By Patti Murphy
I first met Paul H. Green in 1998, when he graciously agreed to keynote a conference I was presenting on the evolution of check payments from paper to electronic. We were ahead of the times. Paul and I were both convinced that checks were not going away – at least not in our lifetimes.
The prevailing sentiment then was that checks were fast becoming passé. After all, the Internet was gaining traction, credit card adoption had shot past 80 percent, and debit cards (PIN- and signature-based) weren't far behind.
"At some point in the not-too-distant future, the use of checks may begin to dwindle as electronic payment methods become less expensive and more accessible and familiar to consumers," Green said in his presentation (yes, I still have a copy). "However, we must recognize that the volume of checks has grown by more in absolute numbers during the last 20 years than all electronic payment methods combined."
Paul and I weren't alone. There were other "believers" in the longevity of checks, including several industry experts and Federal Reserve insiders. And initiatives were underway – like check imaging and image exchanges – that were beginning to diminish the importance of paper to the check system.
Now, 15 years later, the pool of believers has grown exponentially. And credit card usage has fallen. The last Federal Reserve payments study, published in 2010, indicated that 20 percent of noncash payments were made using credit cards in 2009, down from 23 percent in 2006.
Meanwhile, the value of check payments continues to dwarf that of electronic payments. Checks represented 44 percent of the total dollars paid out by Americans in 2009; credit cards were 3 percent and debit cards 2 percent, according to the Fed. (An updated payments report, based on 2012 data, is due out by the end of 2013.)
There are several reasons why checks continue to dominate the payments space. Perhaps the most obvious is technology. Quite simply, imaging and mobile technologies are breathing new life into the check payment system. "Mobility makes accepting checks so much easier," said Gary Brand, Director of Source Solutions at banking services firm Fiserv Inc. Fiserv offers several imaging and mobile solutions, including a remote deposit capture (RDC) app that allows consumers to deposit check payments to prepaid cards using a mobile device.
Brand said about 50 banks and credit unions are going live with Fiserv's mobile RDC solutions every month. Financial institutions offering the solution have signed more than 2 million users in the past two years, Brand said during a presentation at the 2013 RDC Summit, a yearly conference put on by RemoteDepositCapture.com.
According to Brian Egan, Senior Vice President in the retail payments office at the Federal Reserve Bank of Atlanta, in the nine years since enactment of the Check 21 Act (which gave legal accommodation to processing checks as images rather than paper), the Fed's check processing shop has gone almost completely paperless.
"Today 99.9 percent of the checks coming into us are in electronic form," Egan said at the RDC Summit. But prior to 2004, when Check 21 took effect, the preponderance of checks cleared through the Fed as paper items.
An analysis by a group of economists at the Federal Reserve Bank of Philadelphia revealed that the Fed saves 7 cents every time it accepts a check presented electronically rather than as paper. That translated to $1.16 billion of savings in 2010 alone, according to Getting Rid of Paper: Savings from Check 21, a working paper published by the Philadelphia Fed in May 2012.
And the benefits don't end there. New bank product offerings like remote check deposit are slashing costs, driving deposit growth and enabling banks to spot fraudulent transactions more quickly.
Brand and several other industry experts also made a compelling case for bankers to leverage their expertise in risk analysis and their customers' affinity for mobile devices to support real-time check verification and guarantee services. After all, checks are laden with valuable information that banks can use to assist with the process. "This is a huge market," Brand said. "The numbers are staggering."
The unbanked and underbanked total nearly 70 million U.S. adults, according to the Federal Deposit Insurance Corp.; many of these individuals use reloadable prepaid debit cards in lieu of bank accounts. Surveys by the Fed indicate members of this group are big users of mobile devices. In fact, for many, mobile devices are the only way they have of accessing the Internet.
In 2012, 91 percent of the unbanked and underbanked had mobile phones (compared with 87 percent of the general population) and 57 percent had smartphones, according to the Fed.
These consumers are accustomed to paying to cash checks at check-cashing outlets – and now even at banks. Regions Bank in Birmingham, Ala., claims to be the first bank in the United States to roll out a mobile RDC product with variable pricing and make it available to noncustomers.
Consumers who use Regions Now, a reloadable prepaid debit card, can use their smartphones to cash checks and have the funds applied to those cards. Cardholders can get immediate availability on the checks for $5 and up. If they're willing to wait until the next morning to access the funds, the fee is $3. Making a mobile deposit is free to those willing to wait out a typical bank-imposed check hold period. The same fees apply to mobile check deposits by account holders.
"Customers are willing to pay for this," said Greg Melville, a Regions Vice President who addressed the RDC Summit. Regions expected 20 percent of its mobile banking customers would pay for expedited funds availability, but "the number is much higher than that," Melville said.
Regions limits its losses using various risk management tools and evaluates the potential for deposit fraud differently, depending on how quickly customers want access to the funds. Checks that consumers want to access immediately get authorized through Ingo Money, a check-cashing and guarantee network (previously known as Chexar) that's built around RDC technologies.
Visa Inc. said it would help promote Ingo. It is expected to start mailing out small-dollar checks to millions of consumers with Visa-branded prepaid cards, encouraging them to use their mobile devices to deposit the checks to the cards.
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