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

Check Safekeeping

The paying bank could save a significant amount with check safekeeping alone (stopping canceled checks at the paying bank without forwarding them to the check writer) even if checks were not truncated earlier in the collection process or not presented electronically. Check safekeeping by the paying bank without truncation also avoids some of the obstacles associated with truncation. With truncation, the paying bank cannot see the check when deciding whether to pay or not, cannot verify the payor's signature (although that option is rarely exercised by banks), possibly raising the risk of fraud. In order for the paying bank to accept truncation by other institutions, image capabilities might have to be available. Safekeeping also presents less uncertainty about check retrieval.

At the same time, however, safekeeping also seems to confront many of the same obstacles as check truncation. Some individual consumers and corporations are opposed to check safekeeping and demand their canceled checks back. The most efficient solution might be to charge customers for the incremental cost of receiving their canceled checks.(30) Some banks have already implemented such policies.(31) But even though some banks charge their customers for canceled checks and others provide check images instead, safekeeping is not yet common, mainly because of customer resistance. Note that the results of this study are sensitive to the specific assumption about the distribution of consumers' valuation of (willingness to pay for) receiving canceled checks.

Network Externalities

In the presence of network externalities, a product's value increases, the more widespread the use of the product. For example, the more people who own a fax machine, the more valuable my fax machine is to me, since I can communicate with a larger network of people. In the case of ECP, network effects are likely to be present as well.

The costs and benefits of ECP are likely to be affected by the number of financial institutions truncating checks and receiving electronic files. The more banks have truncation capabilities, the more likely banks are to "communicate" directly with each other to avoid sorting and shipping paper, and the higher the benefits to each paying bank.(32) In other words, the bigger the network of participating banks, the lower the costs and the higher the benefits to other participants. If a centralized storage and retrieval system were established, it might give rise to significant network economies. Intermediary processing costs will also decrease as more banks truncate checks and accept electronic files instead of paper checks. While the conversion of a single bank to electronic presentment might save some check processing costs, it would not eliminate the need for transport. But if all banks converted to electronic presentment, there would be no need for transport, leading to much larger savings. With universal truncation, an intermediary might not have to do any paper handling or distribution, and banks might be able to avoid the cost of having two parallel infrastructures (that is, one for paper and one for electronic check processing).(33) Therefore, truncation of the last paper check will bring the highest marginal benefit. Because of network externalities, electronic presentment has attributes of a public good: Each bank's investment in the transition to ECP benefits other banks.