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A comparison of social costs and benefits of paper check presentment and ECP with truncation

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  • Joanna Stavins

Abstract

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.

Suggested Citation

  • Joanna Stavins, 1997. "A comparison of social costs and benefits of paper check presentment and ECP with truncation," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 27-44.
  • Handle: RePEc:fip:fedbne:y:1997:i:jul:p:27-44
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    References listed on IDEAS

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    1. Nicholas Economides, 1997. "The Economics of Networks," Brazilian Electronic Journal of Economics, Department of Economics, Universidade Federal de Pernambuco, vol. 1(0), December.
    2. Kirstin E. Wells, 1996. "Are checks overused?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-12.
    3. Paul W. Bauer & Diana Hancock, 1995. "Scale economies and technological change in Federal Reserve ACH payment processing," Economic Review, Federal Reserve Bank of Cleveland, issue Q III, pages 14-29.
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    Cited by:

    1. Joanna Stavins, 1999. "Checking accounts: what do banks offer and what do consumers value?," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 3-14.
    2. Joanna Stavins, 2002. "Effect of consumer characteristics on the use of payment instruments," New England Economic Review, Federal Reserve Bank of Boston, issue Q 3, pages 19-31.
    3. Gupta, Amar & Palacios, Rafael, 2002. "Training Neural Networks for Reading Handwritten Amounts on Checks," Working papers 4365-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    4. Helmi Hamdi, 2007. "Some Ambiguities Concerning the Development of Electronic Money," Financial Theory and Practice, Institute of Public Finance, vol. 31(3), pages 293-307.
    5. Jeffrey M. Lacker, 1997. "The check float puzzle," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 1-26.
    6. Hancock, Diana & Humphrey, David B., 1997. "Payment transactions, instruments, and systems: A survey," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1573-1624, December.
    7. Joanna Stavins, 2002. "Who uses electronic check products: a look at depository institutions," New England Economic Review, Federal Reserve Bank of Boston, issue Q 3, pages 3-16.
    8. Jeffrey M. Lacker & John A. Weinberg, 1998. "Can the Fed be a payment system innovator?," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 1-25.
    9. Loretta J. Mester, 2000. "The changing nature of the payments system: should new players mean new rules?," Business Review, Federal Reserve Bank of Philadelphia, issue Mar, pages 3-26.

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    Keywords

    Check collection systems;

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