Business-to-business payments and the role of financial electronic data interchange.

Scott E. Knudson, Jack K. Walton II, and Florence M. Young, of the Board's Division of Reserve Bank Operations and Payment Systems, prepared this article.

Over the past three decades, businesses have implemented a vast array of automated systems to improve their productivity. Nevertheless, most continue to bill their customers with paper invoices and to mail their suppliers paper checks with remittance information. Generating and processing these paper documents consumes significant amounts of real resources, such as labor and transportation. The purchasing company must manually enter data from invoices into its automated accounts payable system, track the receipt of supplies, print remittance documents, and issue and mall checks. After receiving payment, the supplier must manually enter payment data into its automated accounts receivable system and deposit the check with its bank for collection.

To collect payment for its customer, the suppliers' bank (the collecting bank) must typically transport the check to the bank on which the purchaser drew it (the payor bank).(1) Collecting banks frequently route checks through intermediaries, such as correspondent banks or Federal Reserve Banks, which ultimately deliver the checks to the payor banks. Thus, the transportation of checks through the collection chain and the repetitive handling of them at each bank in the chain contribute significantly to the cost of processing checks.

Today, electronic data interchange (EDI) permits businesses to replace paper documents with the electronic transmission of a wide variety of business data. Specifically, EDI consists of the electronic transmission of data in standard formats developed by businesses for documents typically exchanged between trading partners, including purchase orders, invoices, shipping notices, payment orders, and remittance advices.

To permit businesses to automate payment processing fully, the banking industry has combined electronic payment formats with EDI formats for remittance data. When electronic transfers of funds and electronic remittance data are combined to make payments, the transactions are called financial electronic data interchange (financial EDI). Using financial EDI to make payments allows businesses to replace the labor-intensive activities associated with issuing, mailing, and collecting checks through the banking system with automated initiation, transmission, and processing of payment instructions. Thus, it eliminates the delays inherent in processing checks. Financial EDI also improves the certainty of the payment flows between corporations' bank accounts because the payee's bank can credit its account on the scheduled payment date and the payor's bank can debit its account on the same day.

Despite the potentially significant benefits of financial EDI to businesses and the banking industry, businesses continue to use traditional methods to make most of their business-to-business payments.

This article examines the ways business-tobusiness payments are made today and describes the methods for making financial EDI payments. It also explores the reasons that businesses have chosen to use various payment instruments, the benefits of financial EDI, and the impediments to its use.

HOW BUSINESS-TO-BUSINESS PAYMENTS ARE MADE

The three principal types of noncash payment instruments currently used for business-to-business payments are checks, large-dollar funds transfers, and automated clearing house (ACH) transfers.

Checks

Checks are debit transfers, that is, payees must collect funds from payors. Funds made available by banks to depositors of checks are provisional and may be reversed if the payor does not have sufficient funds in its account to pay the check when it is received by the payor's bank. In 1993, more than 96 percent of all noncash payments made in the United States were made by paper checks (table 1). Consumers issued about 55 percent of these checks, businesses issued about 40 percent, and the federal government issued about 5 percent.(2)

Because businesses issue checks to individuals as well as to other businesses, the number of business-to-business checks is difficult to estimate with any degree of accuracy, but the number is certainly large. Moreover, because the value of payments made between businesses is likely to be much larger than the value of those made by businesses to individuals, the value of business-to-business checks probably accounts for a large share of the value of all checks written.

Businesses use checks to make payments for basically two reasons. First, they are a familiar instrument, and they are a readily accepted form of payment despite some uncertainty about receiving final payment. Second, some businesses benefit from the float created by the delays in the check-collection process. Float is created when a delay occurs between the initiation of a payment and the availability of the funds to the recipient. As previously noted, delays occur because checks are typically delivered through the mail, require physical handling, and must be transported among banks in the collection chain. Businesses find float valuable because they can use or invest funds for several days after they have issued a check.

Although discouraged by the Federal Reserve, some companies attempt to increase the float benefit of checks by drawing checks on banks located in remote locations or by otherwise imposing barriers to the timely collection of checks. These practices add to the transportation expenses incurred in collecting checks as well as delay recipients' access to funds. The value of this float benefit, however, varies significantly depending on the level of interest rates and the costs businesses incur to manage float.

