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July 6, 2011updated 04 Apr 2017 4:15pm

Persistent paper

The paper cheque - still regarded as a staple of American deposit accounts and a linchpin of the retail banking system - remains remarkably resilient in the face of an ever-increasing array of alternatives. Charles Davis looks at the current state of the cheque and what is being done to speed its demise

By Charles Davies

The paper cheque – still regarded as a staple of American deposit accounts and a linchpin of the retail banking system – remains remarkably resilient in the face of an ever-increasing array of alternatives, Charles Davis looks at the current state of the cheque, and what is being done to speed its demise

 

Bar chart showing the numbers of cheques writtenTwenty-plus years ago bankers were predicting the imminent end of the cheque, yet it remains, somewhat diminished by card-based alternatives but suddenly breathing new life thanks to technological adaptation of its own. The cheque, it seems, is evolving.

The cheque once ruled the US payments market. At its peak in the mid-1990s, hundreds of millions of cheques annually coursed through the nation’s banking system. From 1979 through 1995, annual cheque volume increased from 32 billion to 49.6 billion items.

Today, there are more than 109 billion noncash payments transactions completed every year in the US. Based on research published by the Federal Reserve System in 2004, the share of those transactions completed by cheque declined from 57 percent to 45 percent between 2000 and 2003 alone.

Since 2003, paper cheques collected by the Federal Reserve Banks have declined by 11 to 12 percent per year, with a 15 percent decline so far in 2011. A Federal Reserve study released in April found that electronic payments continue to gain relative to cash or cheque transactions.

Electronic payments (those made with cards and by ACH) now collectively exceed three quarters of all noncash payments while payments by cheque are now less than one-quarter, the Fed said.

The rates of decline in cheques written and cheques paid during this period were both greater than during the previous three-year period (2003-2006). Though starting from a smaller base, payments made with prepaid cards (which include private label, general purpose, and EBT cards) increased at the fastest rate (21.5 percent per year), reaching a total of 6 billion transactions in 2009.

George Throckmorton, managing director of Advanced Payment Solutions for NACHA said that the cheque is going away, yet stubborn pockets of resistance remain, particularly among small businesses.

“We’re making steady progress, and to look at how many cheques are moving into electronic categories in the coming year, we’re really getting down to small business and some consumer-to-consumer payments as significant opportunities,” Throckmorton said. “Small business is just waiting on the right tool to emerge.”

 

Pressure from merchants 

Bar chart showing the trends in consumer payment typesAll of these cheques have to go somewhere, after all, adding cost and hassle to smaller merchants’ already crowded work lives. But the volume is not shifting to credit cards. Aggregate credit card payments, on the other hand, exhibited the first observed decline (-0.2 percent per year) of any instrument besides the cheque since the Federal Reserve Payments Study began in 2000. Whether through debit cards, prepaid or alternative payment schemes, cheques are in the midst of steep decline.

Still, cheques remain a part of the payments landscape. While electronic payments overtook cheques in the United States by 2003, the value of cheques continues to far exceed the value of commonly used electronic payments, suggesting that big-ticket items still have Americans reaching for the chequebook. There also remain many smaller mom-and-pop merchants, fundraising organisations and person-to-person payments and related transactions only accepting cash and cheques in the United States, and that will remain the case for years to come.

Rather than force US consumers to abandon cheques through account restrictions or fees, a host of technological solutions have emerged to allow merchants to accept cheques while minimizing the cost of handling them.

Over the past several years, some retailers – notably Wal-Mart Stores – have adopted electronic cheque conversion at the point of sale with the use of readers that capture MICR (magnetic ink character recognition) information from a cheque and transmit it to the Automated Clearing House (ACH) network. Paper cheques are returned to the customer at the POS, and the customer must sign a receipt. Cheque conversion offers faster clearing, lower return fees and inexpensive ACH transactions – less than five cents per transaction.

The bulk of cheque volume remains concentrated among older consumers and tens of thousands of smaller businesses. While channels for electronic payments have grown more sophisticated in the past few years, with the ACH network and wire transfers offering rails for larger companies’ B2B payments, analysts say thousands of smaller businesses are sticking with paper cheques for commercial payments.

 

Business under pressure

No single electronic-payment vehicle currently provides the average small business with an adequate balance of convenience, lower cost, payment-information capabilities and acceptance compelling enough to drive down B2B cheque use.

In 2010, companies with less than $10 million in annual sales accounted for 65 percent of all payments, according to NACHA, the electronic-payment association that manages the US ACH network. Though B2B payments overall are slowly shifting to electronic channels, NACHA finds that conversion is slow among smaller businesses.

Large corporations manage ACH payments through sophisticated electronic data interchange formats, which enable their mainframe computers to log and reconcile ACH payments automatically. But smaller businesses typically lack such resources. Among larger firms, commercial credit cards are playing a key role in shifting payments from cheques.

Financial institutions and the card networks long have favored small businesses shifting cash and cheque payments to commercial cards, as these generate greater income to issuers and associations.

