Faster Payments

The Fastest Path To Faster Payments In The US

The path to faster payments in the U.S. doesn’t have to be paved with a 500+ person task force analyzing what the world would look like if we were starting from a clean sheet of paper, competing propositions for who’s going to build and operate a new set of rails, or even what sort of spiffy software can make existing rails faster.

Instead, we could do something right away — or almost right away — that would make payments between consumers and businesses faster.

And focus the “faster” payments initiative on what really matters: getting rid of the friction that prevents payments among consumers and businesses from being better and more efficient.

We could kill the check – and the checks rails that exist to support them.

Just because checks have existed since at least 13th century Venice and 19 billion of them were used to pay people and businesses in the U.S. last year doesn’t mean that we should keep them alive. We, as a country, somehow mustered up the courage to move past the horse-and-buggy and 8-track tapes – I think we can dig deep and find it within ourselves as a payments ecosystem to kill the check.

Those who laugh at this idea, as most people do when I present it as a legitimate option on the path to faster payments, say that it’s just not in our nature to get rid of anything in payments. After all, they retort, we still have paper money – cash — some 3,000 years after it was first used as an exchange of value.

As we should and for lots of good reasons. Cash doesn’t impose frictions. And, in many situations – particularly in developing economies, not having access to cash creates it.

Checks, on the other hand, serve no useful purpose.

They create massive cost and friction across our financial system – for the banks that have to process them, to the businesses that have to issue and wait to receive them, for consumers who have to deposit them and wait for the “check to clear” before accessing the funds, and for those who are without access to our financial system to cash the ones they are given as payment.

They are also the culprit for the most popular spam in America —“the check is in the mail.” Yeah, right.

But, don’t look for the recommendation to kill checks to emerge from the report that the 500+ person Fed Task Force that’s examining the path forward for the U.S. is said to issue by year’s end. The cost associated with check processing and the lose-lose business model for check clearing imposed on banks by the Fed is one of reasons that checks are such a drag on the financial system.

And a complicating factor for how to monetize “faster payments” in the U.S.

KILL CHECKS RATIONALE #1: PUT AN END TO THE CHECK’S “FREE LUNCH” SYNDROME

Checks are issued at par. You, of course all know this. But here’s why that creates such friction.

When I write a check to my dog walker (the only person I write a check to anymore) and he presents it to his bank, my bank is compensated the exact same way whether the funds are made available to Bryan instantly, or two days from now.

And that is that they aren’t.

In fact, my bank loses the use of those funds the minute that the check is presented, regardless of when Bryan uses the money. Bryan, doesn’t cash his check, but rather deposits the money in his account to use as he needs to – maybe that same day, but more likely days or even weeks down the road.

Bryan’s bank gets paid zero too – nothing more than the face value of the check. Bryan’s bank then has no real incentive to get Bryan the money instantly, since they’d like use of the money for as long as they can.

As for Bryan, he could care less since he just wants to know that he has access to the amount of the check when he needs to use the money.

The mandatory check-at-par system forced on banks by the Fed sets up a bunch of perverse incentives for both sides.

Originating and receiving banks have zero incentives to make payments faster – they’re not compensated a whit for doing so. Blowing up checks would open a number of other doors for banks to provide value to consumers via “faster” and more efficient payments that they could also monetize.

Something that NACHA’s Same Day ACH rulemaking provides for and which the Fed blessed.

KILL CHECKS RATIONALE #2: CAN ELIMINATE THE COSTLY CHECK CASHERS

The Fed says that 19 percent of all checks in the U.S. are checks written by businesses to consumers. Those consumers then have to deposit those funds into their bank account and/or go to a check casher to gain access to the funds.

Yes, the former is getting easier thanks to mobile remote deposit — even for the financially disadvantaged — thanks to innovators who are leveraging that technology and the near ubiquity of mobile phones. But why do we need the stutter step of digitizing the check when we can just digitize the funds from the business to the consumer?