Large-Dollar Funds Transfers

Large-dollar funds transfers are credit transfers, that is, funds flow directly from the payor's bank to the payee's bank. They are typically same-day payments and can be made almost instantaneously. The two large-dollar funds transfer services in the United States are the Federal Reserve's system, Fedwire, and the Clearing House Interbank Payments System (CHIPS) of the New York Clearing House. The Federal Reserve guarantees Fedwire funds transfers. Thus, they cannot be revoked after the receiving bank is advised that a Reserve Bank has credited its account. The members of CHIPS pledge collateral to ensure settlement of CHIPS transfers, and payments become final at the close of business when all members of CHIPS settle their net positions using Fedwire transfers.

Large-dollar funds transfers account for an extremely small portion of the number of noncash payments. In 1993, for example, they accounted for about 0.2 percent of all noncash payments in the United States. At the same time, however, they accounted for nearly 86 percent of the value of all noncash payments (table 1).

Businesses use large-dollar funds transfers when timeliness and certainty of payment are the most important considerations. For example, they generally settle domestic financial transactions, such as repurchase agreements and commercial paper, and fund zero balance accounts with Fedwire funds transfers.(3) They use CHIPS transfers to settle the dollar side of foreign exchange as well as Eurodollar transactions. Businesses rarely use large-dollar funds transfers to pay suppliers for goods and services.(4)

Automated Clearing House Transfers

The ACH system is a value-dated electronic funds transfer system that is typically used to process high volumes of relatively small-dollar payments for settlement one or two business days after they are processed. Two types of ACH transfers may be used---credit transfers or debit transfers. ACH credit transfers are similar to large-dollar funds transfers in that funds flow from the payor's bank to the payee's bank. The funds received by the payee's bank are generally provisional until the morning of the business day following the settlement day. The Reserve Banks may revoke the payments if the sending bank does not have sufficient funds in its account to fund them on the settlement day. When ACH debit transfers are used, the bank initiating the transfer (the payee's bank) receives funds from the payor's bank. As with checks, funds made available by banks to collecting businesses are provisional and may be revoked if there are not sufficient funds in the payor's account to cover the transfer on the scheduled settlement day.

ACH transactions account for a small fraction of the total volume and value of all interbank payments. Businesses initiate the majority of ACH transfers, but in 1993 less than 1 percent of those transfers were business-to-business payments. Use of the ACH for business-to-business payments, however, is growing rapidly. Based on an examination of the types of ACH payments processed by the Federal Reserve System, ACH business-to-business payments grew at an average annual rate of 22 percent from 1991 through 1993. (The Federal Reserve processes about 95 percent of all interbank ACH transfers.) This rate of growth was considerably higher than the growth in overall ACH use (table 2).

Businesses typically use ACH credit transfers to pay for goods or services and to make tax payments to state and local governments. They use ACH debit transfers to concentrate funds from the bank accounts of widely dispersed affiliates and subsidiaries to the company's primary bank account. Some businesses also use ACH debit transfers to collect funds from businesses that distribute their products. Many businesses, however, are concerned about permitting other companies to initiate debits on their accounts. Thus, ACH debit transfers are used less often than ACH credit transfers for business-to-business payments.

HOW FINANCIAL EDI PAYMENTS ARE MADE

Corporations use various approaches to implement financial EDE The most fundamental decision a business must make when implementing financial EDI is whether payment instructions and remittance data should flow together through the banking system or whether payment instructions should flow through the banking system and remittance data should be transmitted over a direct data communications link with a trading partner or a value-added network (VAN). A VAN is a third-party service provider that manages data communications networks for businesses that exchange electronic data with other businesses. VANs facilitate the exchange of electronic data by accepting data in various formats and by converting the incoming data to a format usable by the receiver of the information. VANs also manage transmission schedules and hold data until receivers are ready to accept them.

The choices businesses make are based on differences in electronic transmission costs, the extent to which the two trading partners exchange business documents electronically, and the types of electronic payment services offered by the two businesses' banks. The following discussion provides illustrations of payment instructions and remittance information flowing together and flowing separately.

