Financial Update (April-June 2001)
Economics of Checks
The Economics of Americans Love Affair With Checks
hecks continue to dominate the market for noncash retail payments in the United States. Each year, U.S. residents write between 65 billion and 70 billion checks, an average of one check per business day per resident. This U.S. dependence on checks is unique among developed countries. It is also extremely costly: by switching from checks to other forms of payment, Americans could save between $60 billion and $100 billion dollars per year.
In an article in the Atlanta Feds Economic Review (Fourth Quarter 2000), James McAndrews and William Roberds explore the question of why checks continue to see such wide use within the United States. Economists explanations have focused on check float the interest earned by a check writer between the time a check is received as payment and the time the payment is settled.
The authors explain how check float arises within the U.S. payment system and how float can discourage the adoption of other types of payment.
The authors also consider two broad categories of proposals for reforming the U.S. payment system. The first set of proposals promotes the use of electronic technology in the check collection process, particularly through electronic check presentment, whereby a check is settled using information from an electronic file instead of from the paper check.
The second set of proposals would substantially reallocate property rights within the check payment system to lessen the incentives for capturing float.
While both types of proposals hold some promise, they could result in duplicative and inefficient investment. Some proposals could also redistribute costs across payment-system participants in a way that would make the proposals difficult to implement politically.
Over the near future, the authors conclude, policymakers will need to weigh these proposals drawbacks against the benefits of a faster transition to a more efficient payment system.