Fed Study Reveals Shift Away From Check Writing

May 16, 2002
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BOSTON — A new study by the Federal Reserve System suggests the retail payment system in the United States is migrating from check writing to electronic forms of payment.

Although paper checks are still the dominant form of non-cash payment, they represent a smaller share of the payment market today.

In its first comprehensive study of the retail payment system in 20 years, the Fed found that checks have declined from about 85 percent of non-cash payments in 1979 to about 60 percent of non-cash payments today.

According to the study, of the 80 billion retail payments that American consumers and businesses make annually, nearly 50 billion payments are by paper check and 30 billion are by electronic means, such as debit and credit cards and the Automated Clearing House (ACH).

Conducted in March and April, the study involved 1,300 banks, thrifts and credit unions and 89 electronic payment processors queried through three Fed surveys on methods and volumes of retail payments.

Since the last Federal Reserve Bank study in 1979, the number of non-cash retail payments has more than doubled from 37 billion to 80 billion.

The 30 billion retail electronic payments originated in the United States in 2000 were valued at $7 trillion and were broken down as follows:

**Credit card transactions represented 15 billion, or half, of electronic transactions and had a collective worth of $1.23 trillion.

**Debit cards were the second most dominant form of electronic payment, with 8.3 billion transactions worth $348 billion.

**ACH was the third most commonly used electronic payment method, with 5.6 billion in transactions. However, ACH carried more than 75 percent of all electronic payment value, or $5.67 trillion.

The data show that consumer bill payments and point-of-sale transactions offer the most opportunities for substitution with electronic payment instruments, as they are the largest categories of checks written today.

According to the study, 49 billion checks are written annually in the U.S., totaling $47.4 trillion in check payments. That compares to 32 billion checks written in 1979 totaling $24 trillion.

As to check volume, consumers write the majority of checks — 51 percent— and businesses receive the largest share of checks — 50 percent.

Businesses, however, write 62 percent and receive 56 percent of checks by value. The average check value today is $965, compared with $757 in 1979.

National Processing Company (NPC), a Louisville, Ky.-based subsidiary of National City Corp., can attest to the trend toward electronic payments.

NPC, the second largest credit card processing company in the world, processes about 20 percent of Visa and MasterCard credit card transactions in the United States for a full range of merchants, from large national retailers to regional merchants to small mom-and-pop operations, said David Fountain, chief financial officer.

NPC serves as the back office operations for merchants in the authorization and settlement of credit card transactions. The company saw an average of 27.5 percent growth in transactions between 1998 and 2000.

According to The Nilson Report, which provides news and research on consumer payment systems, card-based payments, including debit cards, represented about 28 percent of the total payment volume in 1999. Nilson predicts that will rise to 49 percent by 2010.

Nilson charts show that checks represented about 46 percent of transactions in 1999 and project that by 2010 checks will account for about 18 percent of transactions. Cash represented about 19 percent of transactions in 1999, and Nilson predicts that will decrease to 15 percent by 2010.

“Based on what we’ve seen in our business, we believe that this is a real trend, it is happening. We don’t’ believe these are unreasonable numbers that Nilson has on its charts,” Fountain said.

Younger people are much more accepting of plastic as a payment method than are those who grew up writing checks, he observed.

“But if you look at the whole population there’s been a huge movement to card-based payments, really, because of the convenience factor. I think that’s one of the biggest draws.

“You can just swipe a card to capture all the data, you sign the ticket and you’re out of there; you don’t have to write checks, pull out your driver’s license and prove you are who you are. So ease of use is a big driver behind this shift in behavior.”

Credit card incentives, such as frequent flyer miles, also encourage the use of plastic.

“There are all kinds of card-based products now that reward consumers for their usage of those cards,” Fountain added. “It really drives people’s behavior and their desire to want to use those kinds of cards to make payments because every time they do they’re earning some kind of reward incentive that they can use for something that they value.”

Another big driver is debit cards, he said. Consumers aged 18 and over now automatically receive debit cards from banks when they open a checking account. Banks want to encourage consumers to use a debit card because of the disproportionate back office costs of writing a check versus a debit card transaction, he said, and more consumers are adopting debit cards simply because they’re easier to use than paper checks.

Debit cards are still a small percentage of overall transactions because they’re relatively new, but they’re proliferating and their growth rate is much higher than that of credit cards, Fountain pointed out.

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