Payments Watch

The Payments System Research Department of the Federal Reserve Bank of Kansas City has published an article by Barbara Pacheco, senior vice president of financial services, titled “The U.S. Retail Payments System in Transition: Federal Reserve Initiatives“. Besides the big story on the adoption of debit cards, there are some very interesting numbers and charts in here regarding the decline in paper checks being processed by the FED. Some interesting statistics from this paper:

1. Since 2003 paper checks processed by the FED have declined at a rate between 11 and 12% per year and are declining at 15% so far this year.

In my opinion, you have to watch how you read these numbers, as the paper items the FED would clear (vs. paper a typical processor/bank would clear) are also the prime candidates for conversion/image exchange. It is no coincidence, IMHO, that FEDForward volumes are increasing at an even faster rate (i.e. “paper” that the FED would get are simply coming in as images via exchange). What is even more telling:

2. Over 90% of checks “that are image captured and deposited for clearing with the Federal Reserve still have to be converted back to paper at the Fed office closest to the receiving bank.”

A truer measure of the impact to “end to end” check processing due to Check21 / image exchange using the FED numbers, would be to take the 12-15% FED decline and add back the 90% of FEDForward images they end up converting back into paper (IRD’s) anyway. By eye-balling their charts, and doing the math suggested, the “end to end” check volume decline experienced by the FED is more like 7% or so. And even then we might expect their volumes to decline faster than banks and other processors.