Given our current payment system's state of rapid change, it is hard to keep up with evolving payment concepts, much less some of the blur of terms. As you all know, I have been using the acronym POST (Point-of-Sale Truncation of checks) rather than ECP. I do this because the process of exchanging transactions electronically between banks has been referred to as ECP and I believe that capture at the point-of-sale is different in many ways than bank ECP. Bank ECP can have paper to follow, or no paper to follow, which is called truncation. However, these two steps (capture and paper to follow) are always one in the point-of-sale model and are easily confused when the same name (ECP) is used for both capture at the point-of-sale and capture at the bank.
ECP could be widespread and most of us would not even be aware of its existence. On the other hand, POST transactions could grow rapidly at the point-of-sale, enabling banks to enjoy a decline in paper costs as merchants make ECP investments. Of course, the ECP initiatives being encouraged by the Federal Reserve banks are focused on ECP, not POST.
As we move into this changing environment and as you begin to hear more discussions on the subject, we will attempt to arm you with an understanding of the terms, as well as the debate.
Terms: Electronic Check Presentment (ECP) is a check collection process whereby a check is cleared based on information contained in an electronic file instead of the actual paper check (the check is also called "the physical item"). At a minimum, the file includes the account number and the dollar amount. The physical check may or may not follow the electronic file. If the check does not follow the image to the paying bank (the check writer's bank, the bank holding the funds against which the check is drawn), the process is called truncation.
Weighted Average Per-Item Costs and Benefits,
Compared to Paper Check Processing
Depositing
Customer
Bank of First
Deposit
Intermediary
Paying
Bank
Paying
Customer
Under the current paper check environment, the depositary bank bears the cost of processing checks by an intermediary (if an intermediary is involved) and of transporting checks to the paying bank. If the paying bank chooses to have its checks truncated by a Reserve Bank (the Federal Reserve truncated 417 million checks during 1996) the paying bank has to bear the cost of truncation. Those costs would be directly or indirectly transferred to check writers. Therefore, not only would the payor have to give up his/her canceled checks, but also the other costs could potentially increase. In other words, voluntary ECP adoption might result in a redistribution of any resulting savings.
While the industry is currently considering a number of approaches to reduce the cost of paper checks, arguments that the earlier the check is eliminated the greater the overall social cost savings, remain in question. It seems obvious to many who are attempting to evolve the payment mechanism away from paper that the ACH system is a cheaper clearing mechanism than paper. While this seems intuitive, the Federal Reserve System's Functional Cost Analysis, which was last completed in 1994, reflected that the cost per ACH transaction was 14.6 cents for banks with deposits over $200 million. The same report reflected that the cost of a transit check (that is, a check drawn on any bank other than the subject bank) is reported to have also been 14.6 cents.1
While it is clear that there is savings to be had by banks, the question remains: Will these savings ever find their way to the consumer or merchant, who will each have changes to manage and cost to bear?
1. Reserve Bank of Boston, Joanna Stavins, Economist, "A Comparison of Social Costs and Benefits of Paper Check Presentment and ECP with Truncation," New England Economic Review, July/August 1997.
