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The Green Sheet Online Edition

December 26, 2007 • Issue 07:12:02

Insider's report on payments
Rock, paper, electronics

By Patti Murphy
The Takoma Group

Electronic payments now outnumber checks by a factor of almost two to one. That's the news from the 2007 Federal Reserve Payments Study. However, the Fed found that with an ever-growing number of checks payments, electronic exchange technologies are used at some point during the collection process.

At the time of its survey, the Fed said about 40% of all interbank checks were replaced with electronic information along the collection process.

So, although checks are sure to remain part of the U.S. payments mix for many years to come, it's pretty clear now that the paper shuffle associated with checks is following in the footsteps of telex. (As recently as 20 years ago, there were banks still using telexes to initiate wire transfers.)

"The results of our study underscore the ongoing importance of check electronification and other innovations that improve the efficiency of the U.S. payments system," said Richard Oliver, Executive Vice President of the Federal Reserve Bank of Atlanta and the Federal Reserve Banks' Product Manager for retail payments.

"With around 33 billion checks written in 2006, we expect checks to be around for some time," he added.

Checks go electronic, debit eclipses credit

According to the Fed's research, Americans made 93 billion noncash payments in 2006. Just 33 billion of those payments were checks; and of those, 3 billion ended up getting cleared through the automated clearing house (ACH) system.

Under ACH rules, certain types of consumer checks - those written at the POS or submitted as bill payments, for example - can be converted to electronic payments and cleared through the ACH.

The report also shows that for the first time since anyone has been keeping track, debit card usage now surpasses credit card usage, although in terms of dollars Americans are spending much more with credit than they are with debit cards.

One of the most significant changes identified by the Fed's research is the increasing number of checks that end up getting processed as electronic payments.

About one-third of the checks written in 2006 (3 billion) wound up as ACH debits, which represents an eight-fold increase over 2003 tallies, the Fed said.

According to NACHA - The Electronic Payments Association, the fastest growing applications for check conversion is POP, which is used to convert POS checks to ACH items.

During the third quarter the ACH saw more than 123 million POP transactions, compared to just over 80 million during the same period in 2006, NACHA reported.

The next two fastest growing check conversion applications are for Internet payments (so-called Web transactions), which increased 26.62% over the third quarter of 2006 and consumer bill payments (ARC transactions), which grew 19.63% year over year.

In addition to the ACH, some financial institutions are exchanging check images in lieu of moving paper checks through the clearing stream.

SVPCO, the largest private sector image exchange network, is on track to move about 3 billion electronic check files this year. During the month of October, the network cleared 328.7 million checks worth $535 billion.

In October, Aite Group issued optimistic projections about check clearing. Nancy Atkinson, a Senior Analyst at Aite said she expects the number of checks written will fall to 25 billion, but only about one-quarter of those payments will clear in paper form.

Several other analysts have made similarly optimistic projections. And a study by the Independent Bankers Association of America released this summer, showed that most of America's hometown banks (in excess of 85%) expect to be sending and receiving check images within two years.

Two-thirds will be offering merchant remote check capture, and 75% will be capturing check images at the branch level.

Parsing the data

By the Fed's reckoning, electronic and check payments were roughly equivalent in 2003, but by 2006 electronic payments had soared by 19 billion, while the number of checks paid fell by about 7 billion.

ACH transactions grew by almost 6 billion during that three-year span and totaled 14.6 billion in 2006, the Fed said. Those transactions carried a combined value of $31 trillion, making ACH payments the leader by far among electronic payments, with 18.6% annualized growth between 2003 and 2006.

Here's a rundown of other highlights of the Fed's 2007 Payments Study.

  • The 30.6 billion checks that cleared as checks in 2006 had a combined total value of $41.7 trillion.

  • Electronic payments totaled 62.7 billion in 2006, for a combined value of $34.7 trillion.

  • There were 25.3 billion debit card payments worth $1 trillion in 2006, representing a 17.5% annual rate of growth between 2003 and 2006.

  • Credit card transactions numbered 21.7 billion and were valued at $2.1 trillion. The annual growth rate between 2003 and 2006 was 4.6%.

  • Electronic benefits transfers (EBT) card transactions totaled 1.1 billion and $29.6 billion, representing an annualized growth rate of 10% since 2003.

  • Americans made 5.8 billion ATM cash withdrawals worth $0.6 trillion, reducing their use of ATMs for cash at an annual rate of 0.4%.

The Fed began surveying the use of different payment types in America in 2001. The study published in December is the third in what the Fed intends to be an ongoing series.

Several research and consulting firms were commissioned to gather and analyze data for the study, which actually included three different studies in which 1,400 financial institutions and 65 of the largest payments networks were queried. Details of the third study, which categorizes checks by payees, payers and purpose, are expected during the first quarter of 2008.

Assisting on the study were Global Concepts, a subsidiary of McKinsey & Co., and Dove Consulting Inc., a division of Hitachi Consulting. The Green Sheet, Inc.

Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at patti@greensheet.com.

Notice to readers: These are archived articles. Contact names or information may be out of date. We regret any inconvenience.

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