By Patti Murphy
ProScribes Inc.
Electronic payments have been hugely successful, especially with consumers, but not to the exclusion of checks. In fact, a new report from prepaid card company Blackhawk Network Inc. suggests that only cash exceeds checks as a preferred way for consumers to spend money. Ninety-three percent of U.S. consumers surveyed had paid with cash over the past year, the survey revealed. Sixty-eight percent had used checks; ditto for debit cards.
"Consumers still have a strong preference for traditional payment methods," said Teri Llach, Chief Marketing Officer at Blackhawk. "Our findings prove that payments is not either/or when it comes to legacy payments versus emerging products. It's really about convenience and providing a mix of options."
In a document published in 2014 – Cash Continues to Play a Key Role in Consumer Spending: Evidence from the Diary of Consumer Payment Choice – a group of economists from several Federal Reserve Banks reported that checks accounted for 7 percent of consumer payments and 19 percent of dollars spent in 2014. The average check written was for $168, compared with $44 for the average debit card payment.
Check payment services-company CrossCheck Inc. noted in a recent white paper – The Role of Checks in a Digital World – that its years of experience guaranteeing checks shows a preference for checks when doing large-dollar purchases. These include payments to medical professionals, educational institutions, transportation and entertainment companies, contractors, furniture stores, auto repair shops, motorcycle dealerships, funeral parlors, veterinarians, and auto dealerships.
"Merchants should be aware that most checks are written at the point of sale, and that a scanned hand-written check is a more securely verified agreement to pay than any digital method available today," CrossCheck wrote.
During an interview with The Green Sheet, Brandes Elitch, Director of Partner Acquisition at CrossCheck, said, "No car dealership in their right mind is going to accept a credit card for a down payment." The interchange – at 2.5 percent of the payment – is too high. Check guarantee, on the other hand, is priced at about 0.5 percent of the transaction, he said.
Additionally, many large retailers "are absolutely driven to find a way to augment interchange-based payments with some alternative that does not carry interchange," Elitch said. "Whatever alternative emerges will be based on pushing money from the DDA [checking account], not swiping a physical card, and there might be a 50 basis point charge on a $75 transaction but not $1.87 plus 25-cents per transaction."
Elitch added that CrossCheck already accepts and guarantees "virtual" checks for dealer clients, for example, when car buyers don't have their checkbooks. In 2014, CrossCheck guaranteed over $2 billion in check payments for tens of thousands of merchants, he said.
Business preferences for check payments are not limited to collections. Nearly two out of three payments made by middle-market corporations are checks, according to Phoenix-Hecht, a division of UAI Technology Inc. that tracks payment trends for banks and corporate treasurers. Only the largest companies seem to be cutting back on checks, from 50.6 percent of all payments in 2013 to 48.9 percent in 2014, Phoenix-Hecht said. (Phoenix-Hecht defines middle market companies as those with $20 million to $500 million in annual sales; large corporations are those with over $500 million in annual sales.)
"There really hasn't been a single new payment type in at least the last 40 years that has evolved to become ubiquitous, like checks," said John Leekley, Founder and Chief Executive Officer of RemoteDepositCapture.com. What has kept checks at the forefront of Americans' spending patterns is the ongoing adoption of electronic processes for clearing checks, he said. "The check has not been purely paper since the adoption of MICR," he noted. MICR (which stands for magnetic ink character recognition) is a technology that automates the process of sorting and clearing checks between financial institutions.
By most accounts, check usage peaked in the United States in the mid to late 1990s, when more than 40 billion check payments a year were clearing through the banking system. By 2012, the yearly total had dropped to just over 20 billion check payments, according to the 2013 Federal Reserve Payments Study. And those checks amounted to one third of the total value of noncash payments (excluding wire transfers) in 2012.
The average check written in 2012 was $1,420, according to the Fed's research. (The average credit card payment was $94; debit card payments averaged $39.) About 90 percent of all checks were cleared through the banking system as electronic image files, the Fed said.
