Americans love writing checks, and that’s what we all still do. Around 14 billion a year, in fact.
You might argue that this humble piece of paper – which can be traced back to ancient times – is what runs the US economy. “If it ain’t broke, don’t fix it,” the old adage goes, and there simply seems to be a strong sense of ‘doing things the way they’ve always been done’ when it comes to check issuance.
But the use of checks is slowing, albeit almost imperceptibly to the average citizen. Prior to the fateful events of 9/11, checks were trucked from banks to central processing centers, sorted and then flown to various destinations by airplane. The average day saw checks worth around $6 billion in the air, growing to around $47 billion after the FAA grounded planes following the 9/11 terrorist attacks.
Check out the Check Act
Enter the Check 21 Act, a federal move to shift a paper-based economy towards a brighter, more secure digital future. In short, the Act allowed banks to use electronic images of checks instead of paper.
Today, almost no payments are settled between banks using paper, even printed images of checks (so-called ‘substitute checks’) are almost non-existent. This digital leap saw annual savings to the banking sector of some $1.2 billion a year, according to reports. Consumers and businesses, according to the same report from the Federal Reserve Bank of Philadelphia, enjoy $2 billion in benefits from faster payment processing.
Print this so I can scan it
And yet, this historic change is as good as invisible to ordinary bank customers and small businesses – still busy writing and depositing checks the way they always have, and unaware of the shorter journey these valuable pieces of paper now have.
Logically speaking, a modern check is a printed computer ticket which is then digitally scanned so money can be transferred. And that sounds crazy, right? In other words, a computer instruction which is then delivered by an antiquated postal service.
The 2020 pandemic has etched another notch in the slow, gradual death of checks – paper can carry the virus, so people are becoming more reluctant to exchange paper money and checks to help avoid the spread of COVID-19.
With lockdowns in place, and people fearful of crowds, buying online has become far more of a widespread norm. Those reluctant to purchase online, or fearful of sharing financial details online, have now taken the digital leap, but more through necessity than curiosity.
And you’d be hard pressed to find many online retailers that still accept checks.
A business savior?
The enduring appeal of these pieces of paper is manifold. There’s the obvious advantage from a consumer and business point of view of the lag between paying by check and the recipient cashing it – a veritable business savior in these pandemic times. Check writing can be easily controlled and monitored.
Thousands of people are employed nationwide simply to process checks. It’s the finest example of the ‘if it ain’t broke, don’t fix it’ mentality; and not one of these employees would care to question the efficiency, effectiveness or security of the existing check system.
Familiarity with checks and the system also breeds comfort. There’s a sense that companies and consumers alike can control checks. Instant electronic payments strike fear into the hearts of small business owners and shoppers nationwide. Checks give companies a “float” from the time written to the time they are presented.
As well as the sense of control, a check feels official. It’s a familiar, elaborately printed document and something we are all used to seeing in the most official environments.
Home for unwanted checks
One of the weirdest aspects of America’s enduring love affair with the check is that thousands – if not hundreds of thousands – of checks go uncashed every year. Companies go out of business; move location, or a check for a minor amount is more trouble to cash than it’s worth. And the authorities are in no hurry to deal with this issue – uncashed cheques may constitute “unclaimed property” that gets turned over to the state.
Of course, the murky world of unclaimed checks creates a number of issues – like artificially inflating your account balance; the problems of tracking unclaimed assets and business accounting headaches.
On average, a paper check passes through nearly a dozen hands before reaching the final payee, such as an employee. Clearly not COVID-19 compliant. They can also be lost, stolen, easily misplaced, misrepresented and mauled.
Around half of businesses in the US are classed as small businesses. And those small businesses are reluctant to embrace the technology required (often quite a leap) to engage in the world of digital payments and digital payment processing, with many citing bank processing fees (at least, for credit card transactions) as a valid reason for not adopting electronic payments. And let’s not forget the extra short-term liquidity offered by a delay in a check arriving and being presented is a lifeline for a lot of businesses right now.
