Paper check processing volume at the Federal Reserve banks is falling off at an increasingly steeper rate.
The central bank now projects that its check processing volume will fall 13% to 15% next year. This would follow an anticipated drop of 10% to 11% this year - a figure that the Fed said in late 2003 would be down 9%, and then had to revise this summer. Check volume in 2003 fell 4.7% from the previous year.
Fred Herr, a senior vice president in the Federal Reserve System's retail payments office, said the decline was a result of the growing popularity of alternative payment methods, including debit transactions and online payments. He also stressed the surging popularity of converting checks to automated clearing house transactions at the retail lockbox, known as accounts receivable conversion, or ARC.
Notably, the Fed's projections for 2005 include only a small bump from the Check Clearing for the 21st Century Act. Though the law takes effect this month and is expected to facilitate a broad shift to settling checks with digital images instead of the original paper, Mr. Herr does not expect it to affect check volume appreciably until late in 2005.
"Check 21 is going to have an impact on processing volumes," he said. "But next year we're not attributing a lot of it to Check 21. Toward the end of the year it will begin to accelerate." The Fed sees the biggest impact from Check 21 occurring in 2006, he said.
The Fed said that about one-third of the 2004 volume decline was caused by the use of ARC. Nacha, the electronic payments association, reported in July that ARC was on track for 1 billion payments this year, up from 220 million in 2003, and that it would continue growing briskly in 2005.
In addition, Mr. Herr said, big bank mergers mean that more checks will be cleared "on us," without being routed through the Fed for processing.
Mr. Herr was careful to note that the projected decline represents only the anticipated drop in the Fed's processing volume, rather than the overall drop in the number of checks being written. In January of this year the Fed said it would update its report on overall check volumes, with additional information on electronic payments. The updated study should be available in November.
As volume falls the Fed is consolidating its processing operations. The central bank announced plans in August to shut down nine check-clearing centers in 2005 and 2006, in addition to the closing of 13 sites announced last year.
Edward Neumann, the managing director of consulting at Javelin Strategy and Research in Pleasanton, Calif., said the Fed's projections match the outlook he has heard from banks.
He expects another year of strong growth for ARC, as more billers convert payments at the lockbox. "There are still a lot of checks that can be wrung out of the system," Mr. Neumann said.
Every major bank is testing its check imaging systems and many are beginning pilot programs with image exchange networks, he said. He said most are projecting that their image exchange volume will not begin rising, and affecting paper check processing volume, until the second half of 2005.
But when image exchange does take off, volumes could shift fairly quickly, Mr. Neumann said. "At some of the large institutions, it will be like a light switch. For the other 8,000-plus institutions, it will be more of a slower curve."
