Growth In e-Payments Volume Contributes to -6.4% Annual Check Decline

Implications: e-Payments growth accounted for over 66% of all noncash payments in 2006, contributing to the decline in check volume annually,  since 1995 when approximately 49.5 billion checks were paid. Approximately 30.6 billion checks were paid in 2006 with a value of $41.7 trillion, down from 37.3 billion checks in 2003. ACH payments has also trumped check payments as ACH e-Check conversion programs have expanded with billers and merchants who convert checks at the POS (Point-of-Sale) and POP (Point-of-Purchase). Since the passage of the Check 21 Act over three years ago, significant changes have occurred in the way checks are processed. 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, which could potentially save banks and credit unions as much as $2 billion annually by reducing transportation costs, float time, check fraud and check process costs.

Analysis: Since the passage of the Check 21 Act (The Check Clearing Act for The 21st Century) in October 2004, more than eight billion check payments totaling over $11.5 trillion has moved from traditional paper based processing to electronic image processing. Paper checks are transitioning to electronic images of checks at an unprecedented pace, resulting in a decline in paper check volume of -6.4% annually. Substitute checks (a.k.a. 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.

1.  As image/exchange volume increases 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 plans to build 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 its paper processing fees and IRD fees for those institutions who still use traditional check processing and IRDs (Image Replacement Documents) because they haven't made or either can't afford to make infrastructure investments to benefit from cheaper electronic check processing. Another twist to this story is that check electronification may offer businesses ways to process checks so inexpensively in relation to processing fees for credit cards that it may spur a number of merchants to promote payment by check over plastic, which could impact the card networks interchange revenue.