The Green Sheet Online Edition
September 12, 2016 • Issue 16:09:01
Insider's report on payments:
No cash? No checks? Nonsense.
The European Central Bank wants to eliminate cash, and it's starting with the 500 euro note (worth about $557 at this writing). At present, 500 euro notes in circulation total €300 billion ‒ nearly one-third of all euro-denominated cash outstanding, according to the ECB.
The move, ostensibly intended to deter fraudsters and money launderers, is the latest in a string of initiatives by government entities to rid the global economy of paper payments. The Danish government set a 2030 deadline to rid its economy of paper money. Banks in Norway have stopped accepting or dispensing cash, except through ATMs. Researchers in Sweden reported that mobile payments tied to bankcards have eliminated at least half of that nation's cash in circulation.
Meanwhile, U.S. banks, their technology partners and the Federal Reserve have invested significant time and money on networks and processes to support real-time (or near-real-time) electronic payments, like same-day automated clearing house (ACH) payment ‒ despite the fact that checks remain an important medium of exchange. This is true for the nation's 28 million-plus small businesses, and for consumers. In fact, Federal Reserve data suggests cash is a preferred payment method for at least one third of Americans under age 54.
The arguments given for wanting to go cashless or checkless typically are based on two assumptions: first, that cash and checks are easy pickings for criminals; second, that cash and check payments are slow and resource intensive.
The case for criminals
Cash is indeed big with fraudsters. Plenty of news reports and crime shows depict drug dealers surrounded by piles of greenbacks. If cash were no longer an option for drug dealers and other criminal enterprises, however, they would turn to other mediums of exchange, like prepaid cards, bitcoins or something else. I read a New York Magazine report a few years ago about how laundry detergent had become a street currency in some cities. It revealed how thieves were ripping off giant bottles of Tide from retailers large and small, and exchanging them on the street for drugs. At the time a 150-ounce bottle of detergent was worth $10 in pot or crack.
And lest we forget, there are legitimate uses of cash that electronic alternatives can't always address. Case in point: I have a thirty-something friend who never carries cash. Recently, he ran out of gas while driving to work and flagged down a teenager for help. Sure, the kid said, give me $10 and I'll run to the gas station for you. So much for that idea. (Eventually, my friend called, and I brought a can of gas to him, but not without a reminder of why he should always carry at least a little cash.)
While checks have long been a lure for criminals, banks and their partners are becoming adept at thwarting check fraud. The American Bankers Association reported that in 2014, U.S. banks were able to prevent $8 out of every $10 of attempted fraud against checking accounts. Of the $1.9 billion in losses sustained by banks from such fraud, 66 percent involved debit cards; less than one-third of the total arose from check fraud.
From a financial standpoint, card fraud is a far worse problem. The Nilson Report said card fraud worldwide totaled more than $16.3 billion in 2014; $7.76 billion of that was sustained by U.S. banks and merchants. U.S. implementation of EMV (Europay, Mastercard and Visa) aims to curtail losses from counterfeit cards (a major contributor to fraud), but there is a downside.
"As the U.S. migration to EMV progresses, the combination of continued strong growth in ecommerce, ready availability of consumer data and credentials on the underweb, and disappearing counterfeit fraud opportunity will create a perfect storm that will result in a sharp rise in CNP fraud," said Julie Conroy, Research Director for Aite Group LLC's Retail Banking practices.
Checks dominate B2B
One reason for check fraud's allure is that businesses are highly dependent on checks. Treasury consulting firm Phoenix-Hecht reported that while consumer-to-business checks have been on the decline for more than a decade, business-to-business (B2B) check payments continue to grow. Nearly a third (65.5 percent) of all payments made by corporations in 2014 were checks; credit and debit cards accounted for 6.2 percent of the total, according to Phoenix-Hecht.
The nation's 28 million small businesses are especially keen on checks. When it comes to B2B payments, checks often are the only option for these businesses, since most lack direct access to ACH origination services. Checks are easier to initiate, and with widespread adoption of image capture and exchange technologies, check clearing times often rival those of electronic alternatives like the ACH.
Bank of America estimated the all-in cost of accepting and processing a B2B check runs as high as $20; invoice processing adds between $4 and $8 to that. In the long run, paper checks may not be cheaper, but get rid of the paper, and things look different.
BofA recently inked a deal with Viewpost IP Holdings LLC, a technology firm with an open network that leverages check imaging technologies and processes, and has advanced fraud tools to support faster check payments and better cash management. Viewpost works with several other large banks, too, said Pat McMonagle, Viewpost Executive Vice President and Director of Payment Operations.
Businesses access Viewpost using their banks' online portals to send and receive checks (and related documents) without ever touching paper, typically on a next-day basis. "We're leveraging the capabilities and efficiencies of the check system," McMonagle said. "We introduce the efficiencies of electronic processes and leverage the Check 21 rails to facilitate." (The federal Check 21 Act paved the way for widespread adoption of check image exchange in lieu of processing paper checks.)
Viewpost generates paper checks (from online requests), then captures images of the checks for clearing through the banking system, in keeping with federal regulations and industry conventions. Even with this extra step, McMonagle said, it's not uncommon for the entire process (initiation through the process of debiting the check-writers' account) to take just hours. That's on par with same-day ACH payments.
The bottom line? Despite the proliferation of electronic alternatives, cash and checks are destined to be part of the U.S. economy for the long haul. That's why, to suggestions that the United States become cashless or checkless, I say nonsense.
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 email@example.com.
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