Recent Payment Trends in the United States

Survey data collected for the Federal Reserve in 2007 show a continuation of significant changes in the way consumers and businesses make payments. Data previously published by the Federal Reserve show that in 2003 the number of electronic payments in the United States (made mostly through debit and credit card networks and the automated clearinghouse system) exceeded the number of check payments for the first time.1 The recent data indicate that by 2006 the number of electronic payments was more than twice the number of check payments, or about two-thirds of all noncash payments (table 1, chart 1). The value of electronic payments has also grown substantially, but in 2006 they still accounted for less than half the value of noncash payments (45 percent).2 The use of checks has been declining since the mid-1990s, generally because check payments—and most likely some cash payments—are being replaced by payments made with electronic instruments. The latest data show a continuation of this trend. Consumers in particular are paying electronically much more often than in the past, with most of the increase between 2003 and 2006 due to a rapid rise in the number of debit card payments of relatively low value (on average, $39). Consumers’ checks are also increasingly being ‘‘converted’’ into electronic payments made via the automated clearinghouse (ACH) system.3 In 2006, about 8 percent of all checks written were converted to ACH payments, compared with fewer than 1 percent in 2003. The interbank check-clearing system itself is also rapidly becoming more electronic, as original paper checks are increasingly being ‘‘truncated’’ and replaced with electronic images during the checkclearing process.4 The apparent catalyst for the dramatic change in check clearing was passage of the Check Clearing for the 21st Century Act (Check 21). Signed into law in October 2003 and taking effect in October 2004, Check 21 allows a collecting bank to present a legally equivalent paper copy of an original check—called a ‘‘substitute check’’—if the paying bank requires a check to be presented for payment in paper form.5 In early 2007, an estimated 57 percent of all interbank checks in the United States were presented in original paper form and about 43 percent were truncated and ultimately presented to the paying bank either electronically or as a substitute check. Of the portion that were truncated, 66 percent were presented electronically. The number of checks presented electronically in 2007 was approximately three times the number presented electronically just one year earlier. More recent data on the portion of interbank checks presented by the Federal Reserve Banks indicate that dramatic changes have continued since the 2007 surveys. Data for June 2008, for example, indicate that about 53 percent of checks NOTE: Darrel W. Parke and May X. Liu, of the Board’s Division of Research and Statistics, provided valuable assistance with survey design, sampling, and production of the statistical estimates. 1. Previous reports include Geoffrey R. Gerdes, Jack K. Walton II, May X. Liu, and Darrel W. Parke (2005), ‘‘Trends in the Use of Payment Instruments in the United States,’’ Federal Reserve Bulletin, vol. 91 (Spring), pp. 180–201, www.federalreserve.gov/pubs/bulletin/ 2005/spring05_payment.pdf; and Geoffrey R. Gerdes and Jack K. Walton II (2002), ‘‘The Use of Checks and Other Noncash Payment Instruments in the United States,’’ Federal Reserve Bulletin, vol. 88 (August), pp. 360–74, www.federalreserve.gov/pubs/bulletin/2002/ 0802_2nd.pdf. 2. Payments transmitted over large-value funds transfer systems (such as Fedwire, operated by the Federal Reserve, and the Clearing House Interbank Payments System, or CHIPS, operated by the Clearing House Payments Company), sometimes called wholesale payments, are outside the scope of this article. These systems are used primarily for large monetary and financial transactions, such as overnight loans between depository institutions. Including such transactions in the calculations reported in this article would not meaningfully affect the total number of payments but would dramatically increase the value. An unknown number of transactions of other types are made over these systems by consumers and businesses. 3. Most check conversions take place at ‘‘lockboxes’’ to which bill payments are mailed; a small proportion take place at retail establishments when checks are tendered at the point of sale. Consumers whose checks are going to be converted are permitted to ‘‘opt out.’’ Under the rules of the National Automated Clearinghouse Association (NACHA), corporate and business-format checks are not eligible for conversion to ACH payments. 4. Interbank checks are checks that pass between depository institutions. 5. Before Check 21, paying banks’ requirement that the original check be presented was a major barrier to the widespread use of electronic check-clearing technology. The option of providing a substitute check gives depository institutions and their agents the freedom to use electronic check-processing methods for most or all of a check’s journey to the paying bank, as the substitute check is needed only at the end of the process if the paying bank requires paper. A75