For the last 25 years the banking industry has been trying to eliminate the paper check and move to electronic banking services.

In 1971, The Federal Reserve Board announced that it intended to move toward electronic funds transfer systems - and since then bankers have been looking at how to reduce paper and move money electronically.

The concept was certainly a good one. Electronic funds transfer is faster and more efficient than physically transporting paper checks. Faster clearing and settlement would speed up the transfer of funds, reduce float in the payment system, and substantially reduce the opportunities for abuse and fraud.

However, over the last 25 years the number of paper checks processed in the United States has risen instead of declining. In the 1970s, the number of paper checks grew about 7% a year - faster than the economy or population growth rates. In the 1980s, check volume grew at about a 5% annual rate. And now the number of checks continues to grow, though at a slower 2% rate.

This growth comes in spite of the enormous energy devoted to creating and promoting electronic banking products.

Today we have electronic banking products that in theory could eliminate the paper check completely.

Automated teller machines can replace checks written for cash - a practice that once generated 15% of the consumer checks in this country.

Debit cards were designed to replace checks written at the point of sale, a practice that generated about 35% of the consumer checks. Debit- card transactions have been slow to grow, and there are still billions of consumer checks written to merchants at the point of sale.

Finally, about 50% of the consumer checks were written to pay a bill from home. These checks were to be attacked with home banking systems.

Yet no home banking services have reduced substantially the number of checks written to pay bills.

On the corporate side, the movement to electronic banking has been equally aggressive.

The automated clearing house was built in 1972 to move money electronically. ACH service providers have been modestly successful at eliminating the production of payroll checks by offering the electronic direct deposit service.

They have been less successful in getting consumers to pay bills - even those that recur, such as utility bills or mortgage payments - electronically.

The most successful use of the ACH has been a program in which Social Security payments are deposited directly into consumers' bank accounts.

In addition, corporations are using the ACH to replace depository transfer checks and wire transfers, moving money from one corporate account to another electronically.

For all its services, the ACH generates about two billion payments annually, while check writing continues to exceed 60 billion items.

A 2% growth rate on 60 billion checks will generate over one billion more checks annually - far outpacing the growth of all electronic banking transactions.

Why is check writing still growing? Why haven't electronic banking services significantly affected check writing? Are bankers blind to the value of electronic banking or are they simply unable to convince the American public to stop writing checks?

The answer is not clear.

Bankers can significantly affect check writing through pricing policies. Though check fees may have discouraged some check writing, the price increases have been gradual enough so that the public has accepted them. The result has been that check writing has become even more profitable to the banks.

Banks have been very successful at promoting the use of ATM machines to get cash, but it is often more expensive to use an ATM than to write a check for cash at the branch.

Debit cards have been heavily promoted by Visa and MasterCard, but the merchant fees to accept debit cards have been much higher than those for accepting checks, causing some merchants to resist electronic debit.

Finally, technology has undermined the development of electronic banking from home.

The consumer requires a truly user-friendly home banking system. But the technology to make that happen is both expensive and not fully developed at this time.

The simple fact is that the check is both inexpensive to process today and a source of lucrative direct-fee income to the banking system. There is nothing inherently immoral or stupid about processing paper. It is not inherently obvious that electronic processing must be more profitable than paper processing. There is no clear marketing strategy that will get consumers or corporations to switch from writing checks to using electronic banking.

The banking industry has developed a comprehensive strategy for making the check even more efficient over the next decade.

Through the use of image technology, financial institutions will be able to process checks more efficiently inside a single bank, and from bank to bank.

Electronic check presentment promises to clear checks more quickly, reduce check fraud and return checks more quickly if they cannot be paid. In addition, the industry is developing more efficient techniques for encoding checks, handling unreadable checks, verifying the signatures on checks, researching errors and making adjustments, clearing checks from bank to bank and eventually sending out customer statements.

Just as important, the check has a very strong fee income stream for banking as well. If a consumer writes a check to a merchant that overdraws his account and will not be paid, the nonsufficient funds fee can be $30, but if the same transaction were attempted with a debit card at the point of sale, the authorization will be denied and the bank will receive no fee income from that transaction. NSF fee income can be a significant item, since about 1% of all checks are returned, the majority for NSF.

To be sure, providers of electronic banking services also have built fee income streams and made their operations more efficient. Banks are now charging annual fees for plastic cards, increasing ATM fees, linking merchant discounts fees to debit-card transactions, charging the same fee for ACH transactions as for checks, and billing monthly fees for home banking services.

However, even as volume builds in the electronic banking world, the economies of scale in this business are nowhere near the levels achieved in checking operations.

A group of banks recently determined to study the relative costs and benefits of checks and electronic banking channels.

These institutions aim to measure the costs and revenues directly associated with processing transactions from checks, ATMs, debit cards, the ACH, and phone-based bill payment.

The study will compare the profitability of these services across the participating banks to see what can be done to reduce costs and increase revenues.

I don't want to give the impression that I believe checks are better than electronic banking services. Far from it.

For the last 25 years, I have analyzed electronic banking services, trying to figure how to present them, promote them, and make them successful. I have built my professional reputation on electronic banking, and I want electronic banking services to succeed and eventually to replace the check.

But, speaking realistically, the check is here to stay.

The American public has a love affair with writing checks, and the banking industry has done everything in its power to make the check a ubiquitous payment instrument.

Instead of trying to get rid of one of its most successful products, I believe banks have tried to capitalize on that success by making check services as profitable as possible. And now banks are doing the same for electronic banking services.

Instead of pitting one service against the over or trying to replace one service with another, many banks are trying to make them all profitable, so that they will make money no matter what the public uses to transfer funds.

Unfortunately, no one I know of has measured how profitable they are relative to each other. And no one has looked at the best practices that each service has to make them more efficient from bank to bank.

I would argue that the case for electronic funds transfer has to be made from each financial institution's perspective, not from society's, because financial institutions act in their own self-interest.

Finally, it should be emphasized that the check collection system is the monopoly of the banking industry. Only the major banks and vendors serving those banks know how to process checks efficiently.

Banking has the franchise on check processing, and it is very profitable. On the other hand, electronic banking has many competitors, and some see this area as an enormous opportunity for themselves, since they have strong electronic capabilities.

Microsoft's Bill Gates has been quoted as saying banks are dinosaurs. In the world of electronic banking, it is possible for the likes of a Microsoft to compete with banks, but it cannot compete in processing paper.

Before banks embrace this electronic funds transfer world to the exclusion of paper, let's not throw the baby out with the bathwater.

Let's take a hard look at how profitable checks are and how profitable they will be over the next decade.

Let's also look at how banks can control the electronic world of the future and how profitable that world will be.

Let's work at keeping both the paper and electronic payments systems franchises where they belong ... in the banking industry.

Mr. Lipis is president of Global Concepts Inc., an Atlanta-based research and consulting firm.

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