In chart 1, the purchasing company (company A), which is the payor, transmits remittance data to instruct its bank (bank A) to pay its supplier. Bank A creates an ACH credit transfer instruction, indicating the specified payment date, and attaches the appropriate electronic remittance data to that payment instruction. (See appendix A for a discussion of ACH payment formats.) Bank A transmits the payment instruction with the remittance data to an ACH operator. At present, there are two national ACH operators--the Federal Reserve and Visa, U.S.A.--and two regional ACH operators--the New York Automated Clearing House Association and the Arizona Automated Clearing House Association. After receiving the payment instructions and remittance information, the ACH operator edits the payment instructions, extracts accounting data from them, and transmits the payment instructions and remittance data to the seller's bank (bank B). Bank B then transmits a payment advice and the remittance data to the selling company (company B), which is the payee.

When ACH credit transfers are processed by the Federal Reserve, on the scheduled payment date the Reserve Banks maintaining the accounts of banks A and B debit and credit the reserve or clearing accounts of banks A and B respectively, for the total value of transfers sent or received. If a private sector ACH operator processed the ACH transfers, the value of all ACH transfers processed for the banks using that operator would be netted, and each participant would settle its net position through its account maintained on the books of a Federal Reserve Bank. (Banks that do not have a reserve or clearing account settle ACH transfers through correspondent banks' reserve or clearing accounts.) Bank A and bank B then debit and credit their respective customers' accounts.

In chart 2, the payor transmits payment instructions to its bank (bank A) and remittance information to the payee through a VAN. The payment instructions are processed through the banking system and settled as described above, with the exception that remittance data are not attached.

To facilitate the use of financial EDI, some banks provide VAN-like services with payment services to their corporate customers. Some of these banks have developed their own networks for communicating data to their corporate customers, and some of them also contract with VANs to transmit remittance information to their corporate customers' trading partners.

The following examples illustrate how financial EDI payments are made using ACH credit and debit transfers. Sears Roebuck and Company's Merchandise Group began using ACH credit transfers to pay its suppliers in 1983. Sears uses EDI format standards to transmit payment instructions and remittance information to its banks. The banks convert the data to ACH payment formats, which are then processed as shown in chart 1. If Sears's supplier requests that remittance data be sent separately, rather than with the payment, Sears transmits the remittance data to the trading partner through the same network used for exchanging other business data with that trading partner. The ACH transfer is then processed by Sears's bank as shown in chart 2.

General Motors Corporation began using ACH debit transfers to collect payments from its dealers through their bank accounts in 1982. General Motors sends ACH formatted payment instructions, with information identifying the vehicles for which payment is being requested, to one of its banks(5) The ACH debit transfers are processed in the same way that ACH credit transfers are, except that, on the settlement day General Motors's banks credit General Motors's accounts and the dealers' banks debit the dealers' accounts. In 1993, using this method, General Motors collected 600,000 payments from its dealers, with a value of $12 billion.

General Motors also uses ACH credit transfers to make payments to suppliers. Besides transmitting remittance information to suppliers through the banking system or a VAN, General Motors will mail it directly to a supplier if the supplier's bank cannot receive EDI data. In 1993, General Motors made 700,000 ACH credit payments valued at $38 billion to suppliers.(6)

The federal government began using ACH transfers to make payments to businesses, state and local governments, and educational institutions in 1987. The program, called Vendor Express, is managed by the Treasury Department's Financial Management Service (FMS). Although vendors continue to submit paper invoices to federal agencies, the agencies make payments using ACH credit transfers. To permit vendors to identify payments, one ACH transfer, accompanied by an addendum record that contains information referencing the vendor's invoice, is sent for each invoice received. Depending on the capabilities of the vendors' banks, the remittance information may be delivered in electronic or paper form. In 1993, more than 100 federal agencies participated in the program and made approximately 5.3 million payments, valued at $326.8 billion.(7) The program has improved the timeliness of government payments and has significantly reduced the government's transaction COSTS. (8)

BENEFITS AND COSTS OF FINANCIAL EDI FOR BUSINESSES

At present, neither EDI nor financial EDI are widely used. Approximately 44,000 companies, out of millions of businesses in the United States, exchange business data electronically.(9) Only about 10 percent of these companies also use financial EDI.(10) Moreover, no more than fifty banks have the capability of providing complete financial EDI services to their corporate customers. (11)

Incentives for Using Financial EDI

Several factors influence a company's decision to use financial EDI. For companies that have implemented EDI, the principal benefits of extending EDI capabilities to the initiation of payments are lower transaction costs and increased control over the timing of payments.

