Escolar Documentos
Profissional Documentos
Cultura Documentos
44
45
FIGURE 1
22.7
20
0
6.8
11.1
-20
22.9
24.7
-40
-60
61.2
72.2
-80
89.7
-100
96.7
-120
Belgium
Canada
Germany
Italy
Netherlands
Sweden
Switzerland
United
Kingdom
United
States
FIGURE 2
18.64
20
0
-20
-40
34.85
42.14
-60
-80
76.55
71.78
79.20
75.03
90.48
-100
97.04
-120
Belgium
Canada
Germany
Italy
Netherlands
Sweden
Switzerland
United
Kingdom
United
States
46
FIGURE 3
Check payments
Debit card payments
200
150
100
50
1984
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
47
Second, consumers are reluctant to switch to electronic alternatives unless they offer superior benefits
to checks. While consumers may believe that electronic
payments are less expensive overall, they are reluctant
to change unless they view the shift as beneficial to
them. Credit card issuers often offer additional services
such as extended warranties, dispute resolution services, and frequent-use awards, along with interest-free
short-term loans to those who pay off their balances
each month.
Third, some consumers feel checks give them greater control over the timing of their payments, leading
to better budgeting. Hirschman (1982) argues that some
consumers believe that checks may enhance their ability to track, budget, and control spending better than
other payment instruments. Mester (2000) argues that
checks give consumers more control over when to pay
bills than pre-authorized ACH payments and can more
easily attach remittance information. Yet, consumers
can also access their checking accounts via their debit cards and maintain budgeting, tracking, and control
over their funds. When using debit cards, consumers
cannot overdraw their accounts unless previous credit
lines have been established. However, debit card usage in bill payment is relatively low, given the slow
adoption of the necessary infrastructure.
Because consumers perceive checks to be a lowcost payment instrument and are comfortable with them,
they are reluctant to change unless there are strong
incentives to do so. From a cost standpoint, checks are
relatively inexpensive if one ignores non-sufficientfunds fees. As we noted earlier, explicit per-check charges by financial institutions in other countries have been
effective in changing consumers payment habits.
Merchants
A primary issue for merchants is the cost of payments. There are significant differences in the cost of
accepting alternative payment instruments. The Food
Marketing Institute (FMI) (2000) estimates the merchants cost to accept each payment instrument (see
table 1). Online debit cards are the second least expensive payment instrument for merchants
to accept at 80 cents per $100 of transacTABLE 1
tions. They offer merchants immediate
Merchant
costs
to
accept
a payment instrument
funds, low per-transaction fees, and little,
if any, settlement risk. While cash proCost per
Check
cessing costs are low at 90 cents per $100
transaction
not
Check
Online Off-line
(dollars)
Cash
verified
verified
Credit debit
debit
of sales, most consumers are reluctant to
use cash for larger purchases. Credit card
Cost per
$100 sales
.90
3.00
.60
1.80
.80
1.80
and off-line debit card transactions cost
merchants an average of $1.80 per $100 in
Source: Food Marketing Institute, 2000.
sales. The average check transaction costs
48
FIGURE 4
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1995
96
97
98
99
2000
01
Source: Nilson (19962001), Nos. 737, 726, 705, 678, 654, and 627.
49
FIGURE 5
1987
88
89
90
91
92
93
94
95
96
97
98
99
50
400,000
300,000
Verification
200,000
Guarantee
100,000
0
1991
93
95
97
99
01
The Federal Reserve has historically played an important role in the development of check processing.
However, some have questioned this role. Green and
Todd (2001) argue that as the United States transitions
to the next generation of payment instruments, the
Fed should promote efficiency, integrity and accessibility primarily by means other than direct service
provisionsuch as participation in the setting of standards, the drafting of model legislation and the regulation of payment services markets (Green and Todd,
2001, p. 1). They further argue that encroaching on
activities that the private sector can perform efficiently
and equitably may erode the Feds reputation as a
trustworthy and neutral institution.
The Feds role in check processing has declined
over the past two decades, partly due to regulatory
changes such as the Monetary Control Act of 1980
(MCA), the removal of interstate branching restrictions,
and changes to Regulation CC to allow banks to settle
checks in same-day funds. In the five years following
the passage of MCAunder the terms of which the
Fed had to price its financial services and make them
available to all financial institutionsthe Feds share of
interbank check clearing decreased sharply.28 Summers
and Gilbert (1996) claim that the Feds share of check
volume decreased from 61.0 percent in 1980 to 49.8
percent in 1985.29 For the same period, its share of check
value decreased from 48.5 percent to 31.7 percent.
