A Comparison of Social Costs and Benefits of Paper Check Presentment and ECP with Truncation
Each year, about 60 billion checks are collected in the United States. While the shares of electronic payments methods such as the automated clearing house and credit and debit cards have been growing in recent years, the volume of checks has grown by more in absolute numbers during the last 20 years than all electronic payments methods combined. Partly because of their convenience, checks remain an extremely popular way to carry out transactions. Since it seems that checks will be around for the foreseeable future, it makes sense to try to improve the process of their collection.
This article compares the social costs and benefits of electronic check presentment with truncation to those of paper check processing. Even though ECP with check truncation was found to raise the net social benefits by 2.39 cents per check, or around $1.4 billion per year, several obstacles may prevent the private market from reaching universal truncation in the near future. The obstacles include transition costs, network externalities, uneven distribution of savings, an interim period of dual check processing (paper and electronic), and uncertainty surrounding check or image retrieval by paying banks. Despite these obstacles, there are reasons that it might be socially desirable to encourage ECP (through pricing policies, for example). However, the results presented here are too preliminary to specify any exact policy recommendations.