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The End of Checks in the US?

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6 January 2010
Bob Meara
In December, the UK Payments Council announced a 2018 target date for closing all cheque clearing operations in the UK. With some alarm, a few clients have asked Celent if the Council’s actions might signal similar forthcoming action in the US. And, if so, what are the implications? This post makes several observations. The UK Payments Council correctly notes that “cheque use is in long-term, terminal decline”. Having peaked in 1990, check volume has declined some 40% over the past five years. Thus, the Council’s decision amounts to taking a proactive stance toward hastening the decline in checque usage – a decline already in its 20th year. It aims to seek voluntary actions among financial institutions to provide modern (electronic) payment alternatives and to educate both consumers and businesses in the process. And, the Council’s decision isn’t definitive. 2018 is a simply target date, with thorough analysis ahead before anyone “pulls the plug”. So, what about the US? First, a little perspective. Check usage is in decline throughout all developed economies, with differences in the start and rate of decline. The figure below compares annual check dollar value (versus GDP) alongside the percent electronification of non-cash payments across multiple countries. Over the time period analyzed, the US and Canada had the highest relative check dollar volume. The US is well behind the UK – at least a decade – in overall usage and rates of decline. So, if the UK Payments Council initiative is to be replicated in the US, a target sunset date of 2028 might be a comparable starting point. Don’t hold your breath in other words! In addition to being a full decade behind the UK, the situation in the US is different along multiple dimensions. Here are a few: o The UK is a much smaller payment system with comparably few banks. It is fundamentally easier to get 12 UK clearing banks to agree than 8,000+ US banks and a roughly equivalent number of credit unions. o The UK already had a highly concentrated processing infrastructure in its’ Intelligent Payment Systems Limited (IPSL) entity. Not so in the US. While operational consolidation is well underway, there is a comparatively long way to go. Such consolidation is an inevitable economic result of the unit volume decline. o The UK had no Check 21 equivalent. It uses a rough equivalent of Electronic Check Presentment (ECP) called Interbank Data Exchange, or IBDE. The IBDE was set up by the 12 UK clearing banks in 1996 as a system to electronically exchange cheques and clearing balances, but the original items still travel physically from collecting to paying banks. Thus, the pain of declining check volume is likely greater in the UK since physical processing remains a requirement. Checks are dying a natural death in the US. Financial institutions would do well to invest in long-term care for checks through image infrastructure, widespread distributed capture and electronic statements. It’s too early to be shopping for headstones just yet. More information about the UK Payments Council can be found at: http://www.paymentscouncil.org.uk/

Comments

  • Great post Bob, but what you don't address is the impetus for check decline - i.e. changing consumer behavior. All it will take is an Apple or a Google to crack the P2P payments space and personal checks will quickly disappear. With internet banking so strong already in corporate B2B payments, banks are likely to make the call themselves...they won't need much encouragement if they are carrying a dead weight around their necks.

  • Bob - Great perspective, and thanks for the data showing check usage over time. I couldn't agree more with the point about investing in long-term care for checks. In addition to the investments you cite, improving check fraud defenses (including cross-channel protection that include check analysis) should also be on the list, since check fraud is rising even faster than check usage is declining.

  • Thank you both for your posts!

    P2P checks are and have been on a steep decline. C2B check payments less so, migrating to online bill pay. B2B payments remain stubbornly check dominated with expensive changeover costs for businesses while offering marginal ROIs.

    No doubt the landscape will continue its migration to ePayments. But, is there a compelling reason for financial institutions to invest in accelerating the trend? I think not. Much of the cost has already been extracted from the check payment system. As long as there is a path for managing the unit cost curve reasonably alongside the volume declines, let's enjoy the ride.

  • Great article! We couldn't agree more. The costs associated with processing manual cheques far outweighs the benefits. You would think that with so many software packages that allow for EFT payments that the adoption rate would be substantially higher. Fact of the matter is that electronic processing gives you greater visibility to cash, and allows staff to pick up on cheque (sorry, CDN spelling) fraud faster.