According to a survey conducted by the EDI Group, Ltd., a research and consulting firm, 23 percent of the 370 respondents saw potential cost savings as the most important reason for using financial EDI.(12) For example, businesses can reduce personnel expenses by eliminating manual processing, eliminate postage costs, and, in some cases, benefit from lower bank service charges.

The use of financial EDI and electronic payments in general also permits corporate cash managers to control the timing of payments. When a corporation uses ACH credit transfers to make payments, the settlement date for the payment is scheduled when the corporation sends payment instructions to its bank. Thus, the timing of payment obligations is known with certainty, and corporate cash managers can plan their funding needs in advance. Similarly, corporations receiving ACH credit transfers know the scheduled payment date and can plan on receiving payments with a high degree of certainty. Businesses using ACH debit transfers can also schedule payment dates with each other so that the company whose bank account is being debited can fund the payment on a specific date.

Conversely, when payments are made with checks, the day on which a check will be delivered to a corporation's bank for payment cannot be predicted. As a result, many companies purchase cash management services from their banks to obtain information about the value of checks that have been delivered for payment each day. Obtaining this information is labor intensive and costly for the company and its banks. In addition, the uncertainty associated with check payments may prevent a corporation from investing its cash balances in the most optimal way.

Thus, financial EDI has the potential of eliminating the costs banks incur to capture daily information about check payments and of reducing the charges companies pay for these services. It may also improve a company's earnings on its cash balances.

According to the EDI Group's survey, companies using financial EDI found several benefits besides reducing costs and improving control over the payment process. First, the electronic payment information exchanged between trading partners is more accurate than that on paper documents because the information is not manually entered into accounting systems by each trading partner. Second, businesses can respond more quickly to customer requests, such as verifying discrepancies in purchase orders and invoices or identifying erroneous payment amounts or terms, because data are readily accessible through automated systems. Third, large companies indicated that financial EDI allows them to form technologically based alliances with their suppliers, which may lead to long-term trading relationships.

Societal cost savings could also result from greater use of electronic payments. David Humphrey and Allen Berger calculated that the social costs of making payments using ACH transfers in 1987 was substantially less than issuing, collecting, and settling checks.(13) Since 1987, however, changes have occurred in the processes used to issue and collect checks, and technological advances have been introduced in ACH processing. As a result, the cost savings that might be realized by converting business-to-business payments to financial EDI cannot reliably be based on earlier calculations.

Impediments to the Use of Electronic Payments

While the potential cost savings associated with using electronic payments may be substantial, the impediments to their use are substantial as well. First, the float benefit associated with check payments affects businesses' choice of payment instruments. About 15 percent of the respondents to the EDI Group's survey cited concerns about the loss of float as the reason that their companies had chosen not to participate in financial EDI.(14) Although the costs of managing float and current low interest rates are reducing float benefits, the value of check float to businesses, on average, is still substantial. (15)

To compensate for the loss of check float, some corporations adjust payment terms when converting to electronic payments. For example, General Motors found that, on average, the checks it wrote were paid 3.6 days after they were issued. When it began making electronic payments, General Motors reached agreements with its suppliers to make electronic payments three days later than when it had been issuing check payments. This agreement improved funds availability for its suppliers by six-tenths of a day on average.(16)

Second, most companies that implement EDI systems focus initially on achieving internal operating efficiencies rather than on improving their payment operations. Thus, the small percentage of businesses using EDI that also use financial EDI probably reflects the initial emphasis of businesses on re-engineering primary business functions. After businesses take these steps, they may pursue improvements in payment operations.

Third, for corporations planning to install EDI systems, start-up costs can be significant. The EDI Group's survey data indicated that the median cost for a corporation to install an EDI system is about $7,500. The costs range from about $5,000 for smaller companies to more than $10 million for large corporations. For companies to add a new trading partner, the survey results indicated that the median cost, including all out-of-pocket and personnel expenses, is about $750, ranging from a few hundred dollars to more than $20,000.(17) Corporations that have installed EDI systems estimate that they are able to recover their investment in about two years, on average. Many firms, however, find the initial costs prohibitively high.

