Personal Check Use in the U.S.
In the August 5th issue of The Green Sheet (96:08:01) we detailed our research on the use of checks in the United States, a report which has now been distributed through the National Organization of Clearing Houses.
While knowing overall U.S. check usage is an important ingredient in determining true check market potential, retail consumer check preferences is the other half of the story.
Unfortunately, national check activity in the retail sector is not readily available from any source in the U.S.
Respected organizations have produced reports and research papers for various purposes, each based on what is hoped to be a representative sample of consumers or retailers.
As an example, Arthur Anderson & Co. surveyed 2,000 retailers in 1993 for their 1994 Survey of Retail Credit Trends. Also, Chain Store Age and Ernst & Young combined two research studies from retailers and 1,000 consumers nationwide to form the basis of their 1996 Survey of Retail Payment Systems.
Checks represented 23.3% of all retail transactions in 1993, up from 20.5% in 1992, according to Arthur Anderson & Co. The value of checks also increased, from 13 to 29% for retailers who report annual sales in excess of $200 million.1
The primary payee for individual consumer checks is the business community, representing 87% of the total checks written by consumers. Consumers write about 35% of their total checks at the point-of-sale, and 52% from home for reoccurring bills. The primary payee for Business checks (57%) is other businesses, while the primary payee for Federal, State, and Local Government checks (78%) is individuals.
In terms of all checks, 58% are relatively risk free. This percentage represents all government checks, business payments to individuals (principally payroll checks) and government, and individual consumer's checks drawn for purposes other than retail payments. The primary risk associated with checks is concerning checks drawn for payments at the point-of-sale and business to business checks (see table 2). These checks will represent some 26.4 billion checks worth over $27.2 trillion in 1996, (35% of the individual checks, and 57% of the business checks).
Check risk is managed in the United States in one of two ways: First, businesses determine which checks they will or will not accept, and subsequently attempt collection of those checks which are dishonored. These events may be supported through the use of individual or combined negative check writing history and through the use of third-party collection assistance, with the resulting costs and write-offs born by the merchant.
Alternately, businesses may contract for a third-party to provide approval and guarantee services in which the third-party has the collection and loss responsibilities for checks, and the merchant pays a fee for such services. Given the risk management options, Ernst & Young found in their 1996 survey, that "one in four merchants avail themselves of third-party verification services to perform check authorization services. Another 16% say they use manual approval methods and 13.3% have established an in-house authorization system."2
Our research reflects that about 30% of retail business locations in 1996 will out-source authorization or the responsibility for the check (guarantee) which represents about 6-7% of the value of checks.
Industry trade publications reported in 1995 that 725,000 merchants utilize either guarantee or verification services, outsourcing their authorization process or the risk of check loss. We believe that this number is overstated in terms of merchant locations by about 20%, due to a level of sales puffing, as well as the fact that many merchants utilize more than one service, in particular a verification service along with a guarantee service, resulting in merchant locations being double counted.
Given the 2.2 million merchant locations in the United States, the location penetration for outsourcing some, or all, of the check risk problem represents 26% of the potential locations (2.2 Million/580 Thousand).
In addition, industry trade publications reported in 1995 about $200 Million in outsourced guarantee and verification dollar volume. Regarding transactions, we believe that the volume is also overstated by about 20%, for the same reasons. This means that outsourced volume, verified, guaranteed or assigned for collections, represent but 6.6% of the current check market dollar volume potential ($180.0 Billion/$27.2 Trillion).
Check Use By Business Type:
Check acceptance varies greatly among business types, averaging 23 to 24% in the major retail segments. Research reflects the fact that consumers would often prefer to use checks even more than they are, as evidenced by stronger consumer preferences in surveys than the actual reported use by retailers (see Tables 3-5). Consumers in recent years have shown a preference for checks in numerous surveys, as well as a desire to reduce their use of credit payment vehicles, in favor of checks (see Table 3). Chain Store Age , a trade publication for Retail Executives, notes in January 1996, "Nearly 20% of household disposable income each month is now dedicated to reduction of credit card debts, the highest level since 1990."
Whether checks generally account for a larger or smaller portion of a business's total sales depends on, for the most part, the level of cash payment alternatives offered by the retailer.
As Table 4 illustrates, checks at Specialty Apparel Retailers represent about 20% of all sales transactions while checks represent 10% of transactions in Department Stores, 23% in Discount Stores, 40% in Super Markets, 11% in Convenience Stores, and 26% in Specialty Non-Apparel.3
Finally, in September 1995 American Research Group, based in South Carolina, contacted 1,000 consumers representing a cross section of Americans on behalf of Chain Store Age , and Ernst & Young. When asked about future payment options, consumers responded 75.1% of the time that they would expect their check use to stay the same or increase.
Conclusion:
Over the last few months, our research has shown that contrary to popular theory, the use of paper checks has grown steadily for 125 years and will continue to grow for at least 25 more.
Most importantly, our research has shown that check use is increasing, checks are a preferred method of payment, and the potential to manage check risk has not yet been realized.
By the year 2005, the number of checks written will increase 20%. The value of those checks represent a 35% increase from the value of checks written in 1995. This is due, in part, to the fact that banks are continually improving the safety and security of check handling and that checks are still second only to cash as consumers' preferred method of payment.
Presently, half of all checks processed are written by individuals to businesses. Checks reflect 25% of all retail sales, and studies show that consumers would prefer to use checks even more than they currently do. Research shows that 75% of consumers expect their check use to stay the same or increase in the future.
The primary risks associated with checks are those drawn for payments at the point-of-sale and business-to-business checks. These checks represent approximately $27 trillion in check risk, but currently only about 7% of this value is outsourced to verification or guarantee services.
In short-the market potential for checks is huge.
Foot notes
1 Chain Store Age Executive and Arthur Anderson & Co. SC, The Fourth Annual Survey of Retail Credit Trends, Arthur Anderson & Co. SC, (published report, January 1994/Section Two), p. 5A.
2 Chain Store Age, The Magazine for Retail Executives and Ernst & Young, Survey Retail Payment Systems, (published report, January 1996/Section Two), p. 23A.
3 Chain Store Age Executive and Deloitte & Touche LLP, The Fifth Annual Survey of Retail Credit Trends, (published report, January 1995/Section Two), p. 6A.
