Who Uses Electronic Check Products: A Look at Depository Institutions
Approximately 42 billion checks were written and collected in the United States in 2000. The vast majority of noncash transactions continue to be settled with paper checks, which despite gains in efficiency and speed, still require costly and time-consuming sorting and transportation. An alternativeelectronic check presentmentcould save time and money. Yet, electronic services have been slow to take off, possibly because of the way the Federal Reserve prices them. If the pricing structure were revised, there might be more demand from banks for electronic services, and a higher level of efficiency, theoretically, might be obtained.
This paper uses data on purchases of the Federal Reserves electronic check services by individual banks and tests whether demand for these services varies among depository institutions. We find that small and large banks use the services differentlylarge commercial banks are more likely to use MICR Information and Image than are small or medium banks, but the opposite is true for the other electronic check services. Demand elasticities may vary as well, although few of our estimated elasticities are statistically significant, suggesting that demand for the Federal Reserves electronic check services does not adjust with price shifts, probably because other factors (besides the Federal Reserves prices) can influence banks decisions on how much to buy. We find that small and medium banks have more elastic demand for MICR Information than the large banks. However, data matching limited our sample and prevented us from drawing definite conclusions. Our results presented in this article are not conclusive enough to make policy recommendations, and should not be construed as such. Instead, this article is intended to raise the issue of differentiated pricing for electronic check products.