By Brandes Elitch
Our Chief Executive Officer recently sent me a copy of an article written by a respected payment professional that explored the question, What is the fastest way to faster payments? The author posited that the answer was to "kill the check." Given the writer's level of sophistication, I was surprised by the false assumptions, leaps of faith, and just plain logical and factual errors that pervaded the article. The article was so erroneous, I thought at first it might be a prank, but it wasn't.
It's about time somebody responded to the constant refrain that "checks and cash are going away, and pretty quickly, too," as I heard another industry "expert" say a short time ago. Here is my rebuttal to the writer's points. ISOs and merchant level salespeople typically are focused on selling credit card processing and often have little or no banking operations background, so I hope this brief primer on bank "facts of life" will be useful.
If you have ever worked in a cash vault or visited an armored courier operation, you know that cash is the messiest, dirtiest, most manually intensive processing operation there is for a bank. Handling large amounts of cash is dangerous; it also incurs the most slippage of any payment form. In fact, when I worked for one of the largest banks in the United States, our division executive used to regularly say that if he had his way, he would close the bank's cash vaults and outsource the whole operation to Bank of America.
One of the most moving experiences I have seen is to visit the headquarters of a major armored courier operation and see the framed photos on the wall of all the drivers who were killed in the line of duty picking up and transporting cash. I suggest that the writer spend a day riding shotgun in one of these trucks – after she is fitted out with a bulletproof vest, of course. No friction, indeed.
for the check to clear If you deposit an on-us item in a bank before the cutoff (typically 3 p.m.), you will usually get same-day credit. All other checks are one-business-day items. Just to be clear, that means the funds are available for withdrawal the next business day.
Since all automated clearing house (ACH) items are next business day, a typical mixed items cash letter would have even better availability than an ACH debit if you used a major bank as the depository. As for "same-day ACH," this will not be fully implemented for three years, and there are other constraints on it that do not exist with check processing.
The writer also criticized the Fed for paying banks at par (actually, most items clear through The Clearing House, not the Federal Reserve, now that all cash letters are fully electronic). Yes, checks were discounted at the time of Andrew Jackson, but since the founding of the Federal Reserve System, this has fortunately not been the case.
And from a practical standpoint, it is irrelevant since the Fed funds rate is zero, and some banks are even charging the depositor a negative rate on free collected balances. Thus, there is absolutely no time value of money in clearing a check a day sooner when the interest rate is zero.
Another canard. The unbanked do not want to have depository accounts, or they had accounts, and their banks closed them and put them on ChexSystems for five years because they had too many overdrafts.
When I worked at a top-five bank, I was continually surprised at the number of new accounts that were closed within the first 90 days, given the enormous focus on signing new accounts in the branch. This happened because some people just couldn't figure out how to avoid overdrafts.
First, we should recognize that this is not because they are ignorant; they just don't have enough money to live on, which is the case with perhaps a quarter of the population. After you pay a bounced check charge of $35 five or six times, you realize that it's just not worth it, and you can get a prepaid account from someone like Green Dot for a small charge that works just fine for paying your bills.
Some of the unbanked do not have legal identities (12 million aliens), and some just do not want any record of their payment activity. There is no reason to pay 4 percent to cash a check, unless you have no proven identity or track record and are cashing a check at a bodega to send money to Mexico or the Philippines, which by the way, is an enormous business by itself.
Banks are required by the Federal Reserve to keep "vault cash" and, of course, banks create money via the fractional reserve system. The real issue today is that banks are not making enough loans and don't need cash to fund them.
The most basic cash management equation is to get the money in faster and delay disbursements as long as possible. The idea that small and midsize businesses are suffering because their clients are not paying them in 30 days is not the real issue. The real issue is that very large enterprises, such as the largest big-box retailers, pay their suppliers whenever they want, usually in the 90-day timeframe and, yes, they still take the discount.
Their model is to get new inventory, put it on the shelves, sell it and get paid well before they have to pay for it, and this has been the norm with these large retailers for many years. This is precisely why there is an exchange for selling accounts receivable and why factoring is such a huge business in spite of interest rates north of 30 percent. It has nothing to do with the medium of exchange.
Really? When I worked at a money center bank, we had a small business account for merchants who deposited fewer than 200 checks a month. It cost about $100 a month in account maintenance and 20 cents per check deposited. If you deposited 200 checks, it would not cost $1,400; it would cost about $200, and please don't tell me that it costs $1,200 a month to have an A/P system generate and print 10 checks a day.
OK, let's compare this with Square Inc., which was designed for the really small merchant. Square charges 2.75 percent and a per-transaction charge. So, on a typical $100 retail sale, that's about $3. Is the bank going to charge the merchant $3 to deposit a check? Definitely not. Incidentally, Square lost $212 million in 2015, so it is going to have to raise its fees, too.
The real issue here is unpaid accounts receivable, not the fact that they are being paid with the check as the medium of exchange. Companies pay their A/P when they want, not when the vendor wants, and they stretch it out until the merchant squawks, and I mean squawks loudly.
This is a fact of life in corporate America. Large enterprises want to closely control whom they pay and when they pay an invoice, and they will not allow vendors to just come in and debit an A/P account when they want. If they did want that, they would have converted to electronic data interchange 20 years ago. When I sold controlled disbursement, the name of the game was to get just one or two extra days of disbursement float, certainly not to pay vendors faster. As you can plainly see, "killing the check" is not only impractical; it is illogical. Finally, we should recognize that merchants live in the check world because of the protections afforded them by the Uniform Commercial Code, which does not apply to ACH transactions. Instead of saying, "Kill the check," we should say, "Viva the check, and the UCC, too!"
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 email@example.com.
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