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The electronification of checks

Checks: From dominant to niche To support the clearing and settlement of the billions of
paper checks Americans were writing by the turn of the
Checks once ruled consumer payments. In 1997, nearly century, the Fed and the banking industry had invested
57 percent of consumer transactions were made by huge sums of money in the machinery that could read and
check. Today they account for only about 3 percent sort checks, as well as armored vehicles and airplanes to
of payments, according to the Federal Reserve’s Diary shuttle bundles of paper checks between payee and payor
of Consumer Payment Choice. Even so, checks still banks.
move large sums, especially in business-to-business
transactions. (At the time, I was one of a handful of reporters covering
the Fed, in particular its role in the payments system. I
would often joke at the time that EFT stood for ever faster
trucks.)
Another precursor was check conversion – the process of
scanning a paper check to create an electronic item that That was then. This is now: according to the Fed's Diary
could be cleared through the ACH system. For a time, POS of Consumer Payment Choice, checks accounted for just 3
check conversion was a big deal, and a fairly easy sale. percent of consumer payments in 2024; credit and debit
cards accounted for nearly two-thirds (65 percent). Digital
"The retail environment has seen tremendous growth and remote payments (think online and app-based)
in the use of electronic POS terminals and check MICR represented 23 percent of all consumer payments.
readers. MICR readers allow for check verification using
third-party authorization systems, providing valuable Consumer and business checks combined totaled 11
risk protection," The Green Sheet noted in a 1999 report. billion in 2021, the Fed reported. That's a far cry from the
"With that same equipment, merchants can convert the 40 billion estimated in the mid-1990s. And while those 11
paper to an electronic entry, benefiting from at least one billion checks accounted for just 5 percent of all non-cash
major advantage: if the electronic payment is returned payments, they represented 21 percent of the value of all
unpaid, the merchant will receive the return in half the non-cash payments made that year.
time it takes for the paper return to be received."
11 changed checks forever
Industry research at the time suggested consumers were
comfortable with POS check conversion: 53 percent said So what happened to shift checks from a dominant method
they were very comfortable, 26 percent were somewhat of non-cash payments to an also-ran? Several technological
comfortable and 10 percent were neutral, according to The developments played a role, including improvements
Green Sheet's reporting. The Fed was on record favoring the in imaging technology that enabled electronic check
migration from paper to electronic checks. Impeding that presentment and ACH check conversion. But the real
migration, however, were laws and regulations predicated impetus was the terrorist attacks of Sept. 11, 2001.
upon the exchange of paper items.
With all commercial and private airplanes grounded for
Checks also produced income streams for banks and other three days in the aftermath of those attacks, bags of checks
businesses. Not just check authorization and guarantee piled up on loading docks at bank and Fed operations
firms either. Playing the float was a common strategy centers, and what had been an efficient check clearing
among large companies with B2B check payments. Paying mechanism ground to a halt.
companies would issue checks drawn on banks in remote
locales, realizing it would take time for the paper to Eventually, of course, the restrictions on air travel were
clear through the banking system, time that would help lifted, and those checks got cleared. But the incident
generate additional interest income and/or improve cash forced the Fed's hand. For the first time in its nearly 100-
flow management. year history the Fed went to Congress with a legislation
request. The resulting bill, the Check Clearing for the 21st
"New payment concepts are discussed daily and it seems Century Act (the Check 21 Act), was signed into law in
inevitable to most of us that in the not-to-distant future 2003 and took effect one year later.
the payment system will be far different from the one we
use today," The Green Sheet's 1999 report stated. "Currently The Check 21 Act created an instrument known as the
just about everyone you meet in the financial services substitute check, a copy that was the legal equivalent of
industry is talking about moving away from checking the original paper check and used for all purposes as
accounts and converting to debit, ACH, or paperless though it were the original check. What that meant was
electronic settlement in one form or another. Yet little is that banks receiving check deposits could take pictures
said about how banks will replace the lost revenue." (create images) of checks and use those images to create
substitute checks.

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