ere's something I never expected to write, at least not this many years before my retirement: Check writing in America is on the wane. Now don't get me wrong. I'm not suggesting that banks should immediately divest themselves of check-processing equipment, or that ISOs and processors should eliminate check services from their menus of offerings. But long term (perhaps in another 20-30 years), it now seems safe to predict, there will be fewer checks used to pay for goods and services in America than cards or other types of electronic payment transactions.

Last year, the Federal Reserve announced results of the first significant counting of check payments in more than 20 years. The Fed's number crunchers had calculated that Americans wrote nearly 50 billion checks in 2000 - substantially fewer than the 60 billion, or so, checks that I and other observers had guesstimated based on heretofore available data, yet more than the roughly 32 billion checks written in 1979, the last time the Fed counted.

In August, the Fed restated its research findings. Rather than 49.5 billion checks, the Fed says upon further study it now appears Americans wrote just 42.5 billion checks in 2000; the total was probably closer to 49.5 in 1995, the Fed says. While the 2000 number still tops the 1979 total, the difference is not quite as great as it seemed at first. And if the Fed's statisticians are correct, U.S. check usage probably peaked around 1995.

To be honest, when I first read the Fed's second take on its 2001 study, I was dubious. The new, revised data, contradicted much of the anecdotal evidence that has been bandied about the payment-processing and banking businesses in recent years. It also seemed to advance certain agendas - such as the Fed's Check Truncation Act (CTA) proposal.

Providing grist for my mill of cynicism, members of Congress in September - while balancing heavy workloads, such as the debate over waging war against Iraq and re-election campaigns - announced a hearing on the Fed-drafted CTA.

In check truncation, the physical movement of checks is stopped (at the bank of first deposit, a lockbox collection site, or the point-of-sale) and replaced with electronic exchanges; these can be handled bank-to-bank, via the Fed or through the ACH.

The Fed's CTA proposal, however, rather than taking paper out of the payments system, adds a new document to the processing stream - an "image replacement document" (IRD) that banks could use in lieu of truncated checks to run through sorting and processing equipment. Apparently, there are many banks that still want/need to process paper, and the CTA aims to accommodate this. (See "Fed's Research Reveals Opportunities for E-Payments, But Obstacles Lurk," Green Sheet, Jan. 28, 2002, issue 02:01:02.)

While committee hearings this late in the Congressional season aren't likely to result in quick action, proponents says the attention that has been given the CTA by lawmakers bodes well for action in the next Congress, which begins in January.

Taking Another Look at the Data

Now, to my change of mind: The more I look at the Fed's report and the more I talk with folks who spend a lot more time than I do poring over data like this, the more inclined I am to concur with the Fed's latest assertions that check usage probably peaked in the mid-1990s and that Americans probably wrote only 42-43 billion checks in 2000.

Jack Walton, a staffer in the division of reserve bank operations and payment systems at the Federal Reserve Board in Washington, explained to me in great detail how he and fellow staffers arrived at the revisions.

It seems the initial report, issued late last year, was just a "snapshot." It basically compared data collected from financial institutions in 2000 to what had been collected in 1979. What Walton and his colleagues did subsequently was to paint a detailed picture of check usage in America, plotting the data collected in 2000 against that from a survey of 600 banks conducted by the Fed in 1995 (on check fraud and related issues) and the 1979 data. Comparing the data from these three surveys, Walton explains, shows clearly that there was a decline in checks between 1995 and 2000 - a decline that can't be explained by economic contraction, he insists, since both years were part of a long economic expansion.

But the decline was not uniform, across regions or across different types of financial institutions. For example, Walton's analysis indicates that checks are more prevalent in the Midwest than in the Northeast, while the value of checks paid per capita was 47% higher in the Northeast than in the West in 2000.

Another interesting finding: Despite the overall decline in the number of checks paid between 1995 and 2000 across all financial institutions, credit unions and savings institutions actually experienced increases in check volume. Together, these institutions accounted for 14% of all paid checks in 1995 and 20% in 2000.

But in a written report on the data analysis (published in the August 2002 Federal Reserve Bulletin), Walton and Fed colleague Geoffrey Gerdes note that the 1.8 billion increase in the number of checks paid annually by credit unions and savings institutions was more than offset by an 8.7 billion drop in the number of checks paid annually by commercial banks.

