The surging popularity of lockbox check conversion is accelerating the decline in paper check volumes and has prompted the Federal Reserve banks to lower their 2004 check processing projections.
And with the number of paper checks being converted into automated clearing house transactions at lockbox sites likely to double next year, that decline will probably become even steeper in 2005.
Patrick K. Barron, the first vice president of the Federal Reserve Bank of Atlanta and the director of the Federal Reserve System’s retail payments office, said the practice known as ARC, or accounts receivable conversion, is having “a noticeable impact” on the volume of checks being processed through the Federal Reserve System.
According to Nacha, the electronic payments association, about 1 billion checks will be converted into ACH transactions using the ARC format this year. That comes to 2.5% of the estimated 40 billion checks that will be written this year. “ARC is making a big difference,” Mr. Barron said.
ARC is just one reason for the overall drop in paper check volume, along with increased use of debit, credit cards, and online bill payment. However, with ARC volume reaching 209 million items in the second quarter, 791% more than a year earlier, it is clearly becoming a more important factor.
In October the Fed said that its check volume had fallen 4.7% and that it would drop 9% this year. But this week Mr. Barron said overall check volume for 2004 could be down as much as 11%.
It is not just because consumers are writing fewer checks, but also because more checks are being converted into electronic transactions before they enter the industry’s check-clearing stream. “That’s not necessarily the number of checks written,” Mr. Barron said. “It’s the number of checks cleared by various intermediaries.”
The Fed historically has handled about half of interbank check clearing, though observers say it is now closer to one-third because of growing use of private-sector outfits such as Clearing House Payments Co. and the National Clearing House Association.
William B. Nelson, an executive vice president at Nacha, of Herndon, Va., said that ARC is poised for continued growth. Right now a few dozen banks that operate large lockbox operations are using the format, and he estimated that only 10% of consumer check payments are being converted.
But this is about to change. “There are literally dozens and dozens of banks jumping into the market and offering ARC to their customers, banks of all sizes,” Mr. Nelson said. “It’s not just the big banks anymore.”
As a result, ARC volumes could double again in 2005, to 2 billion items, which would continue to drive down paper check volume, Mr. Nelson said.
Another key development is the Check Clearing for the 21st Century Act, which many expect will facilitate the use of electronic check images for settling and clearing. And just like ARC transactions, the shift to image exchange networks will have the effect of removing paper items from the check processing system.
Mr. Barron said he expects the law to contribute to further declines in check volumes in 2005, which he said would probably be steeper than this year. He said he could not tell just how Check 21 will affect paper check use, because it is unclear when banks will begin to use image exchange systems.
Mr. Barron said the declines due to ARC played a role in the Fed’s decision, announced Monday, to close nine check-clearing centers in 2005 and 2006. This is on top of the 13 site closings announced last year by the Fed; by early 2006 the number of Fed sites would fall from 45 to 23.
The Fed said it plans to discontinue item processing operations in Boston; Columbus, Ohio; Birmingham, Ala.; Nashville; Detroit; Oklahoma City; Houston; Portland, Ore.; and Salt Lake City. And it may consider closing more sites as check volume continues to slide, Mr. Barron said.
