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The Green Sheet Online Edition

August 22, 2011 • Issue 11:08:02

Insider's report on payments
Checks: Like the Energizer Bunny, they just keep going

By Patti Murphy
ProScribes Inc.

The Payments Council of the United Kingdom is putting the brakes on plans to shutter what remains of that country's check clearing system. The implicit message: Britons aren't ready to abandon their checkbooks.

To this I add, neither are Americans. And for good reasons: checks enjoy near universal acceptance, they clear quickly and efficiently, and they're cheap to use from the consumer's perspective. Factor in the unintended consequences of recent legislative mandates - such as revenue shifts brought on by the interchange caps dictated by the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 - and the motivation to shift checks to debit card payments could even dissipate.

Like the bunny made famous by Eveready Batteries, checks keep going, with no end in sight.

The numbers

U.S. consumers wrote 24.5 billion checks in 2009, according to the 2010 Federal Reserve Payments Study. That was a 7.1 percent drop from 30.5 billion three years earlier.

The 2009 Survey of Consumer Payment Choices, from the Federal Reserve Bank of Boston, meanwhile, revealed consumers are less likely to abandon their checking accounts than they are newer access technologies. Nearly a third (31.7 percent) of accountholders at some point have discarded an ATM card, and 5.9 percent have ditched a debit card, but only 4.9 percent have ever relinquished a checking account, according to that survey.

It's not just consumers who cling to checks. The latest data from the Association for Financial Professionals suggests nearly three out of four U.S. companies use checks to pay trading partners.

And although the sheer number of checks written by corporations is down, the checks that are getting issued are for increasingly larger amounts. MasterCard Advisors predicted in The State of Business-to-Business Payment Transformation, a September 2010 white paper prepared for U.S. Bank, that should this trend persist, "the average size of a B2B check transaction in 2013 will be nearly three times what it was in 2005."

True costs

It's a fact borne out by generations of experience: old methods of payments never disappear completely. Cash and checks continue to thrive even as debit and credit and prepaid card payments soar. One obvious reason is pricing: few check writers are being assessed fees that even approximate the costs incurred by their financial institutions to provide that service.

It's ironic, really, that despite the public outcry over bank fees, many Americans (business owners and consumers) seem to consider free (or cheap) checking a birthright.

I use a mobile veterinary service. During a recent visit, I inquired about whether they took credit cards. The vet answered yes, but because the charges can mount, most folks write checks. "That's just fine with me since it's free to deposit checks," she added. I said that checks really aren't "free" and explained the cost of processing checks. She shrugged.

According to eCypress LLC, an Ohio company that specializes in helping companies implement electronic payment programs, the "hard" cost of issuing a check runs between 63 cents and $1.14. Add to that variable costs (such as check processing, review and resolutions), and variable fixed costs (for example, utilities, depreciation and maintenance contracts) and you come up with an all-in cost of $1.95 to $5.40 per check.

Meanwhile, the all-in cost of payments through the automated clearinghouse can run as little as a nickel and as much as 21 cents, according to eCypress.

What has always perplexed me is the notion of banks charging huge sums for bounced checks and prioritizing debits to maximize overdraft fees, while continuing to perpetuate the myth of free or cheap checking.

No company likes to lose customers, and banks are no exception. And there's plenty of evidence, anecdotal and otherwise, to support fears that these are not the best of times to raise bank fees.

A 2011 poll of consumers by Bankrate Inc. found 64 percent of total respondents were willing to change banks if their banks hiked checking account fees. The most likely candidates: adults earning $75,000 a year (75 percent said they'd bolt in response to higher fees) and those under 30 (71 percent).

Checking trends

In March 2011, Moebs $ervices Inc., an Illinois-based firm that tracks trends in banking, predicted a huge shift in checking accounts this year to community banks and credit unions as large banks start charging for previously free checking accounts. "This shift is going to move about 13 million checking accounts to community banks and credit unions by the end of 2011," said Mike Moebs, the firm's Chief Executive Officer.

Moebs, an economist, calculated it costs a big bank about $300 per year to provide a checking account to a customer. "[A]nd with fees falling below these costs, the average checking account at a Wall Street bank is unprofitable," Moebs said. "Because Main Street financial institutions can operate below the $300 cost level, they can turn a profit and will continue to take market share away from larger banks."

The largest national and regional banks, combined, had 45 percent of checking accounts in the United States in 2009, while smaller regional banks, community banks and credit unions together had 55 percent.

Moebs predicted that going into 2012, the share of checking accounts held at the largest banks will drop to just 35 percent as smaller institutions woo customers with free checking.

Between July 2010 and February 2011 the share of community banks offering free checking rose by 1 percent, and the universe of credit unions offering free checking rose 9 percent, according to Moebs' data crunching. "To paraphrase Mark Twain, the death of free checking has been greatly exaggerated," Moebs said.

Here's some additional data from Moebs:

  • Checking accounts with minimum balance charges rose from 25 percent of all financial institutions in July 2010 to 28.6 percent in March 2011.

  • The median fee for failing to maintain minimum checking account balances was $6.

  • The cities of Los Angeles, New York, Philadelphia and San Francisco saw the largest increases in "Main Street" institutions with free checking.

  • The cities of Denver, Milwaukee and Sacramento, and states of Maryland, Massachusetts and Ohio saw the largest decreases in numbers of financial institutions offering free checking.
end of article

Patti Murphy is Senior Editor of The Green Sheet and President of ProScribes Inc. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.

The Green Sheet Inc. is now a proud affiliate of Bankcard Life, a premier community that provides industry-leading training and resources for payment professionals. Click here for more information.

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