demise
In the UK, the cheque is suffering a slow death and in the process
is resulting in an increasing cost burden on the payments system.
To counter this inefficiency, the Payments Council has proposed, as
part of its National Payments Plan, a proactive approach to
significantly speed up the elimination of cheques.
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The UK Payments Council, in a consultation paper it has published,
has proposed that consideration should be given to the adoption of
a programme aimed at accelerating the decline in the use of cheques
in the UK. The paper calls for comments on the council’s National
Payments Plan, which is intended to provide a strategic framework
for the development of payments in the UK over the next five to ten
years.
A voluntary organisation established in March this year, the
council has 27 members including the UK’s major banks, building
societies and the Bank of England, and a number of major foreign
banks with UK interests.
Providing a background to the debate around the use of cheques, the
council said many industry observers believe that the use of
cheques will be discontinued in the UK at some time in the future
and that a point will eventually be reached when industry-wide
cheque clearing is no longer sustainable, as has already happened
in a number of European countries, including the Netherlands and
Sweden.
Alternatives must exist
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By GlobalDataHowever, argued the council, before this could happen in the UK,
viable and accessible alternatives would need to exist for all
current cheque uses. The council noted that while cheques are
shunned in certain sectors of the economy such as retailing, they
continue to play an important, though still declining, role in
other parts of the economy, especially among SMEs and older
consumers.
The council argued that there are two ways in which the financial
services industry could respond to the cheque issue. The first
approach is to stand back and allow changes in customer behaviour
and market forces to determine the rate at which the use of cheques
decline. However, this will be a protracted and costly approach,
observed the council. The alternative approach would be to
proactively speed up the cheque’s demise.
The protracted nature of the cheque’s decline in the UK is
illustrated by data from the Association for Payment Clearing
Services. Private cheque transactions in the UK peaked at 3.8
billion in 1990 and by 2006 had fallen to 1 billion. Business and
public-sector cheque transactions peaked at 1.2 billion in 1990,
falling to 700,000 in 2006. During the period, total cheque
transactions fell from 64 percent of all non-cash transactions to
13 percent.
While cheque volumes are expected to continue falling significantly
over the next few years, “there will be a long tail of cheque
payments”, said the council, adding “these will be difficult to
eliminate”. According to the council, cheque transactions are
expected to fall by 7 percent annually to 840 million in 2016, when
they will account for only one payment in 50.
As cheque use declines, the cost of processing each cheque will
continue to rise, widening the already substantial cost
differential with other payment instruments. This represented
inefficiency and, said the council, provided strong motivation for
consideration of a more proactive effort to phase out cheques
within a reasonable timescale.
The council continued that the timescale would be entirely
dependent on there being alternatives that covered all the
circumstances in which cheques are used, and on good evidence that
cheque users were finding that they met their needs and were
understandable and accessible. This approach, explained the
council, would be consistent with the view of the Cheque and Credit
Clearing Company that there should be a clear future direction for
cheques, with a definite planning horizon, in order to maintain
integrity in a declining market. With the exception of Northern
Ireland, all cheques in the UK are cleared via the Cheque and
Credit Clearing Company.
Two prongs towards accelerated decline
Should there be general support for a proactive approach towards
accelerating the decline in the use of cheques, the council
recommended that a two-pronged approach would be appropriate.
The first prong would focus on those parts of the market, such as
the payment of utility bills, in which electronic payment
mechanisms are already well established and users themselves are
keen to see more substantial reductions in cheque use. The council
stressed that consumers’ choice of payment methods is driven to a
significant extent by businesses’ acceptance of particular types of
payment. Given this, the council said, large cheque payers and
recipients, including banks, insurance companies, registrars and
government, would be encouraged to take the lead in moving the
market from paper to electronic payments. To provide focus, a
target date would be set for ending cheque use in these sectors. An
education campaign would be run to support the migration.
The second prong, said the council, would focus on sectors in which
electronic alternatives to cheques are not yet widely available,
and/or in which the uptake of the current alternatives is
relatively low. This would include person-to-person payments,
payment of subscriptions to clubs and societies, and payments to
micro-businesses such as window cleaners. The emphasis would be on
developing, and/or enhancing, alternatives to cheques that are
cost-effective and acceptable for users, and on informing cheque
users about the alternatives that already exist.
Research is needed
However, before a proactive approach to reducing cheque use more
rapidly could be adopted, the council conceded, research on how and
why cheques and other payment methods are used and on the barriers
to moving from cheques to alternative payment mechanisms will be
required. In this regard, the council believes lessons can be
learned from similar initiatives such as the introduction of direct
payment to recipients’ accounts of state benefits and state
pensions.
Concluding its overview of the cheque issue, the council noted that
if its recommended approach is adopted it envisages that in seven
to ten years’ time the vast majority of users will no longer
require cheques, and cheque clearing could be closed. In its
discussion paper, the council asks whether, on the assumption that
acceptable alternatives to cheques have been developed, it would be
acceptable for the National Payments Plan to include a target date
of 2018 for the closure of cheque clearing.