Fourth, even for businesses that have implemented EDI to communicate with their trading partners, the additional costs of implementing financial EDI can be high. A business must establish a relationship with a bank that can support its financial EDI requirements. It must also establish data communications links with the bank and may need to modify the formats used in internal automated accounting systems to send payment instructions to the bank.

Finally, because relatively few businesses participate in financial EDI, most businesses must be able to issue and receive checks as well as make electronic payments. Maintaining both paper-based and electronic payment systems reduces the potential benefits of financial EDI. To simplify the payment process for their business customers, some banks are beginning to accept instructions for all their business customers' payments. Based on information about the form of payment requested by the company's suppliers and service providers, these banks initiate either electronic payments or checks on behalf of their customers. While these services simplify payment processing for businesses, the banks must maintain dual processing systems.

Despite the potential of financial EDI to reduce the costs of the resources consumed in making payments in the United States, a significant conversion of business-to-business payments to electronic form may not occur for some time. First, before a company can consider using financial EDI, it must install EDI systems to communicate with its trading partners. Because installing such systems may require a company to make significant modifications to its internal automated systems as well as to develop the capability to transmit business data to its trading partners, implementation costs are high. As a result, many companies may not yet be able to justify the investment in EDI systems.

Second, even for companies that have implemented EDI systems to communicate with their trading partners, using financial EDI to make payments to those trading partners is complex. The company must find a bank capable of processing financial EDI transfers, determine whether each trading partner's bank can receive the payments and provide the remittance data, and consider renegotiating payment terms with each trading partner. To many business managers, these undertakings are daunting.

Third, many businesses continue to benefit from the float created by the check collection system. Even though current low interest rates have reduced this benefit, check float continues to act as a disincentive to increased use of financial EDI.

Finally, for both businesses and banks, the need to maintain systems to process checks as well as electronic payments is complicated and costly.

While issuing and collecting checks currently consumes significant resources, the total costs and potential benefits of converting the nation's payment system to an electronic one are difficult to quantify. Similarly, the costs and benefits associated with financial EDI are difficult to quantify. Several factors, however, indicate that the use of financial EDI will grow. The cost of technology continues to decline, and even small businesses are using automated systems to track inventories and to maintain their accounting systems. Gaining access to value-added networks, which simplify electronic communications between trading partners, is becoming easier.

In addition, several large companies that have installed EDI systems are interested in expanding those systems to their payment processing. The interest of these companies is providing the impetus for some banks to offer financial EDI services or expand the services they currently offer. Moreover, the federal government's plans to improve its efficiency through automation, including expansion of its Vendor Express program, will require banks to develop the capability of processing financial EDI payments for the businesses providing goods and services to the government.

At the same time, a considerably greater understanding of the costs and benefits of financial EDI is needed before determinations can be made about its potential for increasing the efficiency of the payments system in the United States. Thus, the types of payment services used by businesses in the future will ultimately be based on the collective results of individual businesses' cost-benefit analyses and their demands for specific payment services.

APPENDIX A: EDI FORMATS

The American National Standards Institute (ANSI) is the coordinating organization in the United States for the development of national standards for EDI. ANSI members establish standards used to meet this country's business needs. In 1979, ANSI formed the Accredited Standards Committee (ASC) X12 to set inter-industry standards for electronic data interchange for business transactions. It is currently supported by more than 300 organizations representing corporations, financial institutions, government agencies, trade associations, vendors, and consultants.

Transaction Data Sets

ANSI ASC X12 standards are cross-industry, public standards that may be used by any company, in any industry, for the exchange of information. The format standards, called transaction data sets, have been developed for many business documents. Each ANSI transaction data set is identified by a three-digit number. For example, a payment order-remittance advice is an ANSI 820 transaction, and a purchase order is an ANSI 850 transaction.

The payment order-remittance advice (ANSI 820) is the most common transaction data set used for financial EDI. A payment order instructs a bank to take funds out of the payor's account and send the funds to the bank maintaining the account of a trading partner. A remittance advice provides specific information about the payment. For example, a $500 payment might be made to pay $100 for invoice number 1, $200 for invoice number 2, and $200 for invoice number 3. The ANSI 820 format permits a company to transmit a variable amount of remittance information, depending on the requirements of each transaction.

