Past performance is generally a good predictor of future results, but that likely won't be the case when the Federal Reserve Bank completes a study on Americans' check usage later this year. The most recent Fed study, released in 2007, concluded that approximately 33 billion checks were written in 2006, down from nearly 38 billion in 2003, a 4.1 percent annual decline. Celent predicts that the next study will show that check volumes declined much more sharply over the last three years. Here's why:
• Consumer enrollment in online bill payment continues to increase. According to NACHA, the number of bills paid online increased by about 1 billion per year from 2006 to 2009.
• Government check payments, representing 3 percent of check volume in 2006, have largely moved to the automated clearing house networks.
• With debit card use increasing, retailers are reporting that point-of-sale check usage is declining at more than 15 percent annually.
• Viable alternatives to check payments—Boku, CashEdge, FreshBooks, Mopay, PayPal, PaySimple, Square, Vendorin, to name a few—are multiplying at an astonishing rate. There has been growing activity in the business-to-business financial supply chain space for some time, and it's estimated that these new payment mechanisms will eventually result in 7 billion fewer checks written annually.
I wouldn't be surprised to learn that check volumes have declined by 10 percent per year when the Fed next releases results. This is a good thing. Exceptions, disputes and handling costs all improve as payments are made electronically rather than by check. Banks, which have been subsidizing consumer check payments for decades, should be doing whatever they can to speed the demise of check-writing. For example, a small bank in rural Oregon has reduced check handling costs by offering business customers free ACH payroll origination services. More and more banks, too, are adorning mobile banking platforms with person-to-person payments' capabilities, which could further reduce volume by 2 billion or so checks per year.
And here's another idea: with regulatory changes eroding the profitability of checking accounts, maybe it's time to consider charging for check-writing.
Meara is a senior analyst at Celent, a division of Oliver Wyman.