But recipients pay much more for B2B card payments than they do to accept cheques. For example, for a $50,000 cheque transaction, both the buyer and the seller pay between 25 cents and 50 cents to initiate and accept the payment, but for a card payment of the same amount, the buyer pays nothing. The seller could pay $1,000 or more in interchange and other fees.

 

Alternatives emerging

Electronic-payment alternatives, including the ACH system, remain costly and complicated. But the paper-cheque logjam could crumble in the next few years if initiatives succeed in making ACH-payment data more manageable for small businesses.

Though still in the nascent stages of adoption, some new online-payment services designed to drive transaction volume over the automated clearinghouse network are starting to have an effect on cheque holdouts.

The number of ACH transactions conducted in 2010 rose 3.4 percent, to 19.4 billion, NACHA reported in April. That compares with a 2.6 percent increase in volume in 2009. The dollar volume that was moved over the network last year was $31.7 trillion.

Programmes such as Secure Vault Payments, the Electronic Billing Information Delivery Service and other initiatives by NACHA could continue mitigating declines in transaction categories that once were major contributors to growth, including cheque conversion. The Electronic Billing Information Delivery Service, which is commercially available after a multiyear pilot, enables companies, such as utilities and carriers, to send bills directly to their customers’ bank websites over the ACH network. Consumers receive the bills as a message on their bank’s website.

The proliferation of mobile-payment services, including those that allow a consumer to make purchases and schedule payments on a mobile device and those that use the device as a card replacement, could also be a boon for the network.

NACHA’s members in May 2010 approved a rule expanding the definition of the WEB transaction category, which pertains to consumer payments authorised over the Internet, to include debits initiated over a wireless network.

NACHA also is working to ensure that B2B payments carry the same amount of data as paper cheques. NACHA’s corporate trade exchange, or CTX, category allows a business to send up to 800,000 characters of information with a payment. Transactions initiated with the transaction code in 2010 rose 11.1 percent, to 67.03 million.

In the next three years, businesses, government entities and non-profit organizations plan to double their use of paperless payment technologies, according to a survey of accounts payable professionals recently released by US Bank, International Accounts Payable Professionals and the business research firm APQC.

The study predicts that paper cheques will shrink from more than 60 percent of a typical organization’s payments to less than 31 percent.

Nearly 65 percent of those surveyed reported reduced paper cheque usage in 2010 compared to the year before. For organizations exceeding $5 billion in revenue, it’s even more pronounced – three out of four report declining paper cheque use.

“While the survey indicates e-payment is growing across the board, the larger the organization, the more likely it is to be happening,” said Kurt Adams, senior vice president of strategy and programme management for US Bank Corporate Payment Systems. “With manual paper cheques contributing to the challenges many accounts payable departments face, it’s no surprise that organizations are looking toward electronic payments to address their pain points.”

 

Decline inevitable

The trend is only going to accelerate, according to the survey’s projections. Respondents said they plan to nearly double the use of purchasing cards, ACH and electronic funds transfer in the next three years. Paper cheques could constitute less than 31 percent of payments by 2014. Again, the largest organisations are moving the fastest: they anticipate only 13 percent paper payment by that time.

“Electronic payments have emerged as an alternative means of conducting business, offering numerous tangible benefits for buyers and sellers alike,” said Mark Brousseau, vice president of research and business development for IAPP-IARP-TAWPI. “The universal migration to e-payment makes perfect sense, as does the projection of greater momentum over the next three years, given the increasing pressure companies face to reduce costs and improve agility.”

US federal agencies are among the nation’s largest cheque users, but they too are moving to electronic payments and prepaid cards. The migration of Social Security payments from cheques to electronic deposit will represent the largest-ever electronic payments shift, as the Treasury Department has announced plans to move 11 million people from cheques to ACH deposits by 2013.

The shift to electronic payments will save the federal government about $1 billion over the next 10 years. More than 18 million baby boomers are expected to reach retirement age during the next five years, with 10,000 people a day becoming eligible for Social Security benefits. Currently, 628,000 Social Security or SSI paper cheque payments are issued to federal benefit recipients each month.

The savings are compelling: it costs 92 cents more to issue a payment by paper cheque than by direct deposit. About eight in 10 federal benefit recipients already receive payments electronically, which makes the numbers all the more eye-popping.

For banks looking to minimise cheque handling, remote deposit capture represents another rapidly growing technological alternative to dealing with all that paper.

Mobile remote deposit capture enables financial institutions to drive cheque-bearing customers to self-service channels and away from more costly branch services. Thus far, only a small handful of banks are actually live with a mobile remote deposit feature, including USAA Federal Savings Bank, JPMorgan Chase & Co. and State Farm Bank.

Those numbers are expected to grow this year, as several large vendors, including Fiserv,  Jack Henry & Associates and Fidelity National Information Services, agreed to offer mobile remote deposit capture to their bank and credit union customers using patented imaging technology from Mitek Systems, whose software has been largely responsible for spreading the service.

“We’re right on the edge of a huge change, as even the smallest merchants can gain access to tools that help them reduce or eliminate cheques,” said NACHA’s Throckmorton. “All these clients have needed is a compelling business model for electronification and the same richness of data they had been enjoying on the paper side, and it is emerging.”

Table showing growth in electronic payments

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