  • Some commentary on the same subject from Canada:

    Canada - endangered paper 1/2/10 Globe&Mail The paper cheque, a reliable method of payment for hundreds of years, is at risk. It may be soon sacrificed on grounds of technological improvement. But the cheque is one portable convenience that Canadians should not be forced to give up. The British Payments Council issued a report last month calling for the end of cheque clearing by 2018. Its assessment is brutal. ‘Key drivers behind the continued use of cheques were habit, tradition & inertia, combined with a lack of awareness & confidence in other payment methods.’ But there will be an ‘inevitable change ... implicit in the ongoing decline in cheque usage.’ While fewer people are writing cheques (down a projected 37% in Canada in the past decade), there is no indication that they will disappear altogether. They remain key to commerce: $3.2-trillion in transactions under one of Canada’s payment systems, the Automated Clearing Settlement System, were paper-based in 2008, including most of the system’s transactions over $50,000. Yet the Canadian Payments Association says it is ‘researching viable alternatives to cheques’ & expects a decision this year from its member institutions on how to proceed, adopting as an assumption the ‘demise’ of cheques. There is a romance to the cheque, with the memo field allowing a personal note to the recipient. Indeed, cheques are the perfect, discreet gift: less impersonal than an electronic PayPal deposit, less attractive to thieves than cold cash, & more liquid than a gift card. They create just the right distance between giver & recipient. But the practical benefits of the personal cheque outweigh the cultural ones. A cheque’s signature can be checked against the one on file, establishing identity in a way PIN numbers cannot. The payer typically records the date, cheque number, payee & amount of the cheque, yielding information equivalent to that produced by any electronic receipt. Most banks allow the payer to receive a copy of the deposited cheque, or its image, to make sure that it has cleared. Postdated cheques allow a person to plan for repeated, regular payments, while preserving an ability to cancel the transaction. & many Canadians & Canadian institutions continue to rely on them: businesses large & small, newlyweds & landlords, churches & charities. The transaction cost - generally $1 or $2 for consumer use - is often small enough to make a cheque worthwhile. Few people pull out chequebooks as a first choice any more, but that doesn’t mean they should be banished. Cheques are a lifeblood of commerce & interpersonal relations. Canadians should be allowed to keep writing them.

    Canada - in cheques we trust 1/5/10 Globe&Mail Your editorial Endangered Paper (1/2) says the Canadian Payments Association, the owner & operator of Canada’s national clearing & settlement systems, has adopted as an assumption the ‘demise’ of cheques & is expected to soon decide ‘on how to proceed.’ The CPA has not asked for any such decision from its member institutions & is not considering any initiative to phase out cheques. The CPA’s draft long-term strategy document does point out, though, that other countries have outlined ‘broad strategies to manage the decline & eventual demise of cheques.’ It recognizes the changing landscape of payments. With electronic payment options becoming more & more popular, cheques represent a smaller share of all the payment items entering the clearing & settlement system in Canada. This share has fallen dramatically, from 86% in 1990 to 18% today. This being said, cheques remain a convenient method of payment for many Canadians, particularly for small & medium-size businesses that appreciate the remittance data the paper cheque represents in order to reconcile their accounts payable. As we point out in our document, 70% to 80% of all commercial payments in Canada are initiated as cheques. President & CEO, Canadian Payments Association

  • Very informative information here. I can't believe that checks will be obsolete so soon. There are too many check payment systems, especially in the online communities, for them to just disappear. This would make it quite difficult for those that don't have a CC or debit card to do business in real time and online. Thanks for sharing!

  • [...] do these days? Well we used to walk into a branch to deposit or cash a check, but statistics show check usage in the western world is in rapid decline due to Internet banking adoption and electronic transaction capability. You might need to request a [...]