The Green Sheet Online Edition
May 27, 2013 • Issue 13:05:02
Taking the checkbook away, or not
By Brandes Elitch
Things are not always what they seem. This is sometimes true at the wine tastings here in Sonoma County. You taste a wine you have never tried before. You like it, so you buy a case, only to discover that every bottle tastes different.
How can this happen? Well, it turns out that wine is a living product. When it is young, it is fruity and not particularly complex. As it matures, it loses the fruitiness and gains complexity, depending on the varietal.
Also, many variables affect a wine's taste. A cork could become creased, or even tainted. A white wine in a clear bottle will go bad if it's left in even a little direct sunlight. There could be a variation in the aeration a particular wine receives, or the yeast might fail to work properly. And if wine isn't stored at a constant temperature and humidity, it could oxidize. Even the size and shape of the serving glass will affect the wine's taste.
Then there's another, troubling variable. I have seen tasting rooms pour one type of wine, and then sell - depending what they have in stock - a different year, a different blend, a different varietal, or a different lot to unsuspecting consumers, who find their wine tastes different when they get home.
It's the same thing with statistics. As somebody said, there are three kinds of lies: lies, damn lies and statistics. This applies to the payments industry, too, especially with the long-standing, concerted and well-funded campaign on the part of some to discredit the check.
It seems every time I turn around, someone is talking about doing away with checks. And sometimes, what passes for research to bolster this argument has been put together by a "researcher" with an agenda.
Fiction and reality
Now I'm going to present some claims presented at a recent payments conference, and then I'll try to distinguish between fiction and reality:
- Claim: Checks account for half of the payments made by small businesses; card based payments account for 20 percent. The balance is split between cash, credit, debit and prepaid cards; online bill payments; preauthorized automated clearing house (ACH) debits; wire transfers; Internet payments; and cash.
- Reality: Virtually all small and midsize enterprise (SME) business-to-business (B2B) payments are check based. Yes, large banks have been trying to sell electronic data interchange (EDI) to corporate America for 25 years, and some EDI adoption has occurred among Fortune 500 trading partners.
However, EDI has never filtered down to the SME market. The claim that the small business sector is paying 20 percent of its payables with a credit or debit card is not credible. And as for so-called purchasing cards (P-cards), it would be difficult to find a bigger epic fail at the card issuers over the last 20 years than P-cards.
- Claim: For B2B payments, 41 percent are check, 10 percent are cash, 22 percent are debit/credit card, and 27 percent are "all other payment types."
- Reality: What really jumps out here is the claim that fully 27 percent of all B2B payments are something other than check, cash and card. What else could this be? ACH credit pushes or ACH debits? Not likely.
For many years, banks have promoted Positive Pay with full account reconciliation as a way for businesses to manage check fraud. With Positive Pay, the business sends a file to the bank every day of checks issued by check number and dollar amount. The bank compares this file to the subsequent checks presented file and culls the items that don't match.
This is why corporate America remains unconvinced that it's OK to convert business checks to ACH. It's not OK, because banks have different silos for ACH and for checks, and converting business checks to ACH would negate Positive Pay.
- Claim: Half of consumers still use checks at least monthly.
- Reality: About one fourth of American consumers are unbanked. Nobody knows the real number, because it is impossible to be precise here. That leaves about 75 percent of consumers with checking accounts.
The average household pays anywhere from five to 15 monthly bills, and at least a few in every household are check based because there is no alternative (for example, the gardener, the maid and other personal service providers). And many consumers are loath to have automatic ACH debits to their demand deposit accounts. What has declined is writing checks at the POS; this has been replaced by debit card payments.
- Claim: Of the seven motivators for consumers to use fewer checks at the POS, the last and lowest score was "I am able to charge more on credit cards."
- Reality: The idea that the least important thing to a consumer is to access a credit line strains credulity. The main reason to get and use a credit card is to have the money to buy something that you couldn't otherwise pay for, because you don't have enough money in your checking account. That's what "credit" is. Half of the consumers who use credit cards revolve their balances; only half pay the balance in full every month. That means at least half of the people with credit cards are using them because they don't have any disposable income.
- Claim: Thirty-five percent of consumers state that so-called swipe fees influence card usage at small merchants. In other words, the consumer usually won't pay with a credit or debit card because "they are concerned that the merchant has to pay fees on them."
- Reality: This is preposterous. Do you mean to tell me that average consumers, when buying something at a POS, stop and ask themselves if they think the merchant making the sale is being penalized by an egregious interchange rate, and if so, will tender something other than a credit card to help out the merchant?
The studies I am familiar with show that more than 40 percent of consumers would happily switch payment methods just to get a discount, and a third would be more likely to use mobile payments if they had rewards programs like credit card rewards programs.
- Claim: Among consumers who still pay with checks, 14 percent say that they don't use online bill payment, and 16 percent say it takes more time for a check to clear.
- Reality: Meanwhile, I have found research indicating that only about one third of consumers pay bills from an online banking website. And since Check-21 came along six years ago, all checks clear the next business day, so there is no float.
The future of checks
Now, here's what I believe is going to impact check usage. Consumers are using computers and mobile access to make purchasing decisions, both online and in the store, and this is blurring the line between brick-and-mortar and online retail environments. The credit card is the default method of paying online, and it has always been so. Consumers like mobile banking, but have shown little interest in making mobile payments. A mobile payment would most likely be made with a card, not a check.
When it comes to using a digital wallet at the POS, only 10 percent of consumers have any interest. Consumers are doubtful about the security around mobile payments; only 19 percent say that they believe mobile technology is secure for payments.
About one quarter of consumers overall, and as much as one third of gen Y (age 18 to 34), indicated that they plan to use prepaid cards as a substitute for a traditional checking account. They said prepaid cards offer more security and limited risk, can be used to make online purchases, and help with budgeting.
When you are wine tasting, it is important to take notes and compare at least five or six wines. Do this in the morning, before eating, when your senses and palate are fresh and clear. When you are reading studies of the payments industry, keep a clear head, and ask who the writer is.
Ask if the writer, or the writer's sponsor, has an agenda - it will usually be obvious. If you suspect this is the case, try to understand what the agenda is, and why it exists, before you accept the conclusions as reality.
Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at firstname.lastname@example.org.
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