Why Are (Some) Consumers (Finally) Writing Fewer Checks? The Role of Payment Characteristics

Since the mid-1990s, the U.S. payment system has undergone a transformation featuring a significant decline in the use of paper checks that is quite uneven across consumers and not well understood. This paper shows that characteristics of payment instruments are the most important determinants of their use, by estimating econometric models of consumers’ adoption (extensive margin) and use (intensive margin) of checks plus six other payment instruments, using data from a comprehensive new data source. Changes in the relative convenience and cost of checks can explain directly about 34 and 11 percent, respectively, of the 8.4 percentage point decline in check share from 2003 to 2006. Changes in the relative characteristics of substitute payment instruments also likely contributed indirectly to the decline in check use through an increase in the number of payment instruments adopted per consumer, but the exact magnitude of this indirect channel cannot be identified with available data. JEL Classifications: D14, D12, E41, G21 Scott Schuh is Director of the Consumer Payments Research Center and a senior economist and Joanna Stavins is a senior economist and policy advisor at the Federal Reserve Bank of Boston. Their email addresses are [email protected], and [email protected], respectively. This paper, which may be revised, is available on the web site of the Federal Reserve Bank of Boston at http://www.bos.frb.org/economic/wp/index.htm. The views expressed in this paper are those of the authors and do not necessarily represent those of the Federal Reserve Bank of Boston, the Federal Reserve System, or the AARP. We thank Gene Amromin, Santiago Carbó-Valverde, Bob Chakravorti, John Driscoll, Chris Foote, Jeff Fuhrer, Luigi Guiso, Oz Shy, and Robert Triest for helpful comments and suggestions. We thank David DeRemer, Benjamin Levinger, Charles Sprenger, Caroline Theoharides, and Michael Zabek for excellent research assistance. And we thank Sharon Hermanson, S. Kathi Brown, and the AARP for kindly providing data from their 2006 survey. This version: November 2009 Consumer Payments Research Center