By Patti Murphy
The Takoma Group
A funny thing happened on the way to a "checkless society": Some folks started writing checks for larger amounts, and a notable percentage actually started writing more checks.
According to a new paper from the Federal Reserve Bank of Boston's Consumer Payments Research Center entitled Why Are (Some) Consumers (Finally) Writing Fewer Checks?, aggregate check volume dropped 16 percent between 2003 and 2006, but only 31 percent of U.S. consumers reduced check use during that period, and a scant 0.4 percent stopped using checks altogether.
Meanwhile, 19 percent of consumers reported increasing their use of checks during that same three-year stretch.
(Granted, the data is a bit old, but in the world of payment research this is as fresh as data comparing usage of payment methods gets.)
The paper, authored by Scott Shuh and Joanna Stavins, both Senior Economists at the Boston Fed, analyzes data from the Fed's last nationwide check study (which collected data from 2006) and related research. It's a working paper, which means it's subject to revisions. The most current version was published in February 2009 and is available at www.bos.frb.org/economic/wp/index.htm.
I asked David Walker, President and Chief Executive Officer of the Electronic Check Clearing House Organization, for his thoughts on these check trends. (ECCHO is a not-for-profit group that supports electronic check exchanges in much the same way NACHA - The Electronic Payments Association oversees the automated clearing house [ACH] system.)
"I've always been skeptical of the notion that this is entirely a generational thing," Walker said, referencing suggestions that younger consumers aren't wed to checks the way their parents might be.
"There are some transactions that are still best-suited for checks," he added. For example, payments for "legally important events" (such as speeding tickets or tax payments) that people feel more comfortable paying by check.
While the need for check payments may not go away entirely, "Checks are becoming checkless," Walker said. The proof is in check image exchange volumes.
In 2008, SVPCO Image Payments Network, the nation's largest check image exchange network, handled a record 5.6 billion check images, nearly twice the number exchanged across the network in 2007. SVPCO was clearing an average of 27.4 million check images daily, according to network reports.
Walker suggested that as more banks ramp up electronic check exchange, and more paper gets squeezed out of the check clearing process, it's only a matter of time before there's no need for payers to actually fill out those little pieces of paper (with funny numbers on the bottom) known as checks.
Banks already accept and process electronic drafts -one-time, customer-authorized ACH debits known as WEB (for Internet-initiated) and TEL (for telephone-initiated) transactions, which are covered by electronic payment laws.
Walker seems to be suggesting check payments could evolve to become in effect electronic demand drafts that incorporate the same information flows and legal protections that are today associated with checks.
"It starts with changing people's thought patterns, and especially their thoughts about checks," he said. "It's not just about whether [checks are] going away or not."
Our focus on the demise of checks has ignored a basic premise about payments: Old payment methods rarely retire; they continue to coexist with an ever wider array of options.
The difficulties come with integration on both technological and human levels. Take health care payments, for example. According to First Annapolis Consulting, spending on health care hit $2.25 trillion in 2007, and a huge chunk of that tab was paid by check.
Consumer out-of-pocket expenses reached $269 billion in 2007, First Annapolis said. I'm betting most of that amount was paid with cash and checks.
I discovered this first-hand recently when I accompanied my brother to a physical therapy session: No one in the office knew what to do with the debit card he presented for payment. The card was issued as part of a flexible medical spending account provided by the local school district (a major employer in the area).
"Sorry, we don't take those," said the woman at the payment window. Only payments by cash or check were accepted. I scoped out the place. There were no check image readers; checks and cash (the only types of payments accepted) were locked in a box in someone's desk.
The waiting room was teaming with patients. I was stunned. If I were an ISO or merchant level salesperson (MLS), I'd have returned the next day to sell the office on card acceptance and remote check capture.
The situation I encountered is not unique. McKinsey & Co. estimates 80 to 90 percent of health care payments today are made by cash or check.
In a discussion paper published in November 2008 - New Prospects for Payment Card Application in Health Care - Ann Kjos, of the Payment Cards Center at the Federal Reserve Bank of Philadelphia, estimated a mere 3 percent of consumer out-of-pocket payments in the medical sector are made by credit or debit card.
According to the U.S. Bureau of Labor Statistics, the health care industry in the United States includes 580,000 separate offices and professional practices. And many of these house multiple providers.
Clearly, there exist opportunities to electronify these businesses and, perhaps, help chip away at rising health care costs. Bob Meara, Senior Analyst, Celent LLC, estimates two-thirds of small businesses (businesses with revenues of less than $1 million a year) receive five or fewer check payments a day.
Using the RDC Business Value Proposition Calculator, a tool available on the Web site www.remotedepositcapture.com, I made some rough calculations.
Assuming the office I visited takes in just five checks a day (it likely accepts more) and staffers deliver deposits to one of the local bank branches three times a week, the business could likely save more than $2,000 a year in operational costs by using remote check capture and deposit services. Labor savings alone would total about $1,800.
So, some folks like to pay by check. It's not necessarily a bad thing. ISOs and MLSs would do well to view this as an opportunity to extend their reach into new vertical markets - like health care, where customer out-of-pocket expenses will reach $314 billion next year, according to the U.S. Department of Health and Human Services.
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at firstname.lastname@example.org.
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