As Check Volumes Plummet The Fed Speeds Up Infratructure Changes

Implications: Since the passage of the Check 21 Act in October 2004, significant changes have occurred in traditional check processing. Banks, credit unions, image networks and the Federal Reserve are working to build the infrastructure to transition banks and credit unions to 100% electronic check imaging/exchange from traditional check processing, which could save banks and credit unions as much as $2 billion annually by reducing transportation costs, float time, check fraud and check processing costs. Additionally, consumers' shift in payment preferences from cash and checks to e-Payments has accounted for over 66% growth of all noncash payments in 2006, contributing to the sharp decline in check volumes annually. Check volumes began declining in 1995, when approximately 49.5 billion checks were paid. ACH payments has also trumped check payments as ACH e-Check conversion programs has expanded with billers and merchants who convert checks at the POS (Point-of-Sale) and POP (Point-of-Purchase).

Analysis: More than eight billion check payments totaling over $11.5 trillion have moved from traditional paper based processing to electronic image/exchange processing since the passage of the Check 21 Act (The Check Clearing For the 21st Century). Paper checks are transitioning to electronic images of checks at an unprecedented pace, resulting in a decline in paper check volumes of -6.4% annually. Substitute checks (a.k.a. IRDs - Image Replacement Documents - paper printouts of check images authorized under the Check 21 Act in lieu of the original check) are also assisting in the evolution of traditional paper check processing to electronic image clearing of checks, prompting the Federal Reserve to speed up infrastructure changes at its processing facilities throughout the U.S.

1.  As image/exchange volumes increase the cost of check processing will increase by an average of 5-6% annually.  Essentially, the lower the volume of checks processed the higher the costs will be to process those checks

2.  Image/exchange enables institutions to streamline paper check processing. By sending images electronically rather than transporting the physical paper checks, banks and credit unions can reduce transportation costs, check fraud, float time and check processing costs

Takeaway:  The Federal Reserve is also participating in image/exchange of paper checks and has built incentives into its new fee structure for check processing in 2008. If banks and credit unions process electronic images of checks, the Fed will reduce processing costs and will raise paper processing fees and IRD fees (Image Replacement Documents) for those institutions who still use traditional check processing and IRDs because they haven't made or either can't afford to make infrastructure investments to benefit from cheaper electronic check processing.