The Federal Reserve banks are likely to accelerate their plans to shutter check processing facilities in response to the increasing drop-off in check use, and commercial banks may follow suit, according to a Fed executive.
"The pace of decline in paper checks, what we call legacy checks, is going to continue if not accelerate," said Richard R. Oliver, an executive vice president at the Federal Reserve Bank of Atlanta and the manager of the Fed's Retail Payments Office, said in an interview Tuesday. "We have to continue to accelerate the downsizing of our paper processing infrastructure."
According to a study the Federal Reserve Board's Financial Services Policy Committee released Tuesday, nearly half the checks written in 2006 were sent from consumers to businesses, either as remittances, such as utility payments, or at the point of sale.
About 30.6 million checks were processed that year, and more than 15 million were eligible for conversion to automated clearing house transactions, Mr. Oliver said.
The Fed reported in December that 2.6 million checks were converted to ACH transactions in 2006, but the use of check conversion formats has grown dramatically since then, as have other electronic payment options.
Tony Hayes, a partner in Marsh & McLennan Cos.' Oliver Wyman Financial Services, said that consumer-to-business checks "is the category of checks that is declining by far the most quickly." Not only are billers turning more checks into ACH files, but consumers also are using checks less often at the point of sale and to pay their bills, he said. "Both of those markets are in free fall."
The Fed has announced plans to cut back so that by mid-2011 it will have four full-service item processing centers, in Atlanta, Cleveland, Dallas, and Philadelphia; 17 other centers will remain open but will handle only images. The Fed had 45 full-service processing sites in 2003.
"The whole industry is facing that dilemma," Mr. Oliver said, and banks are going to be left with processing equipment, buildings, and transportation that they no longer need. "The volumes are running off faster than you can strip out the assets. You're going to have the issue of wrestling with profitability because of all these stranded assets."
The study found that consumers generated 58% of the checks written in 2006, with businesses writing 38.8% and government agencies writing 2.9%.
In addition, 35% of checks were for $50 or less, and more than 80% were for $500 or less. Only 5% of checks were for more than $2,500.
Though businesses wrote fewer than 40% of all checks, business-to-business checks accounted for 58.6% of the total value of check payments, the study found, because of the high dollar value of such payments.
The study was based on a sample of 30,000 checks from nine participating banks, all of which use the shared image archive operated by Viewpointe LLC.
