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A Thing The Green Sheet Issue 020302-
Issue 020302-
Table of Contents

A Compliment From Left Field

What's Hot (Handheld), What's Not (Smart Cards) in New Products

Back to the Future for B of A, STAR

For Now, E-Checks Fail Their Physical

ETA 2002 Is Right Around the Corner

Virtual Crooks Committing Very Real Crimes

FAQs on Negotiation: Picking the Brain of a Professional Negotiator

Leasing 101: Put the 'Peddle' to the Metal and Rev Up Your Profits

Pumped with Full-Service Knowledge

Flexibility in Numbers for Easy Smart Card Migration

Wireless POS Mighty Mite

Debugging Your Program

Let's Go Fishing


Lead Story:

U.S. Checks Are Only 50 Billion Annually ... Or Are They?

B y now you have probably read or heard about the recent definitive study on checks conducted by the Federal Reserve Bank1, which concluded that checks in the U.S. are much smaller than everyone thought. Which, in fact, is the first interesting element in this study, since 50 billion checks is less than the Federal Reserve thought as well. William Poole, President and CEO of the Federal Reserve Bank of St. Louis, puts it very clearly: "One of the more interesting findings is that the number of checks written in 2001 was estimated to total 49 billion - far below the estimate of 60-70 billion commonly used by those in the industry, including the Fed."2

Have Checks Declined from 70 Billion to 55 Billion?

The answer is a very clearly NO, although I already have read one newspaper misreporting the decline of checks from 70 billion to 55 billion. The truth is, there is much more that we need to know before any sense of growth or decline is possible. William Poole, in committing on the Fed study, makes this point: "Although the Fed has long encouraged the use of electronic payments, we're not ready to predict that a checkless society is around the corner. We don't even know if the number of checks has stopped growing."3

How can this be, you may ask; if the Fed can now tell us that the number of checks is smaller than we and they thought, why can't they tell us if it is still growing? This answer is in the small print of the Fed's new report.

For example, the principal number for the current estimate is extrapolated from the information returned by 1,293 banks (the U.S. has more than 7,000 financial institutions) that provided their information for March and April 2001. While the number and value of checks cleared by the Federal Reserve (I will talk more about this in a moment) is known with a great degree of accuracy, the other categories (meaning checks cleared by the banks on which they are drawn, as well as private clearing information) are estimated, and each has a margin of error of at least plus or minus 15 percent.4

Here are more specifics about the number of financial institutions that responded with information on which the Fed could make this estimate: About 825 banks responded, about 350 credit unions, about 100 thrifts and about 18 other banks whose information apparently was anomalous to the first group of banks.

While reaching a significant number of larger institutions would seem to be an adequate amount of information for such an average, we also must keep in mind that the largest U.S. banks in the country are responsible for only 26% of check transaction volume.

In fact, we often have the sense in the U.S. that it will take only a few banks to reshape the future of the check. This could not be further from the truth. Only 11% of checks are written on the 10 largest bank holding companies in the U.S., and in turn these banks clear only 16% of the checks of others. In fact, 69% of all checks written are drawn on banks other than the top 100 bank holding companies in the U.S., and institutions other than the top 100 are the collecting bank for 54% of all checks cleared.5

Dollar Value Is Yet Another Measure

The Fed 2001 study concludes that the average check in the U.S. has a face value of $965. Before this report, all previous estimates exceeded this estimate. The conventional thinking was $1,059 to $1,194.6

If you review my book Checks at the End of the Twentieth Century and Beyond, you can see that over the previous four years of check reports, I had worked out what I thought was the best estimate of the average check in the U.S.7, and I was the first to report a U.S. average check of less than $1K, at $830, plus or minus 15%. This difference in average check volume has a significant effect on the value of U.S. checks.

Where Checks Are Cleared

The Fed's 2001 information on where checks are cleared and the fact that the difference also has an effect on the dollar value of checks are the two most specific reasons why the results of the 2001 study differ so much from previous estimates.

Based on the 1979 study, it has been assumed that 25% of checks were cleared by the Fed, 33% were cleared as "On-Us" items8 and the balance of checks (42%) were cleared by various private clearing houses. In our previous studies, we had used as much clearing house information as it was possible to obtain, and in so doing we found that the dollar value needed to be reduced by the New York Clearing House volume to normalize the balance of the data.

