Academic journal article Economic Perspectives

Why Do We Use So Many Checks?(off-Line Transactions Paid with checks)(Statistical Data Included)

Academic journal article Economic Perspectives

Why Do We Use So Many Checks?(off-Line Transactions Paid with checks)(Statistical Data Included)

Article excerpt

Introduction and summary

The primary question we address in this article is why consumers, merchants, and financial institutions are reluctant to embrace electronic payments even though electronic payment networks, such as the credit card and automated clearinghouse (ACH) networks, have existed for more than 25 years. While most Internet-based transactions are primarily processed via credit card networks, most noncash off-line payments by both consumers and businesses in the United States are made with checks.

In the United States, there are over 15 checks written per month per person. (1) This is more than three times the number of checks written per person in Canada or the United Kingdom and at least 15 times more per person than in Germany, Italy, Belgium, the Netherlands, Sweden, or Switzerland (Bank for International Settlements, 2000, and Federal Reserve System, 2001). (2,3)

In this article, we incorporate various strands of the payment literature to provide a more integrated view as to why payment system participants are reluctant to use electronic payments. Brito and Hartley (1995), Hirschman (1982), Mantel (2000), Murphy (1988), and Whitesell (1992) focus on consumer choice issues. Radecki (1999) and Wells (1996) discuss the revenue earned and cost to financial institutions from providing check services. Food Marketing Institute (1994, 1998, and 2000), Chakravorti and To (1999), and Murphy and Ott (1977) concentrate on the merchants' perspectives. McAndrews (1997) and Weinberg (1997) investigate the network issues. Connolly and Eisenmenger (2000), Benston and Humphrey (1997), Green and Todd (2001), Guynn (1996), and Lacker and Weinberg (1998) discuss the Federal Reserve's role in the payment system. A more integrated analysis of the underlying incentives of various payment system participants has been developed by Baxter (1983), Chakravorti and Emmons (2001), Chakravorti and S hah (2001), Rochet and Tirole (2000), and Wright (2000).

We study the incentives underlying the payment network to examine why, unlike several other industrialized countries, the United States has been slow to abandon checks. Many observers claim that electronic payments are less expensive than checks. However, these social cost comparisons usually ignore transition costs and the underlying incentives to each payment participant. Furthermore, the provision and usage of payment services exhibit network effects, more commonly referred to as the chicken-and-egg problem, which may impede the adoption of new payment technologies. Even if electronic payments are less expensive and they can overcome the chicken-and-egg problem, consumers, merchants, and financial institutions may still be reluctant to move to electronic payments. We analyze why this is so. In addition, we explore actions by the Federal Reserve to improve the check processing system and whether this could possibly hinder the migration away from checks. Finally, we discuss potential drivers to the adoption of electronic payments.

Check usage

We use two different sources of check data in this article. The first source is the annual payments data published by the Bank for International Settlements (BIS). The second source of data is a comprehensive review of the retail payment systems by the Federal Reserve System (Fed) (2001). The Fed study indicated that the total volume of check payments in the United States was significantly lower than previously estimated. However, the data published by the BIS still provide valuable insights into check usage in other countries and check usage trends in the United States. We rely on the new Fed study for current check values and volumes and use the older data reported to the BIS by the Fed for trends in check values and volume.

According to the new Fed benchmarking study released in November 2001, 49.6 billion checks were written in the U. …

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