By Patti Murphy
ProScribes Inc.
If checks had personalities they might feel a bit like Rodney Dangerfield. Dangerfield was a stand-up comedian made famous in the latter half of the 1900s by his "I don't get no respect" routine. A white paper recently published by Digital Check Corp. addresses the issue head on. That paper, The Disappearing Check – How Much Longer Until the End?, offers an examination and some opinions about how much longer it will take for checks to become history.
As Digital Check observed, opinions about the ongoing existence of checks generally fall into one of two categories: checks are dead or checks will be around for many years to come. "Which reply you get depends mostly on who you ask, and on what he or she stands to gain personally from checks' continued existence," the paper stated.
The Digital Check paper debunks some prevailing myths about check usage. For example, suggestions that checks are being replaced by credit card and mobile payments (the data suggests otherwise). And as for the notion that check usage is declining at an accelerating rate, the reality is that "checks are declining at a linear rate of approximately 2 billion per year, and that rate has remained steady for about a decade," Digital Check wrote.
The paper concluded the chances are slim checks will ever disappear completely, although check usage will continue to decline. "By 2020, the likelihood is that checks will still be around in significant numbers, with about 10-11 billion being the most likely number and the worst case being 8 billion," the paper stated. And what about the long term?
"Best case, they will stabilize for the long term at around 7-8 billion. Worst case, check volume will be down to 3 billion or less by 2030 and trail off to zero," the paper noted.
"Check volume is decreasing, but at less than 10 percent per year," Brandes Elitch, Director of Partner Acquisition at CrossCheck Inc., said during a recent interview. He believes that to suggest checks are dying is simply inaccurate. "In fact, virtually all B2B payments are check-based and will continue to be so for the foreseeable future," he added.
The latest Federal Reserve data shows debit cards represent the largest volume of noncash payments in the United States, with a 47 percent share of the total in 2012, while checks were a mere 15 percent. Yet, debit cards accounted for just 2 percent of the total value of noncash payments, compared with checks at 33 percent. Elitch, of course, has a vested interest in checks, since CrossCheck is a major player in check authorization and guarantee. But his point is that in certain vertical markets where ticket values are high (automotive, medical and education, to name a few) checks are and will continue to be a preferred method of payment. Pricing disparities are one big reason. The merchant acquiring fees for a Visa Inc. and MasterCard Worldwide transaction can exceed 3 percent of the ticket. For most businesses, it costs little or nothing to clear a check through the banking system. Sure the days of "free checking" are gone, but few businesses (and even fewer consumers) have to pay fees to deposit checks.
Then there are the legal considerations. Federal consumer protection laws, combined with network rules and internal bank practices, result in consumers facing limited liability for card transactions deemed erroneous or fraudulent. Also, mandatory dispute resolution processes often favor consumers over merchants when card transactions are disputed.
Check law, on the other hand, tends to be more favorable toward businesses. What's more, with the advent of remote deposit capture (RDC), and in particular broad adoption of mobile RDC, checks often clear faster than card payments. In fact, with technologies and processes that are now widely adopted, it's not uncommon for payees to receive same-day funds availability on RDC transactions. For businesses, it's a matter of timing and banking relationships. However, some banks and nonbanks are now pricing availability on consumer checks.
Customers of Ingo Money, a mobile prepaid card app, can receive immediate availability when making mobile deposits to their prepaid accounts. The cost: between 1 percent and 4 percent of the face value, or a minimum of $5. Alternatively, customers can wait 10 days to access the money, in which case they pay nothing. Ingo uses a combination of proprietary and third-party resources to score the relative riskiness of immediate-availability transactions, which are effectively short-term extensions of credit. Of an estimated 400,000 consumers who have used Ingo Money to deposit checks to prepaid accounts in recent years, 96 percent paid to receive funds instantly, according to Drew Edwards, Chief Executive Officer at Ingo.
Ingo Money is not a flash in the pan. The company has operated under different corporate monikers for about 14 years, during which time it has built proprietary databases and other risk management tools that support check cashing and related services. It also has developed partnerships with several leading payment companies, including Visa, MasterCard, and most prepaid card companies, including NetSpend (a unit of Total System Services Inc.). Ingo has also attracted serious attention from the investment community. (Its latest successful round of funding occurred in April 2015.)
Edwards credits technology advances with powering Ingo Money. "[W]e deployed and refined the risk management processes and capabilities necessary to manage and control the unique risk posed by the mobile channel," he said. Ingo Money is not alone in targeting check risk. Early Warning Services LLC, for example, has been enhancing its line of risk management solutions to help financial institutions spot fraudulent checks deposited to customer accounts before they can become losses.
Early Warning manages a shared national database containing information on over 90 percent of demand deposit accounts (DDAs) in the country. It has existed since the 1990s under various corporate names and at one time was owned by First Data Corp. Today, Early Warning is owned by five of the largest banks in the country and boasts that the national account database combined with its proprietary risk tools helps to inform decisions on about 95 percent of DDA transactions (ACH, check and debit card) that clear daily between financial institutions.
Here's my bottom line: the speed with which checks can be used to exchange value, combined with universal acceptance and the existence of sophisticated fraud management tools, make them an economically viable and, in some cases, preferred form of payment, especially for certain businesses. So let's show checks some respect.
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.
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