The 2002 study concluded that the Fed is clearing about 35% of all checks (10% more than previously thought) and another 30% is cleared as "On-Us" items (statistically, this is about the same number as what was being used). The Fed's study breaks down the remaining check clearing as 20% clearinghouse activity, 10% Same-Day Settlement, and a category called Other. This is extremely important overall because it means that private clearing houses handle (clear) significantly fewer checks than it was generally thought.

Where And To Whom Checks Are Written

A wide variety of methods have been used to estimate who writes the majority of checks in the U.S. and, further, to determine to whom these checks are written. In most cases, these estimates have attempted to determine how large the business-to-business segment of check writing was, and, further, the consumer-to-business segment, with special emphasis on checks written at the point-of-sale.

In a secondary study last year, the Fed ask selected banks to randomly review checks and determine the payee, payor and dollar value. Less than 30,000 of the estimated 50 billion U.S. checks were reviewed and reported to the Fed.

Based on this sample, the Fed determined that 15% of all U.S. checks are written by businesses to other businesses (we had previously reported 23%) and that these checks represent nearly 43% of the value of all checks. In contrast, it further estimated that nearly 34% of all checks are written by consumers (we previously reported 55%) and that these checks represent only 10% of the value of all checks. It is worth noting that this sample was unable to determine the payee or payor 14.3% of the time for the number of checks and 15.9% of the time for the value of checks.


While I certainly do not want to dispute that the current check estimate from the Federal Reserve may well be right, I also think that we do not yet know all the answers from these estimates and averages and may not know for some time. And as for averages, we must keep in mind that if you have one hand on dry ice and the other on a hot stove, your average temperature is just fine; however, both of your hands know better.

Before this or any other check study makes you change your method of payments or seriously revise your business plan, remember, the Fed's Poole says, "The Fed will conduct another payments study in two or three years - not another 20 - to get a better idea of where the various forms of payments are headed. ... For those who want to stick with checks, rest assured that the option will not be taken away."9

  1. In this study, the Federal Reserve's goal was to estimate the total volume and value of all checks written in the United States over a 12-month period, based on a two-month sample period. The Fed notes that the two months were adjusted for seasonality.

  2. William Poole, President and CEO, Federal Reserve Bank of St. Louis, President's Message, The Regional Economist, January 2002, The Research and Public Affairs departments of the Federal Reserve Bank of St. Louis, www.STLS/FRB/ORG.

  3. William Poole, loc.cit.

  4. Retail Payments Research Project, A Snapshot of the U.S. Payments Landscape, Research Results from the Federal Reserve System, Depository Financial Institution Check Study, Exhibit 2, Footnote 4.

  5. Alice M. Rivlin (Committee Chair), Committee on the Federal Reserve in the Payments Mechanism, January 1998, p 15.

  6. In the footnote to the 1991 data from Bank for International Settlements (BIS) the justification for assuming a U.S. average check value of $1,150, which is slightly greater than my 1997 research results ($1,059), is not explained by BIS, and this assumption has been utilized in BIS reports for each of the years 1987 through 1994. Additionally, I have found two more sources reporting a higher U.S. check average. The first is a study prepared for The Banking Research Fund (BRF), which reports that the National Clearing House Association processed 877,000 transactions a day in the third quarter of 1994, for $1 billion per day, or an average check of $1,140. NOCH also reported in 1996 that "...a check averaged $1,194."

  7. In my book Checks at the end of the 20th Century and Beyond I noted that in 1998, the Federal Reserve served as the clearing mechanism for 25% of the checks processed in the United States, with a $762 average check amount. Private clearing mechanisms (clearing house, correspondents and direct sends) processed 42% of checks, with a $1,059 average check amount, for 1997 and early 1998 data (first half) reflect what may be a $122 increase entirely because of ticket growth at the New York Clearing House. Given the addition of another 33% of "On-Us" bank clearing as the remaining clearing mechanism, the "On-Us" check average is likely to reflect the average of the National Organization of Clearing Houses average, less the New York segment. I have historically taken the New York data out of the "on-us" calculation, to tone down the effect of this very unusual check average. With a $548 average check amount for 1997 and early 1998 data (first half) reflecting what may be a $42 increase, I was inclined to raise the "On-Us" ticket for 1998 because neither the missing NCHA or Southwest Clearing House data would have driven the 1998 ticket down. These calculations reflect an average check of $590 (the 1998 half-year total, less New York) and creates an overall weighted average check amount as follows, of $830.

  8. Checks received and settled by the bank on which they are drawn, meaning no other bank is involved in clearing.

  9. William Poole, loc.cit

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