The Fed also experienced a sharp decrease in the
number of checks handled from 1993 to 1995. Given
the lack of reliable non-Fed check volume data for this
period, it is difficult to determine the cause of this decrease. Some financial observers claim that changes
in Regulation CC and the removal of interstate branching restrictions were at least partially responsible. In
1994, Regulation CC was changed to allow banks to
settle checks in same-day funds. These changes may
have resulted in more institutions using private clearinghouses. We would also expect that as banks merged,
the ratio of on-us transactions would increase. However, most estimates indicate that on-us check volume
has remained constant at around 30 percent.30
Alternatively, total check volume may have decreased during this period as a result of the adoption
of electronic alternatives. Therefore, the drop in Fed
volume would be attributable to a decrease in overall
check volume and not a change in market share. Perhaps a more plausible explanation is that both a shift
to private-sector alternatives and substitution of other
payment instruments were responsible for the reduction in check volume. However, as stated before, in
the absence of reliable data, we can not determine the
magnitude of each effect.
51
52
53
Conclusion
In this article, we have examined why U.S. consumers, merchants, and financial institutions have been
unwilling to significantly reduce their check usage. Consumers lack incentives to change their habits. In the
United States, credit card issuers have been successful in gaining point-of-sale market share by offering
incentives such as frequent-use awards and interest-free
short-term loans if monthly balances are paid in full.
However, in some environments, such as online purchases, consumers may have little choice but to use
electronic alternatives. Consumers may become more
comfortable with electronic alternatives the more
they use them, resulting in faster market adoption.
For merchants, the cost to process checks, including the risk of not being able to convert a payment to
good funds, may not be significantly greater than for
electronic alternatives such as online debit cards. However, merchants are also realizing the benefits of online debit cards as evidenced by the rapid deployment
of point-of-sale terminals and the merchants antitrust
suit against the credit card associations. Merchants
may be gaining sufficient bargaining power with payment providers to impact existing cost structures in
ways that may increase usage of electronic alternatives.
Financial institutions in Finland and Norway
have been successful in convincing consumers to significantly curtail their check usage and increase their
use of electronic payment forms by imposing per-check
fees. However, checks remain a substantial source of
revenue for U.S. financial institutions, especially in
terms of non-sufficient-funds fees. Electronic alternatives, such as online debit cards, may not have been as
54
NOTES
1
15
16
FMI (2000) does not break out the cost of fraud for verified and
unverified checks, so we are using FMI (1998) for this portion of
the analysis.
17
Both the Star and NYCE networks have increased their maximum
fees for supermarkets to 19 cents, while Interlink has raised this
fee to 20 cents.
20
For a theoretical exposition of credit extensions and their benefits to merchants, see Chakravorti and To (1999).
22
23
As of the end of 2000, Interlink charged the highest online debitcard-processing fee of 20 cents for point-of-sale transactions. After recent price increases, Interlink still charges the highest fees
with a maximum of 45 cents for point-of-sale transactions.
24
10
25
11
In comparison, 72.5 percent of households had a credit card and
34.5 percent of households had a debit card in 1998 (a substantial
increase from 17.6 percent of households in 1995).
26
12
However, there are several types of merchants, such as gas stations and restaurants, that do not usually accept checks.
13
14
27
28
55
29
The Feds share is taken as a percentage of interbank check volume ignoring any changes in on-us volume.
30
35
There are differences in consumer liability across payment instruments. For a discussion, see Spiotto (2001). For a discussion of how
evolving payment instruments and applications have leveraged the
existing payment infrastructure, see Mantel and McHugh (2002).
36
37
31
32
By mandate, the Fed must recover costs from the financial services
it provides. Investments in equipment are amortized over years.
Thus, it appears that the Fed expects the demand for its checkclearing services will not decline significantly in the near future.
33
A number of other private-sector initiatives have also been undertaken to truncate checks at the point of sale and through lock
boxes. In most cases, these initiatives take the magnetic ink character recognition (MICR) information and turn the payment into
an ACH transaction.
PayPal, the leading provider of electronic person-to-person payments, indicated that 66.9 percent of its payment volume in 2001
originated from online auctions. See McHugh (2002) for a discussion of PayPal and its services.
34
Some observers do not categorize credit cards as electronic payments, because in most instances the statement is provided on paper
and most payments are made by check. However, for most merchants, credit cards are processed, cleared, and settled electronically.
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