And a final, simple and perhaps obvious reason as to why we’ are resolutely sticking with checks: it’s an overwhelming prospect to completely overhaul the national system. There will need to be a major paradigm shift – a re-think from hardware to staff numbers, and everything in between.
You’ve won the customer sweepstakes draw
And yet the check endures. Over and above an almost ‘folksy’ love of the check, there is a far darker reason why the check needs to die – fraud and scams.
We are all too familiar with check scams – such as phony prize wins, fake jobs, mystery shoppers and online classified ad sales. The Federal Trade Commission reports that it receives tens of thousands of fake check reports each year. And the number of complaints is rising – as are the dollars lost.
It’s time we loosened our overly-fond grip on the check. It’s outdated, prone to scams, inefficient and an often ineffective method of payment. While we cling onto a payment method that is largely obsolete in the rest of the world, for all the reasons listed above, a bright new future lies within our grasp.
As reported on pymnts.com, crises such as the current pandemic have a way of exposing weaknesses, vulnerabilities and outmoded systems.
Unreliable, unsafe and untenable
And for Mark Putman, general manager of payments at ADP, that means paper checks. “If the recent and continuing health crisis has demonstrated one thing, it is that compensating people via paper checks is unreliable, unsafe and untenable,” he said.
Discussing the breakdown of traditional payment channels as the pandemic took hold, Putman says: “Paper paycheck production is a complex operation, involving activities like shipping (during several steps of the process) and employees physically reporting for work in office locations (to carry out essential printing and packaging). Needless to say, the world at large experienced a breakdown in both of these activities.
“For example, the federal government estimated that people receiving their stimulus checks (authorized by the CARES Act) by mail might face a five-month delay — long enough to defeat the purpose of the funds in the first place.”
He cites a number of valid reasons why checks are no longer tenable – including many of the points made above, but adds that from an unbanked employee’s point of view, it’s a pretty unfair way of receiving your pay: “a worker actually may need to pay money to access their own compensation — if they do not have a bank account and need to use a check-cashing service to access their money — to the tune of $8 per paycheck. Considering that 25 percent of U.S. households are unbanked or underbanked, the scale of this problem comes into sharper relief,” says the GM.
He asks: “Are paper checks really the best we can do for our workers? Paying them via cash or check can lock them out of the digital economy, where unbanked and underbanked U.S. workers can experience new efficiencies and comforts that make their lives better,” and calls for all US employers to explore and promote the benefits of electronic pay.
So what’s the problem? Putman cites the regulatory barriers that exist for fully electronic payment systems in many states, which mandate or otherwise require employers to continue to offer paper checks. Removing these barriers, as well as the education of employers and workers, of course, would move us closer to a future where workers’ access to their hard-earned money is a safe, repeatable, reliable and touchless process, says Putman.
And let’s not forget research shows that businesses lose anywhere from $4 to $20 to cut, mail and process each paper check within their networks.
Small businesses prefer the control and low cost of grabbing a check, rather than having to deal with the mysteries of the fragmented regulatory framework in the US. In countries with powerful central banks, or strong national banking regulators, the payments industry can be lobbied into adopting innovative systems for consumers. For example, the European Union introduced the Single Euro Payments Area to break down barriers for transferring euros within Europe.
However, in the United States, even the biggest banks are scrutinized by different bodies such as the individual States, the Federal Reserve, the FDIC and the OCC. There are around 6,420 commercial banks and savings institutions in the US, many of which confine operations to their home states. This means electronic payments are subject to variations both at federal level and across all fifty states. So there’s an understandable choke point – to avoid regulatory vagaries, businesses prefer to stick with checks as a reliable payment method.
And the myriad interconnected systems, companies and employees in place who are dedicated to propping up the antiquated check system means it will be a long time before the true demise of the check.
Until that time, to paraphrase the traditional royal proclamation: “The check is dead…..long live the check!”