Although check imaging technologies have been available for more than 20 years, image-based check clearing really took off with passage of the Check Clearing for the 21st Century Act (typically shortened to Check 21), which was passed in 2003 and took effect in 2004. That led to the elimination of many time-consuming, costly aspects of clearing checks.
Previously, it was common for paper checks to pass through a dozen or more hands during the clearing process – from payees, to tellers, to check operations personnel, to couriers, to regional clearing facilities, to paying banks, and all the way back through each of those same entities when checks are rejected by paying banks because of non-sufficient funds, suspected fraud or other issues. Many of these touch points were eliminated as imaging advances gave way to remote deposit capture (RDC), first for branch and ATM deposits and more recently for mobile banking.
The Fed's data shows that in 2012, a total of 3.4 billion checks were deposited by payees using RDC, up from 3.0 billion in 2009. Businesses made 93 percent of all image check deposits in 2012. About half of the 7 percent of check images deposited by consumers were sent to banks using mobile RDC products; the remainder were done using PC-based RDC products, the Fed said. When RemoteDepositCapture.com polled visitors to its site in February, better than two-thirds of those responding said they believed fewer than half of possible end users are onboard with RDC.
Mobile RDC is especially hot. In a report released in March – Consumers and Mobile Financial Services 2015 – the Fed revealed that 51 percent of mobile banking customers used mobile deposit last year, up from 38 percent in 2013.
Bob Meara, Senior Analyst at Celent LLC expects a third of all retail bank deposits by the end of 2015 to be RDC transactions, and he believes most of those will be mobile deposits. By year end 2016, half of all retail deposits at U.S. financial institutions will be remote deposits, with half of all customers (an estimated 87 million consumers and very small businesses) regularly using smartphones to deposit checks electronically. Meara expects more than 6,000 banks and credit unions to offer mobile deposit products by year-end 2016. "Mobile RDC is becoming the new check scanner," he said.
Mobile deposit has had a notable impact on bank balance sheets. Cincinnati-based Fifth Third Bancorp recently stated that it expects to slash $60 million in ongoing operating costs, as more than one third (36 percent) of check deposits have shifted from branch transactions to the mobile channel. JPMorgan Chase & Co. reported that a check deposited by a customer using a mobile device costs just 3 cents to accept, compared with a cost of 8 cents for an ATM deposit and 65 cents for over-the-counter deposits.
Corporate end users have also reported significant benefits from RDC. Indiana University, for example, has been able to streamline the acceptance of more than 400,000 checks through 500 offices spread across eight campuses. One result is that the university's treasury office gains access to investable funds from two to six days faster than it did previously, which has allowed it to boost annual investment earnings, said Ruth Harpool, Managing Director of Treasury Operations at the university.
"RDC is about more than just checks," Leekley said. "It's about the data." David Walker, President and CEO of ECCHO, added, "It's the paper that's the problem," not check payments. ECCHO is a national, bank-owned clearing house for electronic check exchanges.
Checks were created centuries ago to support business-to-business payments. (Consumer check writing had its start in the mid-20th century.) Over the years banks and their business clients invested billions of dollars in technologies and processes that support check acceptance, such as document imaging and the integration of check-based lockbox collections with corporate accounting systems.
According to industry experts, electronic alternatives, such as automated clearing house (ACH) payments, do not readily integrate with these systems and provide limited space for matching payments to invoices.
ECCHO has been pushing for fully electronic check payments, alternately referred to as EPOs (for electronic payment orders) or ECIs (electronically created items). Check writers, especially corporations, have been creating checks as electronic files (instead of paper items) for years, Walker noted.
These are not easily identified in the collection stream because they look no different than other electronic check files. They lack the legal protections accorded checks, however, because they don't start off in paper form, and check laws are focused on paper. Achieving legal status for EPOs would require changes to check clearing rules spelled out in Federal Reserve Regulation CC.
