A rapid evolution of the payments industry due to technology advances has impacted business-to-business (B2B), business-to-consumer (B2C) and peer-to-peer (P2P) payments, promoting the usage of electronic payments over cheque payments. In the US alone, the B2B electronic payment volume was of more than 2 billion transactions in 2009. Institutions recognise the cost benefits of electronic payments, the US federal government saves US$0.925 for each automated clearing house (ACH) payment over a cheque, and for 2009 the estimated savings was US$1bn from the 1.08 billion ACH payments effected by the federal government.
A ‘Chequeless’ Global Trend?
To further understand the trends in cheques and electronic usage globally, we will take a brief snapshot of some countries in both mature and emerging markets.
In the US, NACHA reported that the volume of ACH payments for 2009 was 12.19 billion, an increase of 4.1% from 2008, while cheque volume decreased by 6% over the same period. In the UK, BACS payments reached 2.26 billion in 2009 while the cheque volume, in decline since the 1990, has fallen by more than 40% over the past five years.
In Asia, where countries in the emerging markets are later entrants to the electronic payments era, the growing adoption of electronic payments appears to be consistent. In India, a country where the usage of cheques has always been predominant and National Electronic Funds Transfer (NEFT) was only introduced in November 2005, the shift to electronic payments has been remarkable. The NEFT network has seen its volume grow by 30%, while cheque volume declined by 65 million in the period of 2008-2009 as compared to the previous period. In 2009, China’s Bulk Electronic Payment System (BEPS) payments experienced a staggering growth of 60%, although the cheque volume cleared intra-city increased by 12%.
Source: DBS Bank
In Singapore, the industry has experienced a transition in how companies and individuals effect their payments since the introduction of the ACH electronic payments (namely GIRO) in 1987. Cheque volume declined at a rate of 1.12 million pieces per annum between 1999 and 2008, while GIRO electronic payments have quadrupled over the past 15 years. The year 2009 marks a milestone for the Singapore Clearing House Association (SCHA) when GIRO surpassed the cheque as the most predominant payment product used in the industry. However, the SCHA reckons that the rate of decline in Singapore is slower than in other countries and more could be done to further increase the usage of electronic payments, particularly for B2B payments where the usage of cheques still predominates. The usage of cheques in Singapore is not in terminal decline, but the industry has the potential of further shrinking its usage and shifting more payments towards GIRO.
The adoption of electronic payments is driven by the desire of regulators, financial institutions and customers (both businesses and consumers) for faster, easier and more efficient ways to make payments.
Regulators and Central Bank Initiatives to Lead the Way
Regulators in different regions have a common objective of increasing the volume of electronic payments, as it is more cost-efficient to process an electronic payment than a cheque. Different approaches to increasing the ACH payments volume have been taken, ranging from offering new clearing services and introduction of new payments initiatives to setting a target date by which cheques will no longer be supported.
The Reserve Bank of India (RBI) has clearly indicated its intention to foster a greater adoption of NEFT payments through a series of key initiatives including:
- Extending the opening hours of the system to 7 pm on weekdays and 1 pm on Saturdays.
- Reducing the settlement for NEFT from two-hourly to one-hourly cycles.
- Introduction of NEFT returns within two hours, requiring banks to afford credit of funds to the beneficiary much earlier.
- Imposing pricing caps on electronic payments to ensure cheaper payments.
China is also upgrading its China National Automated Payment System (CNAPS) electronic linkages to improve intra-bank settlement, which will further promote the electronic payment capabilities offered to financial institutions.
In the US, initiatives were introduced to further encourage electronic payments and automate the payments process for cheques:
- In August 2010, the Federal Reserve will launch the FedACH SameDay service, which is aimed at shortening the settlement window by providing same-day clearing and settlement of certain ACH forward and return debit payments. The service establishes a platform for the ACH to support mobile purchases, emerging P2P transfers and other spontaneous payments.
- The Back Office Conversion (BOC) approved by NACHA in 2006 allows merchants to convert paper cheques at the point of purchase to ACH electronic payments. In 2009, the volume of BOC reached 160.5 million, more than doubling from the 2008 volume and contributing to growth of the ACH payments.
In the UK, Faster Payments was introduced in May 2008 with the objective of significantly cutting down the payment cycle from days to hours, offering customers a convenient alternative to shift from cheques. Since the launch, the system has seen a rapid adoption rate and also generated more payments from the customer base. To encourage further development of electronic payment alternatives, in December 2009 the UK Payments Council set a target date to end cheque clearing in the UK and Northern Ireland by 2018. The target date was set after extensive research in the UK among various user groups and with the understanding that such a goal could only be attained with a number of programmes on various fronts.
Singapore has introduced an eGIRO+ initiative that provides a faster settlement of the GIRO payments, cutting down the payments process by one day. However, the adoption rate of this new settlement process has been relatively slow.
Other Stakeholders in the Payment Process
While regulators provide the payments system infrastructure, framework, services and directives to promote the usage of electronic payments, the role of financial institutions in adopting these initiatives is vital. Banks have also changed their systems and processes to leverage on the capabilities available to offer innovative and sophisticated payments to their customers, the corporate and retail segments. With improved settlement cycles from the clearing systems, banks had to enhance their payments product suite with faster and more efficient electronic payments through their internet banking and upcoming mobile banking channels.
Companies are able to manage their working capital more effectively and efficiently by using electronic payment modes, as they can speed up their funds realisation. Some companies have adopted the approach of only accepting electronic payments so that they can fully reap the benefits of the payment automation available to them. In Singapore, in the public sector, payment of some fees (levy fees, school fees) is only accepted through GIRO mode. The trend exemplifies the ongoing adoption of the electronic payments by businesses.
The migration towards electronic payment instead of cheque usage is also dependent on the customer to use alternative payments methods. Banks have already leveraged the internet to provide their payment services electronically, facilitating and automating the payment process. The speed and convenience of internet banking has enabled customers to progress from simply checking their account balances to initiating payment transactions. In 2009 consumer internet banking transactions in the US almost reached 2.4 billion payments, an increase of 8.75% from 2008. The number of internet banking users in the UK is estimated to be 22 million adults, more than half of all regular internet users, contributing to the decline in the usage of cheques and the rising usage of electronic payments. With rapid evolution and greater sophistication of mobile phones, and anticipated developments for media tablets like the iPad, mobile banking will further contribute to the rise of electronic payments as it provides greater convenience and accessibility to customers to make payment transactions.
The Way Forward
The trend towards electronic payments is growing and will continue to grow across different regions and regulators, banks, companies and individuals play an integral role towards this trend. The growth in the mature markets such as US, UK and Singapore may not be as significant as growth in the emerging markets, but all countries are experiencing a rise in the usage of electronic payments. 2014 and 2016 are two critical checkpoints for the UK Payments Council in ascertaining whether their goal for ending cheque clearing can truly be realised by October 2018. Till then, we can foresee that the usage of cheques will continue to decline as other innovative and more efficient payment methods are made available. However, a complete elimination of cheques will take time as it is not only dependent on the viability of the alternatives offered but also on customer acceptance and adaptation to the changes. While there could still be a group of reluctant users who rely on cheques for differing reasons, creating the challenge of completely eliminating the cheque as a payment instrument, the confidence in and awareness of electronic payments methods has grown and will keep on growing.
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