Cheque Payments: A Review

2011 has certainly been a momentous year in the life of the cheque. Following the Treasury Select Committee’s hearing on the future of cheques and meeting more than 600 stakeholder groups, the UK Payments Council announced on 12 July that cheques would be kept as long as customers need them, and that the target for possible closure of the cheque clearing in 2018 had been cancelled. Following the decision to keep the cheque, work is now focused on ensuring that cheques can continue to be processed efficiently and securely despite falling numbers.

The Cheque and Credit Clearing Company (C&CCC) is aware that the decision to keep the cheque has received a warm welcome from many. Responding to the news, the Institute of Fundraising said keeping cheques would ‘make a world of difference’ to many charities, and Which? hailed the decision as ‘a victory for common sense’. It’s worth remembering that while cheque use is down significantly compared to the 1990 peak, 1.1 billion cheques were written in 2010. Cheque volumes have declined at double digit rates for the past four years with the change led by consumers and influenced by businesses deciding no longer to accept cheques, and this trend looks set to continue. This said, in 2020 we are still forecasting that half a billion cheques will be used.

Over the past 20 years direct debits and cards have increasingly become customers’ first choice of payment. We have seen strong uptake of direct debits to pay regular bills, with billers often incentivising their customers to pay that way, increasing use of debit cards to make payments on the high street and more frequent use of cash machines to acquire cash. In recent years consumer payments made through internet and telephone banking have been replacing cheques in areas such as payment of credit card bills. The move by most of the major supermarkets, the main petrol companies and other retailers to stop accepting cheques has also been a major recent influence on falling consumer cheque use.

2011 also saw the closing of the Cheque Guarantee Card Scheme. After months of preparatory work by banks, building societies and the Payments Council, the UK domestic scheme came to an end on 30 June. First introduced in 1969, use of the scheme rapidly decreased over the past 20 years as alternatives such as cards, electronic transfers and online payments became more popular.

Use of guaranteed cheques dropped by 65% in the past five years, and many consumers weren’t aware of how the scheme worked or whether or not they could take advantage of it. Research also revealed that the way the scheme operated was largely misunderstood and most people, including older customers, had few concerns about the closure of the scheme. Eighty-six percent of people over-65 reported ‘little or no concerns’ about the closure of the Cheque Guarantee Card Scheme.

However, since the closure, the Treasury Select Committee has argued the case for restoring the Cheque Guarantee Card Scheme, or an alternative guarantee. In response, the Payments Council has advised that it is awaiting the results of independent consumer and business research that it has commissioned to measure the impact of the scheme’s closure. It will be publishing this research before the end of the year as well as sharing it with the Treasury Select Committee and, depending on what the research shows, setting out the next steps.

Consumer and Business Cheque Users

The C&CCC undertakes an annual survey to understand where and when consumers and businesses use cheques, as well as how well they understand the cheque clearing timescales. The 2011 results show that just over half of consumers with bank accounts wrote cheques, and just under half received at least one cheque during the past year. In fact, over a third of consumers with bank accounts said that they had neither written nor received any cheques in the past year.

The market research also gave further evidence of the downward trend in general cheque use – around 60% of consumers felt that they were writing fewer cheques compared with three years ago, while only 6% felt that their cheque usage had increased. Individuals receive far fewer cheques than they write, with 222 million cheque payments made to consumers last year. Somewhat unsurprisingly the most likely recipients of cheques are those in the middle age bands and higher income and socio-economic groups, with common reasons being as a gift, a refund or as wages (around 5% of the workforce are paid by cheque).

Of course, cheques remain as an important payment method in a number of areas, in particular donations to charities, payments for child-related services such as childcare and school activities, subscriptions to clubs and societies and payments to friends and family or to tradespeople. As in previous years, the most common reason for consumers to write a cheque remained paying a bill by post (36%), although fewer consumers reported doing so than in previous years.

In terms of business use, over 80% of businesses wrote and received cheques in the past year. The average number of cheques businesses wrote and received remained constant at 22 cheques written and 27 cheques received per month. Only 6% of UK businesses said that they had neither made nor received any payments by cheque in the past month.

The most popular reason why businesses say they use cheques is that it enables them to manage their cash flow (32% of businesses). Other popular reasons include compliance with the payee’s request to be paid by cheque (25%), habit developed in the past (24%) and the ability to control which employees can make payments (23%). One change identified over time is that businesses increasingly prefer not to be paid by cheque, with around a third of businesses now expressing this preference. Businesses are also increasingly willing to request that payers do not pay them by cheque with half of businesses wary of accepting cheques from unfamiliar sources, due to concerns that they may bounce.

Paper cheques remain attractive targets for fraud. They can be stolen, altered, forged and counterfeited potentially much more easily than other more modern types of payment. The vast majority of attempted cheque fraud is halted before a cheque is cleared so the criminal doesn’t get any funds. In the first six months of 2011 alone, the industry successfully spotted and stopped more than £254m of attempted cheque fraud. However in the first half of 2011 there was a slight increase in cheque fraud losses, with the figure rising from £14m in the first half of 2010 to £16.4m in the same period in 2011, illustrating the need for continued vigilance in this area.

On existing trends and known market developments, business cheque volumes would fall by around 60% over the next 10 years, to just under 200 million transactions in 2020. The rate of decline could be faster if innovation such as enabling multiple authorisation on electronic payments (e-payments) is delivered as planned in 2013. As things stand, a number of charities, clubs, businesses and local authorities rely on cheques because they provide a means of simply authorising payments which require two signatories.

The cheque clearing system needs to be ready and flexible to respond to any such fluctuations in volumes to ensure that cheques can continue to be processed securely and efficiently for as long as customers need them.

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