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New Fed Study Shows Consumers Account for 58 Percent of Checks Paid

By Ed Bachelder

In recent months, the Federal Reserve has released the results of its three-part 2007 Federal Reserve Payments Study, which provides valuable information about the United States payments system. Collectively, the studies reported that there were 93.3 billion non-cash payments in 2006, worth $75.8 trillion. Of these payments, two-thirds were by electronic means (credit, debit, ACH, etc.), and one-third were paid by check.

The Big Picture

The big picture in payments shows that the migration from paper to electronic payments is continuing, and the growth of electronic payments is contributing to the accelerated rate of decline for paper checks. Only 30.5 billion checks were paid in 2006, down from 37.3 billion in 2003, with volume declining at a -6.4 percent CAGR.

In contrast, electronic payments grew at a 12.4 percent compound annual growth rate overall, with debit, EBT, and ACH all experiencing growth. Debit card volume increased by over 10 billion transactions and now exceeds credit card volume. Remarkably, after 30 years, ACH turned in an impressive 18.6 percent CAGR.

Check Sample Study

Of special interest to remittance processors is the 2007 Check Sample Study, a component of the Federal Reserve Payment Study, which had not been conducted since 2000. Since that time, many dramatic changes occurred in the check clearing system and in consumer payment preferences. The 2007 Check Sample Study gathered very interesting information from the Viewpointe archive for nine large financial institutions, which represent 25 percent of all checks paid in the United States. The study involved a highly structured process that successfully categorized 32,448 checks by Payer/Payee and Purpose and revealed that the largest category was remittance, accounting for 48.8 percent of checks paid. Applied to the broader industry, this translates into approximately 14.9 billion checks paid for remittance purposes.

The study reported that consumer checks account for 58.0 percent of total checks paid. Business checks account for 38.8 percent of checks paid (shown in graph 1).
Another interesting breakdown of the data is that 72.1 percent of checks were paid to businesses, compared to 23.4 percent paid to consumers and 4.3 percent to government (0.2 percent of checks could not be classified - shown in graph 2).

Analyzing the distribution of checks by dollar size reveals that 82 percent of checks paid were for $500 or less, while 35 percent of checks had a value of less than $50. Given this distribution, it is possible that the majority of checks could be vulnerable to migration into ACH or card payments.

Potential Lockbox
Volume for 2006

This research allows us to better project the volume of consumer remittance checks. Based on the Check Sample Study, an estimated 14.9 billion checks were written for remittance purposes. This number, however, includes business-to-business checks. The Federal Reserve has estimated that there are approximately 8 billion business to business checks, most of which may be processed in wholesale lockboxes. If we subtract these B2B checks from the number of total remittance checks paid, the number of consumer remittance checks paid is 6.9 billion. This number, however, excludes ACH conversion of checks at the lockbox (ARC) and point-of-sale (POP). If we add ARC volume back into the volume of consumer remittance checks paid, the total check volume for remittance processors could be 9.5 billion.

The implications of this continuing shift in the payments mix — not the least of which will be the ongoing increase in the unit cost of paper-based payments — will be significant for all parties: financial institutions, merchants, processors, networks, and consumers. The underlying economic and volume trends may push remittance processors toward a tipping point where they may need to reevaluate their systems, investments, and approaches.

The detailed reports, brimming with robust tables and meaty statistics for
payments professionals to digest, are posted on the Federal Reserve’s Website, www.frbservices.org.

The direct link to the report  is: http://www.frbservices.org/communications/payment_system_research.html.

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For more information about the 2007 Federal Reserve Payments Study, please contact: Ed Bachelder, Director of Research and Analytics, Dove Consulting at
617-753-9223 or ebachelder@doveconsulting.com or Lydia Yu, Research Analyst, Dove Consulting at 617-753-9213 or lyu@doveconsulting.com.

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