Those who utilize this technology obviously have some sort of depository account that can accommodate a digital payment – so getting rid of the check hurts no one (but the companies that produce checks, of course).

As for those who don’t have a depository account, I was shocked to learn that there are 13K financial service centers in the U.S. (aka check cashers) – almost as many as there are financial institutions – that consumers frequent to cash those checks. The last time that data was released (2009) by the trade group that represents these 13K outlets, they reported that 350 million transactions totaling $106 billion (with a “B”) of services was delivered to 30 million consumers. Of that $106 billion, $58.3 billion was related to check cashing transactions, another $17.6 billion in money orders and $5.4 billion in prepaid cards. (The rest was related to bill payment, payday lending and remittances).

In other words, 76 percent of the fees pocketed by check cashers were related to services that consumers had to avail themselves of because they, oh – had to cash a check and didn’t have a depository account.

Consumers who today pay anywhere from 1 percent to 4 percent of the face value of the check to a source that regulators and policymakers fear are preying on them. (Ironically, the places with the highest check cashing fees are Maryland and Washington, D.C.).

I’d be willing to bet my next pair of Louboutins that there are a lot of enterprising financial services organizations that would jump at the opportunity to pick off some of that $81 billion by creating a cost-effective basic depository account for those consumers to use.

KILL THE CHECK RATIONALE #3 …BANKS AND BUSINESSES CAN SAVE TONS OF MONEY

Killing checks also means killing the $7.15 it costs to process a check.

Multiply $7.15 by the 19 billion checks still being written in the U.S. and you have a lot of zeros and decimal points – enough to reallocate to creating those basic depository accounts that might serve the underserved or even – gasp – to the development of new products that add value to consumers and businesses.

Of course, check use is declining in the U.S., you say, so aren’t those costs coming down? Ten years ago, 30.5 billion checks were written in the U.S. – a decade later, their use has declined ~38 percent.

But that doesn’t necessarily mean that the costs to process them are declining. If anything, they are increasing. Fewer checks means that it actually costs more for a bank and a business to process them since the scale economics are diminishing.

The Fed reports that consumers writing checks to businesses represent 45 percent of the checks floating around the U.S. today – down significantly over the last 10 years, thanks to scheduled ACH payments like mortgage and car loan payments and the massive reduction (thank goodness) of checks presented to merchants at the point of sale. But when consumers use online bill payment to pay certain billers, if that biller is not set up in their system (as most small billers aren’t), the bank actually has to cut a check and mail it to that biller.

So, when I pay my snow removal guy using online bill payment, some 3 or 5 days after I authorize payment, he gets his check, which he then has to deposit into his bank account – now one week after I initiated payment. It’s absolutely insane since my snow removal guy has a bank account that could receive the funds electronically.

It’s also not the case that, aside from people like my elderly Dad and his friends, that consumers actually like using checks – they just don’t have any other efficient and ubiquitous alternative to pay those who don’t take cards. Checks, like cash, are a method of payment that every business accepts, and for larger purchases, what businesses would rather accept than a card payment.

But if a consumer had an easy way to push an e-payment from the depository account that they were going to use to make that payment anyway, would they?

Of course they would.

KILL CHECK RATIONALE #4 … MAKE B2B PAYMENTS BETTER.

SWIFT produced a very thorough report detailing the rationale for making payments faster worldwide. In it, they say that regulators like faster payments because it will improve cash flow for businesses and, therefore, reduce their reliance on short-term financing to smooth out lumpy accounts receivables cycles.

Businesses with faster payments would, therefore, be healthier.

They would and we could help that happen. And we don’t even need a new set of rails to do it.

We could do that by, repeat after me:

KILLING THE CHECK!!!

In the U.S., the big shocker is that checks between businesses are growing. According to the Fed’s recent stats, 29 percent of the checks written today in the U.S. are checks from one business to another – some 6 billion of them. Not only is that up by more than half a billion from last year, but the value of those checks is increasing, too. The average check amount in 2015 was $1,487 – the highest it’s been since 2007, when it was $1,590.

