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Some of our readers may be aware that the
Federal Reserve is undertaking a challenging task and we ought to know
because it is a check study! The folks at the Fed are ambitious. Not
only are they studying check payments, they are studying a variety of
retail payment methods.
At the National Electronic Check Presentment Conference hosted by the
BAI in San Antonio Oct 1-4, Andrea Eddy of the Federal Reserve Bank
of St. Louis briefed attendees on the status of the market research
study "Looking for Barriers and Opportunities in the Retail Payments
System."
Eddy, who was stepping in for an ill Kathleen Pease, stressed that data
collected for the study will not be sold or used to sell any products
or services. Furthermore, the study is not intended to serve as a predictor
of a particular payment's use and will not forecast whether usage will
increase or decrease. Instead it will collect data and provide some
trend analysis.
Why?
Before we move on, some of our readers may be wondering, "Why do
we need such a study?" or "Why do a study if you're not going
to make predictions?" (In fact, this question was asked by a few
conference attendees.) Well, since The Green Sheet, Inc., has published
six check studies and one book on check use, we see tremendous value
in such a study. As an organization that has researched check use for
years, we have faced the challenges of collecting data that no one seems
to be keeping track of, yet everyone wants. There is no single source
for check data (other than The Green Sheet, Inc.) and a methodology
has not been documented. Eddy told us that the Fed wants to determine
the number of checks written in the U.S, since the most recent Fed study
was conducted in 1974 and studies since then have used that data as
a basis number.
A major reason the Fed commissioned the study is because accurate and
current numbers will help them determine trends and assess the size
and dynamics of the retail payments system. This data can then be used
by all financial organizations, not just the Fed, to review their technological
and equipment needs and prepare for future payment trends. Accurate
and current payment system data can also be used when drafting public
policy and operational procedures, as well as to identify inefficiencies
and improve infrastructures. The Fed's goal is to establish a reliable,
consistent source for payment data and update this information every
18-24 months.
Phase One
"Looking for Barriers and Opportunities in the Retail Payments
System" was commissioned by the Rivlin committee in May 1998. The
first step was a literature search, meaning the Fed pored over all the
check information already in existence. This included public and proprietary
studies from more than 1100 sources. The goal of the literature search
was not to "reinvent the wheel" but rather to identify and
concentrate on the gaps in the published data. They discovered that
there is a lot of data but they were not certain of the validity of
all the figures. They did come to the following conclusions:
The number of retail payments in growing.
The greatest movement of checks out of the payment system is at the
POS (debit card).
Most consumers who prefer checks will continue using them.
Businesses are embracing electronic payments, and some are ahead of
the demand curve.
Phase Two
The second phase of the study involved developing a strategy and executing
a development plan. The Fed had to:
1. Define terminology. For example, what is a "payment" and
what is an "exchange"? (An ATM cash withdraw would be an exchange
while a POS transaction would be a payment.)
2. Determine which financial exchanges will be counted and which will
not. The Fed determined that cash or "casual" transactions,
such as gambling or paying the neighbor to shovel your walk, would be
too difficult to accurately track.
3. Develop a methodology for gathering data.
4. Identify and evaluate secondary data sources.
5. Develop a strategy for aggregating data. The Fed determined that
they will use two month's data collected in March and April of next
year.
Phase Three
Now that the first two steps are complete, the data collection phase
is set to begin. Key data elements gathered will include:
Aggregate check volume and value data
Sub-aggregate breakdowns of check payment by purpose and payor/payee
Aggregate electronic payment instrument volume and value.
To gather this data, three studies are planned:
Depository Financial Institution Check Study
Check Sample Study
Electronic Payment Instruments Study
Depository Financial Institution Check Study
The Depository Financial Institution Check Study will provide data for
estimating the aggregate value and volume of checks. Only paid checks
will be used, as this will reduce the risk of double counting. Data
will be collected from the top 100 Depository Financial Institutions
(DFIs) and a stratified sample of other DFIs. The Fed will be going
to the highest level of the holding company/charter, since banks told
them that is where the data they are looking for can be found. Federal
Reserve Bank and clearinghouse data will also be used. The goal of this
particular study is to capture:
Total paid check volume
Total paid check value
Paid check volume received from the Federal Reserve
Paid check volume received from clearinghouses
Direct presentment/same day settlement volume
Check Sample Study
The second study is the Check Sample Study. The goal of this study is
to collect data on the volume and breakdown of checks exchanged between
consumers, businesses, and government entities. In other words, where
and why checks are written. The Fed also hopes to gather information
about the purpose of the transaction, i.e. point of sale, income, payment,
etc.
You may be wondering how one determines who the check payor and payee
are. Well, this requires a visual inspection of the item. Yes, a human
being has to actually view each individual item. However, sorting through
each check and viewing the payor and payee raises some privacy issues,
specifically Reg P, the Financial Privacy Act. Therefore, if the Fed
is unable to have a third party legally examine the checks and record
this data, this part of the study will either have to be removed or
the Fed will have to rely on each bank to record and report this data.
If the banks are unable to do so, the study will be able to report only
who wrote the check (business, consumer, government) and will not provide
payee statistics. Some industry members are hoping this study will also
yield an elusive number the number of hands a check passes through before
it exits processing.
Electronic Payments Study
The third study is the Electronic Payments Study. This study will gather
aggregate volume and value statistics about electronic payments. Data
will include:
General purpose/private label credit cards
Online and offline debit cards
ACH transactions
EBT payments
This study differs from the other two in that there will be no primary
data gathering. Instead statistics will be garnered from major card
issuers, networks, industry organizations, and government departments.
This study will also differ from the other two in that it will use annual
data for 2000, rather than partial data for 2001.
So where are we now?
The Fed is looking for a research vendor and the project has been sent
out to bid. After a vendor has been selected and the privacy issues
have been resolved, the data collection will begin in March and April
and the report will be released by the middle of next year. Of course,
the accuracy and completeness of the data will depend on the level of
cooperation and participation of the depository financial institutions.
We look forward to the results and encourage all banks to participate
and help us put a finger on some elusive numbers
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