aper checks were supposed to be replaced by electronic payments years ago, and they weren't. Are those companies eager to develop electronic payment strategies worrying over nothing?

Not likely.

The recent landmark study by the Federal Reserve shows that checks are way down. Last year the general consensus was that about 68 billion were written per year in the United States. But the Fed put annual volume at 42.5 billion as of 2000, much less than expected.

Financial companies must adjust to the reality that check volume will steadily decline for the foreseeable future, along with check-based revenue. Lurking underneath this downward trend is an ominous implication that the checking cornerstone may be at risk as customers switch to providers with better electronic payment services.

If the adoption of electronic payments continues in this decade as it did in the 1990s, paper check volume probably will fall by one billion checks per year, to 28 billion to 32 billion in 2010.

Our payment-migration models indicate that paper checks will account for no more than 25% of noncash payments made by businesses and consumers in 2010; in 1990, they accounted for about 60%. Electronic payments will exceed check payments within the next 18 months, and debit card payments alone will eclipse total check payments in less than five years.

Where did the checks go? There are many possible explanations, but most would agree that two types of e-payments are the primary culprits: debit and credit cards. Plastic is now leading the pack at the point-of-sale on the basis of card base growth, merchant acceptance and perceived convenience by consumers.

The change in volume mix will present challenges and opportunities for financial companies on at least three fronts:

• Customers. Financial companies are discovering the power of auto-pay in reducing customer churn by encouraging multiple preauthorized debit automated clearinghouse transactions (ACH) and promoting debit and credit for bill payment. They should leverage their wholesale bank relationships to maximize adoption of recurring payments for bills such as rent, utilities, automotive leases and mortgages. Those that ignore these trends will steadily lose the battle for vital retail deposits.

• Cost. As check volumes dip and electronic payments grow, flatfooted companies will find that their unit costs for check processing rise inexorably as overhead costs are spread across an ever-declining volume base. They will have few options other than to outsource.

• Growth. Companies can pursue new-fee business by coordinating how retail and wholesale organizations go to market with cash management services. Billers that can suppress paper statements stand to save billions.

There also are benefits from promoting the autopay services to both retail and commercial customers. Recognizing the opportunity to take costs out of check processing, companies have the chance to convert costs into revenues through offline debit or credit card transactions to billers that their customers would have paid by check. Since most consumers do not balance their checkbooks, companies that provide value-added reporting will have a strong advantage.

Successful companies will take advantage of the ongoing migration of checks to electronic payments by entrenching themselves into customers' POS and recurring-payment needs. Those that develop a well-honed electronic payment strategy will be able to benefit from the decline of paper check volume.

Richard Crone is a Vice President and Ed Bachelder is a Director at Dove Consulting.