 30 billion in 2006.

Check truncation catches on
In early 2007, an estimated 57 percent of all interbank checks in the United States were presented in original paper form, and about 43 percent were truncated and ultimately presented to the paying bank either electronically or as a substitute check. Of the portion truncated, 66 percent were presented electronically. The number of checks presented electronically in 2007 was approximately three times the number presented electronically just one year earlier.

That trend appears to be continuing, the article indicates. Data for June 2008, for example, indicate that about 53 percent of checks presented to depository institutions through Federal Reserve Banks were presented electronically, compared with about 30 percent in early 2007.

Overall, the number of noncash payments Americans make has soared over the years. Propelled by numerous socioeconomic factors, the average American made more than 300 noncash payments in 2006, compared to fewer than 150 in 1971. "Rising average wealth and income has allowed more consumption, which has evidently led to a rising number of payments for products and services that in the past households either provided for themselves or did without," according to the Federal Reserve Bulletin article, "Recent Payment Trends in the United States."

November 25, 2008