FYI: An Update on Emerging Issues in Banking

The Impact on U.S. Banking of Payment System Changes

May 25, 2004

Although the much-heralded check-less society has yet to arrive, major changes are 

underway in retail non-cash payment systems. Today's issue of FYI surveys the 

implications of the rising use of electronic payments. After rising for many years, the 

number of checks used in retail transactions declined from 49.5 billion in 1995 to 42.5 

billion in 2000—the latest year for which comparable data are available. The table 

below shows that the number of retail electronic payments increased from 14.7 billion 

to 28.9 billion. 

The Use of Checks Has Declined While the Use 

of Retail Electronic Payments Has Increased

Number (Billions) 

Type of Payment 1979 1995 2000 

Check 32.8 49.5 42.5 

Retail Electronic 

Payments 5.5 14.7 28.9 

Debit Card 0.0 1.4 8.3 

Credit Card 

General Purpose 1.5 7.8 12.3 

Private Label 3.8 2.6 2.7 

Retail ACH 0.2 2.8 5.6 

Source: George R. Gerdes and Jack K. Walton II, The Use of Checks 

and Other Noncash Payment Instruments in the United States, 

Federal Reserve Bulletin 88, no.8 (August 2002), 361. 

While fewer checks are being written, the number is still very large in absolute terms 

and in comparison with a number of other countries, some of which have virtually 

eliminated the use of checks. Therefore, efforts are being made to "electronify" the 

checks early in the process of clearing and settlement, sending the information forward 

electronically, which is expected to be a faster and less expensive process than 

current methods that require the physical transportation of large amounts of paper. 

Banks will have to adapt product offerings and pricing as well as back-office 

processing to reflect these payment system changes. Since more electronic 

transactions are cheaper to process, as is the conversion or truncation (or both) of 

checks, banks that do not explicitly charge for transaction services on a per-item basis 

will see a reduction in costs. For banks that have explicit fees for each service (mainly 

banks that supply cash management services), it will be necessary to ensure that the 

profit margins on the electronic transaction services are commensurate with those on 

the paper transaction services. Banks of all sizes should be able to continue to serve 

their customers with a mix of capabilities, including ATMs, on and off-line debit cards, 

credit cards, and other services. 
Bank regulators must be aware of the risk implications of the changes in payment 

systems and must adapt their approaches accordingly. Operational risk is obviously an 

important issue. In this regard, the ownership of funds transfer networks has changed 

dramatically as the number and proportion owned and operated by non-bank entities 

has increased, while those owned by joint ventures of banks have declined. Because 

the operation of these networks has a direct effect on the risk exposure of the banks, 

the risk management practices of the network providers may have important 

implications for the banking industry and the bank regulatory community. Additionally, 

further consolidation among network providers—especially those for ATMs, debit

cards, and credit cards—raises concerns about pricing, service quality, and product 

innovation in a market for which bank regulators have no direct responsibility. 

About FYI

FYI is an electronic bulletin summarizing current information about the trends that are 

driving change in the banking industry, plus links to the wide array of other FDIC 

publications and data tools. 

Disclaimer

The views expressed in FYI are those of the authors and do not necessarily reflect 

official positions of the Federal Deposit Insurance Corporation. Some of the 

information used in the preparation of this publication was obtained from publicly 

available sources that are considered reliable. However, the use of this information 

does not constitute an endorsement of its accuracy by the Federal Deposit Insurance 

Corporation.

Last Updated 05/25/2004