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The economics of check float

Author

Listed:
  • James J. McAndrews
  • William Roberds

Abstract

Checks continue to dominate the market for noncash retail payments in the United States. Each year, U.S. residents write between 65 billion and 70 billion checks, an average of one check per business day per resident. This dependence on checks is unique among developed countries. It is also extremely costly: by switching from checks to other forms of payment, U.S. residents would save between $60 billion and $100 billion dollars per year. ; Why do checks continue to see such wide use within the United States? Economists' explanations have focused on check "float," which is the interest earned by a check writer between the time a check is received as payment and the time the payment is settled. This article explains how check float arises within the U.S. payment system and how float can discourage the adoption of other types of payment. The authors also consider several proposals for reforming the U.S. payment system. While these proposals hold some promise, they are also subject to criticisms. The authors conclude that over the near future, policymakers will need to weigh the drawbacks of these proposals against the benefits of a faster transition to a more efficient payment system.

Suggested Citation

  • James J. McAndrews & William Roberds, 2000. "The economics of check float," Economic Review, Federal Reserve Bank of Atlanta, issue Q4, pages 17-27.
  • Handle: RePEc:fip:fedaer:y:2000:i:q4:p:17-27:n:v.85no.4
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    References listed on IDEAS

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    1. David B. Humphrey & Lawrence B. Pulley, 1998. "Retail payment instruments: costs, barriers, and future use," Proceedings 585, Federal Reserve Bank of Chicago.
    2. Jeffrey M. Lacker & Jeffrey D. Walker & John A. Weinberg, 1999. "The Fed's entry into check clearing reconsidered," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-32.
    3. Kaplow, Louis & Shavell, Steven, 2002. "Economic analysis of law," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 25, pages 1661-1784 Elsevier.
    4. David Humphrey & Lawrence Pulley & Jukka Vesala, 2000. "The Check's in the Mail: Why the United States Lags in the Adoption of Cost-Saving Electronic Payments," Journal of Financial Services Research, Springer;Western Finance Association, vol. 17(1), pages 17-39, February.
    5. Jeffrey M. Lacker, 1997. "The check float puzzle," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 1-26.
    6. William R. Emmons, 1996. "Price stability and the efficiency of the retail payments system," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 49-61.
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    Citations

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    Cited by:

    1. Franklin Allen & James McAndrews & Philip Strahan, 2002. "E-Finance: An Introduction," Journal of Financial Services Research, Springer;Western Finance Association, vol. 22(1), pages 5-27, August.
    2. Kari Kemppainen, 2004. "Competition and regulation in European retail payment systems," Microeconomics 0404008, EconWPA.
    3. Kemppainen, Kari, 2003. "Competition and regulation in European retail payment systems," Research Discussion Papers 16/2003, Bank of Finland.

    More about this item

    Keywords

    Check float ; Checks ; Payment systems;

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