By Patti Murphy
The Takoma Group
To paraphrase a billboard I saw in Southern California a few years back: checks are so 20th century. I recall thinking at the time the claim was a bit presumptuous. After all, Americans were writing more than 30 billion checks a year, and checks accounted for 32 percent of all noncash payments, the Federal Reserve said at the time.
Now, the Fed reports that check writing has been eclipsed by debit card payments, and I'm reassessing my attitude about the billboard message, at least as it relates to paper checks.
According to the 2010 Federal Reserve Payments Study, U.S. consumers made 108.9 billion noncash payments in 2009 (excluding bank-to-bank wire transfers).
Just 24.4 billion of those were checks that cleared through interbank networks, a 7.2 percent decline over 2006 interbank check clearing volumes. The total value of checks cleared through the banking system last year was $31.6 trillion, according to the Fed's latest survey.
While the Fed's data show 24.4 million checks cleared between banks in 2009, the actual number of checks written was higher. The difference represents the number of checks deposited in accounts at banks they were drawn on, referred to as "on-us items," and those converted to electronic payments and cleared through the automated clearing house (ACH) system. Eleven percent, or 3.1 billion checks written by consumers in 2009, were converted to electronic files and cleared through the ACH, the Fed said.
The decline in paper checks in transit is more telling. Roughly 96 percent of checks cleared between banks (known as interbank checks) involved electronic clearing last year, compared to roughly 43 percent in 2007.
Approximately 13 percent of checks were deposited as image files, the Fed said; in other words, the entire clearing and settlement process was paperless.
"Not only does this study show the continued move from checks to electronic means of making payments, but we also see the extraordinary progress the industry has made in electronifying the clearing process for the 27.5 billion checks still being written," said Richard Oliver, Executive Vice President at the Federal Reserve Bank of Atlanta, which sponsored the study.
The Fed's research shows U.S. consumers still like checks, however, especially for everyday items like bill payments, POS transactions and payments between individuals. Taken together, bill payment and POS checks accounted for 44 percent of all checks written in 2009, even though both types of transactions were less popular than in 2006. The Fed puts the decline at 10.6 percent on an annualized basis.
Fewer business-to-business (B2B) and business-to-consumer (B2C) checks were counted last year, but the pace of change was slower than it was for consumer-to-business (C2B) checks. In 2006, the Fed counted 8.3 billion B2B checks; by 2009 that total had fallen to 7.8 billion. B2C checks, meanwhile, fell from 5.6 billion to 5.1 billion during the same period.
Bucking the overall trend, checks written by individuals actually increased by 200 million between 2006 and 2009, when the Fed counted 2.4 billion C2B checks.
Oliver, the Fed system's point man on retail payment systems, concedes the economy may have influenced the data but believes the overall trend away from labor- and cost-intensive paper checks is positive.
"The results of the study clearly underscore the nation's efforts to move toward a more efficient electronic clearing system for all types of retail payments," Oliver noted. "It is also likely that the results reflect changing consumer behavior during difficult economic times."
The economy is the likely reason for a 0.2 percent drop in credit card payments between 2006 and 2009 as well. Americans made 21.6 billion payments valued at $1.9 trillion using credit cards in 2009, compared with $2.1 trillion in 2006.
The Fed's survey data clearly illustrate the growing popularity of all types of debit cards, including prepaid debit cards. Expanding at a compound annual rate of 21.5 percent between 2006 and 2009, payments using prepaid debit cards charted the most remarkable growth, although in terms of raw numbers, it looks like small potatoes.
There were 6 billion payments made using prepaid debit cards last year, including electronic benefit transfer, payroll and private label gift cards; in 2006, the Fed counted 3.3 billion prepaid card payments. Before that, prepaid card payment totals were too insignificant to be counted.
Americans made 14.5 billion payments using PIN debit last year and another 23.4 billion payments using signature debit cards.
In 2006, those totals were 9.4 billion and 15.7 billion, respectively. Together, these two types of debit cards grew at a compound annualized rate of 14.8 percent since the Fed's last payments survey.
But even debit cards were not immune to the perils of an uncertain economy; the average signature debit card payment fell from $40 in 2006 to $37 last year, according to the Fed's survey. The average PIN-based debit card payment, meanwhile, increased from $37 in 2006 to $39 in 2009.
The 2010 Federal Reserve Payments Study is the third in a series of triennial reports on U.S. consumer payment habits. It included three separate research efforts: a study in which depository institutions were asked to provide data on checks and debit card payments; a survey of the largest credit card issuers, processors and payment networks; and a check study that examined a random sample of checks archived with Viewpointe Archive Services LLC.
Following is a quick overview of major findings reported.
In 2009, there were:
A detailed analysis of the Fed's latest payments survey data (including insights on processing methods and emerging payments) should be ready early next year, Oliver said.
The 2010 Federal Reserve Payments Study is available at www.frbservices.org.
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. She is also the founder of InsideMicrofinance.com. Email her at firstname.lastname@example.org.
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