ACH Format Standards

The National Automated Clearing House Association (NACHA) is a national trade association whose members are local ACH associations. Since its formation in 1974, the NACHA has promulgated the formats used for ACH transfers. To support business-to-business payments, the NACHA has developed the following four ACH formats: (1) cash concentration and disbursement (CCD), (2) cash concentration and disbursement plus (CCD+), (3) corporate trade exchange (CTX), and (4) corporate trade payment (CTP).

The cash concentration and disbursement (CCD) format is the simplest of the four. It consists of a payment record in which a reference number may be included to assist in identifying the payment. No other explanatory data may accompany the payment record, however. If a company wishes to transmit more extensive remittance data to its trading partner, the company must use a different ACH format or transmit the information separately.

The cash concentration and disbursement plus (CCD+) format uses the CCD payment record and is accompanied by one additional record, called an addendum record, which provides information explaining the purpose of the payment. Data included in the addendum record may be sent in ANSI ASC X12 payment order-remittance advice and the health care claim payment-advice formats or NACHA-endorsed banking conventions, including formats for electronic dealer drafting, child support payments, and tax payments.

The corporate trade exchange (CTX) format consists of a payment record, which may be accompanied by as many as 9,999 addenda records. Data included in the addenda records may be sent in the ANSI ASC X12 formats or NACHA-endorsed banking conventions.

The corporate trade payment (CTP) was the first corporate format developed by the NACHA and may be accompanied by as many as 9,999 addenda records. The data formats of the addenda records were designed to be compatible with most corporate accounting and receivable systems. Because ANSI ASC X12 standards are replacing the formats used in the CTP addenda records, use of the format will be discontinued in April 1996.

APPENDIX B: FLOAT BENEFITS OF CHECKS

In their 1987 study, Humphrey and Berger calculated that the average value of float to businesses issuing checks amounted to about $1.88 per check.(18) This appendix explains Humphrey and Berger's calculations and updates them for 1993.

1987 Calculations. Humphrey and Berger used the following formula to calculate the value of float per business check:

Average value
of float =       (average value of business check)
                 x (average number of float days)
                 x (average ninety-day
                 Treasury-bill rate/365), or

   $1.88 = ($2,636) x (4.5) x (0.05775/365).

The values used in the formula were calculated as follows:

1. To calculate the average value of a business check, the following assumptions were made:

a. Consumers write 55 percent of checks; businesses, 40 percent; and the federal government, 5 percent.(19)

b. The average value of all checks written was $1,188, based on staff estimates that 47 billion checks were written in 1987, with a value of $55.8 trillion.

c. The average value of a consumer check was $145(20)

d. The average value of a federal government check was $1,074. (In 1987, the Federal Reserve Banks processed 568 million government checks, with a value of $610.7 billion.)

e. The average value of a business check was estimated to equal $2,636, or {$1.188 - [(0.55 x $145) + (0.05 x $1,074)]} /0.40.

2. The average number of float days, 4.5, was the researchers' best estimate, based on conversations with industry and Federal Reserve experts.

3. In 1987, the average ninety-day Treasury bill rate was 5.775 percent.

1993 Calculation. To update the value of float to businesses, Humphrey and Berger's formula was used, and the values used in the formula were calculated as follows:

1. To calculate the average value of a business check, the following assumptions were made:

a. The distribution of checks written by consumers, businesses, and the federal government was assumed to be the same as in 1987.

b. The average value of all checks was $1,150, based on staff estimates that 59.4 billion checks were written in 1993, with a value of $68.3 trillion.

c. The average value of a consumer check was estimated to be $183 by applying a 4 percent annual inflation factor to Humphrey and Berger's estimate of $145.

d. The average value of a federal government check was $1,113. (In 1993, the Federal Reserve Banks processed 480 million government checks, with a value of $534.2 billion.)

e. The average value of a business check was estimated to equal $2,484, or {$1,150 - [(0.55 x $183) + (0.05 x $1,113)]}/0.40.

2. The average number of float days was assumed to be the same as that used by Humphrey and Berger. (Although the Federal Reserve System and others have improved the check collection process since 1987, mail float is the largest single factor in business check float, and it was assumed that mail time has not decreased significantly.)

