Financial Update (Third Quarter 2007)

Latest Fed Check Changes Show Electronic Payments Gaining Speed

check being scannedThe Federal Reserve System's recent announcement of further restructuring in its check processing infrastructure points out the continued, and likely accelerating, decline of paper check volume and accompanying growth in electronic payments.

In late June, the Federal Reserve Banks announced that Atlanta had been selected as one of the Fed's four sites that are expected to provide the full range of check processing services through at least mid-2011. Along with Atlanta, Philadelphia, Cleveland, and Dallas will become regional check operations hubs. The Reserve Banks' remaining 17 processing sites will scale back their check operations. All of these sites will print substitute checks, and some will capture paper checks.

Latest changes reflect trend
Since 2003, the Reserve Banks have more than halved the number of their check processing sites, from 45 to 21. The latest changes are expected to begin in 2008, and the Reserve Banks will review check infrastructure annually.

The most recent Federal Reserve study, published in 2004, found that about 37 billion checks were paid in the United States in 2003, down from 42 billion in 2001 and 50 billion in 1995, as electronic payments increased substantially. That trend appears to be gaining momentum, said Rich Oliver, executive vice president and head of the Federal Reserve's Retail Payments Office.

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In particular, it is becoming increasingly apparent that while businesses and individuals will continue to write checks, the vast majority of these checks will not be processed and transported as paper items. Instead, more and more checks will be processed as electronic images.

Electronic payments set to grow
Growth is accelerating in all categories of electronic payments—electronic checks, debit card transactions, Check 21 conversions, and point-of-sale scanners of checks at retail stores. Retailers are also beginning onsite bulk conversions of paper checks to electronic transactions, so-called back-office conversions.

And NACHA, the payments industry association, is launching a trial of a check truncation method, which will allow more paper checks, and even bank deposits, to be immediately made electronic. Some commercial banks will likely begin offering that service in early 2008, Oliver said.

That service, Oliver observed, is yet another sign that clearing paper checks is becoming less economical for financial institutions. As fewer and fewer paper checks are processed, handling each one becomes increasingly expensive.

July 30, 2007