The Federal Reserve Board is gearing up to conduct a fresh survey of the volume of paper checks written annually, a follow-up to the landmark 2001 research that led to the first clear conclusion that check-writing was on the decline.
Fed officials have been holding a series of meetings to examine the methodology for next year's survey, which will be conducted in April, the same month in which the 2001 version was done. They will try to duplicate the original work closely, to keep the results as comparable as possible. It took until November 2001 to deliver the results of that year's survey-the first the Fed had done in 22 years-but this time the data will be delivered sooner, an official said.
"There's clear evidence that check volumes are declining today at 3% per year," said Richard R. Oliver, the retail payments product manager for the Federal Reserve System. "Some large institutions are reporting much higher rates of decline."
Oliver, who described the project at the Payments 2003 conference held last week in Orlando by Nacha, the electronic payments organization, said the 2004 figure will be compared to the 42.5-billion checks that the Fed ultimately concluded were written in 2001.
Peak Has Come & Gone
The Fed further concluded that the peak for check volumes occurred sometime in the late 1990s but could not be pinpointed. "We do know that it peaked, and we do know that the rate of decline is very, very measurable," Oliver said.
With checks on the wane, debit card payments on the rise, and electronic bill payments becoming more common, the implications for banks-how to allocate processing resources, how to plan for future needs-are big.
"We have a market in flux, a change we've been predicting for 30 years," Oliver said. "Now it's happening, and we're confronted in the industry with what to do about it."
The plusses and minuses of the existing systems for processing different forms of transactions have led to much talk in payment circles about the prospects for convergence, which means, essentially, marrying the characteristics of different payment systems.
Each system has its own strengths and weaknesses, and it would be ideal if the strengths could be combined, said Christopher J.Haney, a founder and director of the software firm Polizer & Haney, who spoke on the same Nacha panel as Oliver.
For example, Haney said, for banks the automated clearinghouse has the advantages of being inexpensive and ubiquitous, but it is not the best option in terms of authorizations or guaranteeing good funds. A credit card transaction, on the other hand, is fast but relatively expensive, he said.
Some examples of hybridization exist, such as check truncation and point of sale check conversion, but when it comes to integrating the various systems, "we've got a lot of work to be done," he said.
Oliver of the Fed gave another example of a hybrid system: the same-day ACH service his agency has been developing, which would lack the speed of a money wire but would take on some of the characteristics of a wire system.
"A same-day ACH system would attract much more new volume, if you could get the immediacy," he said. "The pivotal issue in trying to decide about convergence is what the business case is behind it."
Clashing Business Cases
And various constituencies will see clashing business cases, he said. From a retailer's perspective, it would be good to get paid in a day, rather than in several days, as is the case in a traditional ACH payment.
From a bank's perspective, it might be a problem to have same-day ACH payments all hitting their respective accounts at the same time, 5 p.m. With large credits coming in late in the day, "are there risk management issues?" Oliver said.
With overnight ACH, banks can more easily validate funds on hand.
Steve Winston, the retail operation manager at Capital One Services Inc., a division of Capital One Financial Corp., talked about the potential for lockbox check truncation, which the credit card issuer has just begun to pilot. Capital One is already a major ACH originator, largely in the WEB and TEL categories (which apply to payments made through the Web and by telephone), and it would like to build a flourishing operation in converting paper checks to ACH transactions after they reach the company by mail, Winston said.
'Pretty Big Implications'
"The implications of check conversion are pretty big," he said. "For consumers, I think there's just a lot of confusion. They're starting to accept everything. For billers and financial institutions, it's about cost, it's about risk-what systems do you invest in? Do you start to push for these huge lockbox operations, or do you push electronic billing?"
Electronic processing is "much faster," he said. "You don't have to transport the physical checks."
Another advantage is that fewer sets of eyes see the personal information on a check, such as the check-writer's Social Security or telephone number, and that reduces the likelihood of fraud.
Winston disclosed that a few weeks ago, a courier for Capital One lost $1.5 million of customers' checks. "Today we don't really know where those checks are."
Capital One issued exception pay files for the lost items, he said.
One lesson from this episode, according to Winston, is that convergence techniques such as check conversion could solve a lot of logistical problems.
"What does it take to make a convergence payment program successful? The change is accepted by the consumer, and there are revenue models that benefit all involved."
