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

New England Economic Review, July-August, 1997 by Joanna Stavins

While all the cost and benefit categories are listed, the study measures primarily the costs and benefits to the financial institutions involved. The scenario considered here does not include check imaging.(17) Although imaging may turn out to be crucial for ECP to be widely adopted, imaging represents a separate feature and the benefits and costs of providing check imaging should be estimated separately. Since the study focuses on the costs and benefits of moving from paper check to truncation, the numbers represent deviations from the costs or benefits of traditional paper check processing, and not the absolute costs (or benefits) of ECP processing. Some of the costs remain unchanged under either payments method, such as check printing and payor costs.(18)

When commercial bank cost data are not available, bank costs are approximated using the Federal Reserve's unit costs or fees for Federal Reserve services. Below is a summary of the assumptions used in the study:

1. On-us checks (33.3 percent of all checks(19)) are processed the same way as with paper presentment, but are safekept by the paying bank.

2. Of the remaining items (66.7 percent of all checks), 25 percent are truncated by the bank of first deposit, and 75 percent by an intermediary (see above).

3. MICR (Magnetic Ink Character Recognition) line data are transferred and presented electronically to the paying bank. The average cost of sending an ACH TRX record is used as a proxy for the cost of ECP data transmission.(20)

4. For the approximately 10 percent of checks that currently are collected in more than one day, ECP and truncation speed up the collection process by one day. In other words, ECP speeds up collection by 1/10 of a day.(21)

II. Results

On-Us Items

On-us items comprise 33.3 percent of all checks. Table 1 presents a summary of the costs and benefits of safekeeping of on-us checks by the financial institution as compared to paper check processing.(22) The major additional cost in this case is the paying customer's loss of canceled checks. However, that cost is also reflected in the key benefit, namely the paying bank's lower handling and postage costs in not having to mail those checks to the paying customer. Note that the depositing customer is not affected by check safekeeping. The overall net benefit is positive and amounts to less than 1 cent per item. See Appendix A for detailed cost and benefit calculations.

[TABULAR DATA FOR TABLE 1 OMITTED]

Items Truncated by the Bank of First Deposit

One-quarter of on-others items (16.7 percent of all checks) are assumed to be truncated by the bank of first deposit. Table 2 presents a summary of the costs and benefits of truncation by the bank of first deposit as compared to forwarding the paper check for collection. Note that the net benefits are positive and significantly higher than for on-us items. However, the distribution of costs and benefits varies. As with on-us items, paying customers experience the loss of their canceled checks. They also lose from the earlier debiting that ECP makes possible (that is, reduction in float). The depositing customer gains a similar amount from the reduction in float. The other major gains come from lower handling, transport, and postage costs at each stage of the collection process since the physical checks stop at the bank of first deposit. See Appendix B for detailed cost and benefit calculations.