Still, the fact that more checks are written on credit union (share draft) accounts than on bank checking accounts is noteworthy. Credit union membership has always had appeal to newcomers to the work force.

As a young professional, my first "bank" account out of college was with a credit union; many family members and friends took a similar path in establishing credit histories. I suspect that as consumers grow older, and more financially savvy, many move on to commercial banks, even investment banks with checking-like accounts (Merrill Lynch, for example). In other words, it's possible that the aging of the Baby Boomers is contributing to the decrease in check writing.

For many, debit cards came long after we entered the workforce, and many of us are not fast adopters. But as more banks promote so-called "check cards," the adoption curve is accelerating. Lending credence to this view, Visa announced recently that during the first six months of 2002, transactions initiated using Visa Check cards actually exceeded those initiated using Visa credit cards (3.04 billion versus 2.96 billion). This was a first, Visa said.

Understanding the Nuances

Another point: The Fed's data, as analyzed by Walton and Gerdes, focuses exclusively on the number of checks paid by financial institutions.

For years, bankers and industry observers have counted the number of checks that pass through the sorting equipment of banks, the Fed, clearing houses and service bureaus to size up volume. These so-called "prime passes," however, are often double (even triple) counted.

For example: A check that I write on Bank A is deposited by you at Bank B, which runs the item through a prime-pass cycle and then perhaps sends it to its local Fed or correspondent bank for interbank clearing, where again the check is run through prime passes.

"You can easily get to 100 billion prime-pass items from a base of 42 billion checks," explains Steve Ledford, President of Global Concepts, Inc., an Atlanta-based research and consulting firm that assisted in the Fed's data collection and analysis.

Using similar lines of logic also helps to explain why check-image archives are being populated so rapidly. Viewpointe Archive Services, for example, is adding images of about 1 billion items a month, according to John Lettko, Viewpointe's CEO.

Viewpointe stores images for some of the largest banks in the country, including Bank of America, JP Morgan Chase and First Tennessee Bank, notes Lettko. He estimates that Viewpointe sees 15-20% of all checks written in the U.S.

During a recent interview, Lettko said the Fed's revised check numbers perplex him. When he tries to map Viewpointe's business against the Fed's trend analysis, Lettko says he doesn't come close to 42 billion; 49 billion checks is a more realistic tally of the number of checks written each year, he insists.

But it's noteworthy that two of the three banks that are now "live" with Viewpointe (BofA and Chase) both are headquartered in states with large immigrant populations. It's quite conceivable that immigrants entering the workforce account for some of the check usage. First Tennessee, a Midwestern bank, also is apt to see more check volume because of its locale. (Remember, the Fed reports that check usage is higher in the Midwest and the Northeast.)

Also, the one billion items Viewpointe archives each month include some non-check documents, such as deposit receipts. Together, these factors could account for some of Viewpointe's workload.

Long Live America's Checks

Any way you look at the numbers, there are still a lot of checks written in the U.S. Whether it was 42 billion or 49 billion, there still were more checks issued for payment in 2000 than in any other industrialized country.

In fact, in every industrialized country except the U.S., check volumes dropped dramatically during the 1990s.

Sweden, for example, almost eliminated check writing during the decade, with a 96.7% drop in check payments. In the Netherlands, check usage dropped by nearly 90% during the 1990s; in Switzerland, it dropped 72.2%, according to data from the Bank for International Settlements (BIS), which coordinates activities of central banks of the Group of Ten (G-10) countries.

To discourage check writing, banks in these Scandinavian countries increased fees for handling checks, vis-…-vis electronic payment alternatives.

In the U.S., banks are more likely to impose new fees (or increase existing fees) on electronic payments (such as debit cards) and to give away check services.

U.S. banks have been subsidizing check writers for years; some even advertise free checking. And while bounced-check fees are high, most consumers seem to ignore these charges or accept them as a form of a low-cost loan.

Banks, meanwhile, generate substantial income streams from bounced-check charges.

And as long as these mindsets prevail, Americans can be expected to continue writing billions and billions of checks every year.

Patti Murphy is Contributing Editor of The Green Sheet and President of Takoma Group. She can be reached at pmurphy@takomagroup.com.