3. In 1993, the average ninety-day Treasury bill rate was 3.6 percent.

4. The equation then becomes

$1.10 = ($2,484 x 4.5) x (0.036/365).

Finally, two assumptions were changed to test their effect on the calculated float value. First, the value of a consumer check was assumed not to have increased between 1987 and 1993. (The average value of a consumer check may not have risen because electronic payments, such as automated bill payments and automated teller machine transactions, have replaced some checks.) Given this assumption, the average value of a business check would equal $2,536, or {$1,150- [(0.55 x $145) + (0.05 x $1,113)]}/0.40,

and the value of float per business check would equal $1.12, that is,

[($2,536 x 4.5) x (0.036/365)].

Second, it was assumed that the average number of float days has declined from 4.5 to 3.5. With this assumption, the average value of float equals $0.86 per business check, or

  [($2,536 x 3.5) x (0.036/365)1.

[TABULAR DATA OMITTED]

1. The term "bank" in this article refers to all depository institutions, such as savings and loan associations, mutual savings banks, credit unions, and so forth.

2. "Special Issue: Displacing the Check," Federal Reserve Bank of Atlanta, Economic Review, vol. 68 (August 1983), p. 36.

3. When a business uses a zero balance account for disbursement purposes, the bank maintaining the account advises the business each morning of the value of checks that have been presented for payment. The business then transfers funds to the account to cover the value of those checks. The use of zero balance accounts permits businesses to earn a return on funds through short-term investments, rather than maintaining non-interest-earning balances in demand deposit accounts at banks.

4. Federal Reserve Bank of New York, "A Study of Large Dollar Payment Flows through CHIPS and Fedwire" (FRBNY, December 1987).

5. The Bankers EDI Council, a pan of the NACHA, developed an electronic dealer drafting convention to replace the paper drafts with which vehicle manufacturers had obtained payments from dealers.

6. Data in this discussion were provided by General Motors Corporation.

7. Data provided by the Financial Management Service, U.S. Department of the Treasury.

8. George W. Henderson and Anthony R. Torrice, "Vendor Express: A New Era in Government," EDI Forum, vol. 4 (1991), p. 40.

9. EDI Yellow Pages, Phillips Business Information. Similar data were also provided by EDI, spread the word!.

10. The estimate of the number of financial EDI users was provided by the NACHA.

11. Treasury Manager's Report, vol. 2 (February 18, 1994), p. 3.

12. The EDI Group Ltd., "The State of Financial EDI, 1992," presented at the 1993 Financial EDI Conference, in Financial EDI Resources and Speaker Materials, sect. 2, p. 14.

13. David B. Humphrey and Allen N. Berger, "Market Failure and Resource Use: Economic Incentives to Use Different Payment Instruments," in David B. Humphrey, ed., The U.S. Payment System: Efficiency, Risk and the Role of the Federal Reserve (Norwell, Mass.: Kluwer Academic Publishers, 1990), p. 49.

Humphrey and Berger's calculations indicated that approximately $0.50 per payment could be saved by replacing paper checks with ACH transfers.

14. See "The State of Financial EDI, 1992," p. 14.

15. Using 1987 data, Humphrey and Berger calculated the value of check float to businesses to be about $1.88 per check. Using the same methods, we calculate that the value of check float to businesses in 1993 ranges from about $0.86 to $1.12 per check. The decline is due mostly to lower interest rates. See appendix B for a discussion of the methods used to calculate the value of float.

16. Charles E. Golden, "Making General Motors and America More Competitive through Financial EDI and EFT," EDI Forum, vol. 3 (1990), p. 26.

17. Data provided by The EDI Group, Ltd. 18. See "Market Failure and Resource Use," pp. 45-86. 19. See "Displacing the Check," pp. 36-7.

20. Robert Avery, Gregory Elliehausen, Arthur Kennickell, and Paul Spindt, "Changes in the Use of Transaction Accounts and Cash from 1984 to 1986," Federal Reserve Bulletin, vol. 73 (March 1987), table 3, p. 182.

That study estimated that the average value of a consumer check in 1986 was $130. Humphrey and Berger applied a 4 percent inflation factor to the 1986 figure, resulting in a 1987 average value of $145.