Partners (Number 3, 2004)

Go Direct, Go Farther

Since the 1970s, pundits have predicted a checkless society—one that would allow for flows of funds in a more timely, seamless fashion. Over the last 30 years, credit and debit card use has soared along with the proliferation of automated teller machines. Public acceptance of electronic transactions has made direct deposit of paychecks commonplace. Personal computers with internet access have become fixtures in many American homes now, fueling online banking and e-commerce.

But even as the number of electronic transactions has increased, the volume of checks has continued to grow as well. Given that today’s technology allows for the elimination of the old fashioned paper check, why hasn’t it happened?

Perhaps it’s more accurate to say, “It hasn’t happened yet.” The tide is finally beginning to turn. In 2003, for the first time, national check volume began to decline, and analysts predict a downward trend is now emerging.

Converts to electronic banking are sold on the speed, convenience, and safety of receiving or paying money electronically. No postage stamps are needed, and the cost of buying checks is eliminated. So why do some people still stick with paper?

Many consumers, it seems, still want to put their hands on a piece of paper, despite the chance of mail delay, risk of theft, the inconvenience of going to the bank, and delayed access to their funds. Research shows that some individuals, especially senior citizens, have emotional attachments to paper checks or else don’t trust or understand how direct deposit works.

In the 1990s, use of direct deposit by federal beneficiaries grew steadily. However, it has since leveled off. Nearly a third of federal beneficiaries currently receiving checks indicated they were somewhat inclined to switch to direct deposit, while over half were resistant.

The Social Security Administration delivers over 13 million benefit checks by mail each month at a reported cost to the U.S. Department of the Treasury of 61 cents per check including postage and handling. This puts the annual cost of issuing paper checks over direct deposit transfers at approximately $100 million.

Considering the clear advantages of direct deposit, one might suppose that federal beneficiaries resistant to direct deposit do not have personal bank accounts. However, only about 33 percent of those receiving physical checks, around 4.5 million, lack bank accounts.

The Federal Reserve understands the advantages of direct deposit and its importance in our economy, especially in promoting an efficient and effective payments system. In response, the Fed has implemented the new Check 21 legislation, which provides for an electronic “substitute check” to facilitate payment. To promote direct deposit, the Fed is lending its support to the Treasury in its “Go Direct” campaign.

“Go Direct” seeks to educate those currently receiving paper checks about the advantages of direct deposit. The benefit to the consumer is unmistakable. And savings to the Treasury are significant. We have identified ten markets in which to pilot this educational outreach program and will seek collaboration with banks and community-based organizations to ensure a successful campaign.

With “Go Direct,” everybody wins, and everyone’s dollar goes farther.

Juan C. Sanchez
Community Affairs Officer


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