The Fed suggested addressing ECIs/EPOs as part of a larger package of Reg CC proposals published in 2014, and it requested comments on the need for indemnities for electronically created checks. "That request for comment raised a lot of complex issues we have been working through," said Louise Roseman, Director of the Division of Reserve Bank Operations and Payment Systems at the Federal Reserve Board in Washington, D.C.
Roseman did not rule out future Reg CC amendments that address EPOs/ECIs. But she suggested it will take time to work out some of the particulars. She also said that any changes made may not require a proposal for public comment, as any final ruling will reflect and respond to comments received in 2014.
In the meantime, the Fed continues to work on a plan for payment system improvements that takes a "credit push" approach to near real-time payments, similar to the ACH, but which makes no accommodation for check payments.
In January 2015, when the Fed published its vision of a faster, more secure payment system in Strategies for Improving the U.S. Payment System, it noted that "persistent check usage, challenges in moving the unbanked population to electronic payments and the benefits of promoting innovation are key drivers" for faster payments.
Walker takes issue with the Fed's stated vision. "They have ignored the check payment system," he said. "The Fed is preventing the market from making its own determinations by not supporting fully electronic checks." Although no one can say exactly how many EPOs clear through the banking system, Walker said he believes the numbers are significant.
Walker also questions the willingness of banks and corporations to allocate dollars for building and maintaining a new credit push payment system when that same money could be spent in ways that make money. EPOs can achieve the same end as a new, faster electronic system, he said. And accommodating EPOs to existing business systems and processes would demand minimal investments of time and money by banks and corporations, he noted.
EPOs also will further accelerate the clearing of checks since they eliminate the need to deal with paper. In fact, many checks today clear as images on the same day they are deposited. Once EPOs are legally sanctioned, even more checks will clear as same-day items, Walker added.
Walker's skepticism about a new electronic payment system is rooted in history. In the 1980s General Motors Corp. mandated that all trading partners use electronic data interchange (EDI) for ordering, fulfillment, billing and remittances involving the manufacturing giant or risk losing GM's business.
In a show of support, NACHA – The Electronic Payments Association even created a special ACH format, CTX, to accommodate EDI trade payments. Several of GM's large trading partners complied, but eventually the program was scrapped after dozens of small, but key, specialty suppliers refused to make the investments needed to adapt their accounting systems to EDI, and the initiative fell flat.
"What was bad about paper checks was the medium," Walker said. "Electronic images eliminated the medium [paper] for banks and for the Fed." With EPOs businesses get to eliminate the medium.
There are no firm estimates of the cost to realize the Fed's vision for changing the payment system. However, a recent analysis by the Federal Reserve Bank of Boston revealed that it cost $300 million to build the United Kingdom's Faster Payments scheme in 2008 and keep the network operating for the next seven years. The cost per bank for linking into the network ran about $77 million, according to the Boston Fed's analysis.
When Fed officials discuss near real-time credit push payments they often point to the U.K.'s experience as a working example. However, Walker said his analysis suggests only about 4 percent of total noncash payments in the U.K. use the Faster Payments scheme, which, unlike check and ACH clearing schemes in the United States, operates 365 days a year.
Blackhawk Network recently released How America Pays in 2015: Traditional, Digital and Mobile Convergence in Payments, a report describing results of a survey of 1,000 consumers regarding their preferences for traditional and emerging payment methods. Consumers were asked to indicate which payment methods they had used over the past year.
Here's a breakdown of responses:
Meanwhile, Synergistics Research Corp. reported in April 2015 that it had found growing interest among consumers in paperless checking accounts that rely on debit cards and ACH transactions. Forty-four percent of surveyed checking accountholders expressed interest in this type of account, said Genie Driskill Chief Operating Officer at Atlanta-based Synergistics. Interest was highest among 18- to 34-year-olds (66 percent) and those between the ages of 35 and 49 (51 percent).
"The interest expressed by younger consumers in a digital or check-less checking account that shifts activity to electronic or automated channels suggests the direction that checking might take going forward," Driskill said. "Issuers should be forging their plans now for a more digitally-oriented checking account for the future." 
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