The increasing array of electronic payment options is dragging down the annual growth of paper checks, but experts said banks are at least a decade away from seeing any meaningful reduction in volume.
Indeed, in terms of sheer numbers, checks today are a more popular means of tendering payments than ever before. Annual check volume is at an all-time high of about 63 billion, and the number of checks is expected to grow about 3% per year for the foreseeable future, according to the Tower Group, Newton, Mass.
That projection, which is supported by other research organizations, means that banks may not see the full benefit of their investments in new delivery mechanisms for some time.
Most of the growth in check writing is in the consumer sector.
"We're seeing clear evidence of a slowdown in corporate-to-corporate check payments," said Richard Poje, partner at Treasury Strategies Inc., a Chicago consulting firm. "We're not seeing the same thing on the consumer side. What we're seeing is quite the opposite."
Of an estimated 2.2 billion transactions initiated by consumers per month, fewer than 100 million are done electronically, according to Treasury Strategies' statistics.
"Our most aggressive forecasts suggest that, over the next five to seven years, only about 15% of those remaining transactions will move to electronics," said Mr. Poje.
Electronic and card-based banking services were designed, in part, to replace checks, but in some cases they are having the opposite effect.
For example, credit card issuance has exploded in the past four years, seeming to point to increased use of electronic payments. However, since most consumers pay their monthly credit card bills by check, the proliferation of cards may actually be driving check volumes higher, at least in the short term.
In the corporate sector, Mr. Poje said, more signs are visible that check volumes soon could begin to drop meaningfully.
Increasingly, corporations have been consolidating payments with vendors and moving many of those payments to alternative mechanisms such as the automated clearing house, or ACH, system.
Consumers, on the other hand, are adding payments to their monthly routines - such as those for cellular telephones, cable television, and computer services companies - and paying their new bills by check.
Even those consumers who embrace on-line bill payments contribute to the proliferation of checks, Mr. Poje observed.
He estimated that more than 75% of so-called "electronic payments" initiated by consumers are ultimately completed with checks written by the providers of those services - a so-called "check and list" process.
Optimists expect a slow leveling off in the growth of checks written during the next several years.
But even if the growth of checks slowed to a trickle, banks, the Federal Reserve, and third-party processors would still be handling more than 60 billion checks a year.
Increasingly, these organizations are looking to technologies such as electronic check presentment, or ECP; check truncation; and check imaging to minimize the operational hassles of check clearing.
The Fed, for example, which is estimated to handle about one-third of all checks that clear through the payment system, encourages banks to present checks to their Federal Reserve district banks and accept check presentments from those Fed banks in electronic form.
"We're looking to ECP as a means to reduce the overall (check processing) infrastructure and to bring efficiencies to this process," said Sarah Green, senior vice president at the Boston Fed and retail payments product manager for the Federal Reserve System.
With ECP, instead of rushing paper checks among institutions, banks can electronically capture the pertinent payment information from checks' magnetic ink character recognition, or MICR, lines and transmit that information in lieu of or in advance of the movement of paper.
With the electronic information in hand, the paying bank can get a head start on processing check payment information, saving at least some costs associated with reader-sorter equipment.
Today, about 19% of all checks routed through the Fed are converted to electronic items, either on the way in (as electronic cash letters) or on the way out (as electronic presentments to the paying banks).
The Fed, and some local clearing houses - notably the New York Clearing House - also are using image technology to help build the case for ECP, capturing digitized images of checks that then can be used to support return item processing.
Return check processing requirements present serious obstacles to widespread adoption of ECP and check truncation.
Because of legal requirements and internal bank procedures, MICR- line information that is used to create an ECP file is insufficient to support the decision to return a check that a paying bank won't honor.
But if the collecting bank can transmit a digitized image of the check, upon request, to the paying bank, the latter might be more amenable to receiving electronic files in lieu of paper checks. "We're finding a tremendous amount of interest in our image services," said Ms. Green.
Ideally, Ms. Green said, she and her colleagues at the Fed would like to see the bulk of checks truncated at the bank of first deposit.
With truncation, the physical movement of paper is stopped entirely, while electronic images are captured, used for processing, and stored as needed for future reference.
The Fed already is working on the infrastructure to support such a plan, said Ms. Green. It is truncating the estimated 450 million checks issued per year by the U.S. Treasury and cleared through the Fed, and developing an electronic archive that offers access to the checks' images.
Full implementation of the archive is to begin in March and should be completed by next yearend, said Ms. Green.
For one thing, costs associated with maintaining the paper-based check clearing system are reduced.
Those costs include investments in reader-sorter equipment, in staffing, and in the ground and air transportation needed to shuttle paper checks among banks.
Focusing on ways to trim those costs will make it easier for banks to justify moving to electronic check processes. "There is more money to be saved by the electronification of the check, by far, than there is to be spent," said J.D. "Denny" Carreker, president of the Carreker Group, Dallas.
Bankers, in developing payment system strategies, often give short shrift to checks and electronic check processes, Mr. Carreker said.
"The electronification of checks represents much more strategic opportunity than focusing on the retail side," said Mr. Carreker, referring to industry efforts to promote debit cards and similar payment mechanisms.
The Electronic Check Clearing House Organization, or ECCHO, a nationwide consortium of banks that exchange ECP files, is a case in point.
Launched in 1989, ECCHO saw 219 million ECP transactions routed among members in 1994, according to the Carreker Group, which serves as the clearing house's executive director staff.
Debit cards, by comparison, took 19 years to reach the same transaction volume; ACH and credit card transactions each took about 12 years, according to ECCHO executives.
Last year, ECCHO was expecting member banks to exchange about 500 million ECP files.
"ECP is fundamental to every major initiative going forward," said Mr. Carreker. It can support truncation, check fraud avoidance, disbursement float-reduction strategies, even intra-holding company reengineering programs, he said.
Perhaps more importantly, ECP lets banks maintain a better hold on payments system evolution.
The check system is the exclusive province of the banking industry, Mr. Carreker observed. Banks own the infrastructure and the customer relationships.
"Banks have to take more of a leadership role in the timing and the form of the transformation of the paper-based payment system to an electronic-based payment system," Mr. Carreker said.
It's not something that can be done overnight, however.
After nearly a decade of ECP and truncation promotions by the Fed and ECCHO, fewer than 10% of all checks written are being converted to electronic form. That leaves a lot of paper checks flowing through the system.
"You have to take steps," said Ms. Green. "You're not going to have everybody tomorrow taking legal presentment (in electronic form) and not taking (paper) checks."
Ms. Murphy is a freelance writer based in Takoma Park, Md.