(Should I mention that many of the banks that are leading the faster/immediate payments charge are also the same banks that use checks to pay their vendors? OK, maybe not.)

Checks, like eating too much chocolate on Easter, are a habit and in some cases, a crutch.

Checks have become the default for how small businesses manage their cash flow. I know this having talked to many of them and reviewing the survey results of SMBs that we do each quarter. SMBs know to the day, how long they will have access to the money in their accounts between the time that they generate a check from their accounting system, put it in the mail and have the receiver deposit it.

“The check is in the mail,” is not only one of the greatest lies in business, it’s become a standard working capital management practice for many SMBs — and weirdly for a lot of big businesses to add micro-basis points to their ROIs.

Of course, eliminating the check wouldn’t deny those businesses the control they want over making payments to another business. It would, however, eliminate the friction associated with the lack of certainty on the receiver’s part about when they’ll get paid — and whether when they do, if those funds are good.

KILL THE CHECK RATIONALE #5: BE LIKE EVERYONE ELSE IN THE WORLD

Checks are as scarce as hen’s teeth almost everywhere in the world – but the U.S.

Pick a country: Germany, Austria, the Netherlands, Belgium, Sweden, Finland, Poland, Japan, China – no one uses checks anymore and checks as a method of payment simply isn’t supported. Direct bank transfers (aka giro transfers) and electronic payments are the way that payments are made and received — and have been since the 1950s.

Even in countries like Brazil, where checks are used to make expensive purchases like appliances or cars, their use is discouraged by both retailers and the government. Only 7 percent of consumers there use a checkbook today.

In the U.K., checks are rarely used, too. Consumers are given incentives to pay with direct debit and most retailers won’t accept checks at the point of sale. A survey done last year concluded that only 3 percent of consumers 18 to 24 regard a checkbook and writing checks as important, and fewer than one in five consumers overall do either.

Of course, those consumers would feel differently if they didn’t have access to other more efficient methods to pay their bills. In all of those countries, efficient e-payments and direct debit systems have replaced the need to have a checkbook, much less use it and consumers are given incentives not to.

And everyone seems to manage just fine without the paper-based payments artifact that we continue to cling to here in the U.S.

DO WE REALLY NEED THE PAYMENTS EQUIVALENT OF THE HORSE AND BUGGY?

There is some precedent for getting rid of the check here in the U.S.

In 2011, the U.S. government decided to save billions of dollars by eliminating Social Security checks in favor of making them a direct deposit to a depository account. The announcement was made in 2011 and laid out a two-year window for making that transition. Rather than “legislate” them out of existence, the Social Security Administration initiated a massive public service campaign that let people know that they would be “out of compliance” if they didn’t arrange for their checks to be direct deposited. It’s amazing how well that worked. Even my elderly parents, who loved the tangibility of getting those checks and the social aspect of going to the bank to deposit them, loved it even more when the money just showed up in their accounts on the same day every month.

And the government said that it saved $1 billion by making that one adjustment.

Getting rid of checks, on a wholesale basis, granted, is a lot harder. The U.K. tried it in 2009 – announcing that year that it would close the central check clearing system in 2018, which would put an official end to checks. The public outcry caused the plan to be put on ice. So retailers and businesses took matters into their own hands by making checks an inconvenient and expensive way to pay each other.

It appears to have worked – because there are other efficient methods that consumers can use and businesses also accept.

So, where does this leave us?

Well, first, I’m not against any of the faster payment initiatives. Some of these new rails could be great and offer other benefits related to the movement of information and money that could add real value.

But at the moment, all of these initiatives add more rails and gets rid of none.

All I am suggesting is that if we wanted to do something that would increase the average speed of how payments move in the United States — and isn’t that what everyone wants — the easiest way to do that is to kill off the slowest rails we have today that support 19 billion checks and $23 trillion worth of payments.

To paraphrase Shakespeare, Let’s Kill All the Checks.

#killthecheck – who’s with me?

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