The Dichotomy of Cheques

According to the Payments Council, cheque usage fell 10% over the second quarter of 2010 compared with the same period in 2009, as consumers and businesses continued to switch to cards and electronic transfers (e-transfers). The World Payments Report 2011 also shows this downward trend, with cheques accounting for 16% of all non-cash global transactions in 2009, down from 22% in 2005. There has never been a clearer indicator that we are in the middle of a global shift.

In case we were in any doubt, we only have to look at what is happening on the high street; a number of major retailers, including Sainsbury’s, Asda, Morrisons, WH Smiths and Shell, no longer accept cheques. As they say, actions speak louder than words. Many large value purchases, such as buying a car from your local dealer or garage, consumers prefer card payments to having to get a cheque pre-cleared.

Yet in July, banks were obliged to scrap their plans to abolish cheques by 2018 after pressure from MPs, consumer groups (particularly representing the elderly) and charities. MPs’ efforts to secure the return of the cheque guarantee card also appear to have led to another U-turn. This is because for certain groups – particularly small to medium-sized enterprises (SMEs) and people over 50 – cheques are still used both for making and receiving payments. Large enterprises also still use cheques in abundance for certain types of payments, such as deposits, issuing refunds and making ad hoc payments to suppliers. The difference being that for large enterprises the amounts processed by cheque represent a much smaller proportion of the entity’s turnover compared to SMEs – which explains why cheques are not as important to them but are still central to the SME community.

So what will happen next? If we look at data from the Treasury1 on cheque use and the results from a recent report by The Payments Council on awareness and acceptability of alternatives to cheques, it is obvious that the case could be made to simply allow the cheque to live out its natural life. This is because the consumer group that most relies on it, and has the lowest acceptance of alternative methods, is the older generation.

However, a slow transaction is unlikely to be allowed to happen because it doesn’t make sense from a time or cost perspective. It is estimated that banks will save an estimated £200m a year in processing fees– not an insignificant amount given the current economic climate – from replacing cheques with a number of electronic payment (e-payment) alternatives.

The Fate of Cheques

As a result it is arguable that the Payments Council will reconsider the fate of the cheque around 2015, the original date it planned to review the withdrawal progress when it was set for 2018. It is at this time that the impact on cheque volumes made by alternatives may provide a clearer picture of the emerging payments landscape. At this point, one other factor will come into play: anything that changes the way people have to make payments will impact financial institutions’ and the card payment schemes other ‘cause célèbre’ – the ‘war on cash’. Whatever replaces cheques must also be able to replace cash; failure to do so would affect banks’ liquidity and negate the benefits afforded by doing away with cheques.

There is also another force at play driving progress – the changing banking infrastructure. The payments landscape has been experiencing seismic transformation both from an industry and technological perspective. Consider for example, the possibility, when UK banks finally fully capitalise on the Faster Payments Service (FPS) launched in 2008 – the first new payments service launched in the UK for 20 years – which allows near real-time execution of payments typically from phone or internet banking systems and standing orders.

Many within the industry have criticised the piecemeal introduction and marketing of this service, in particular, the direct corporate access feature; this coupled with banks not amending their own transaction limits for the service to take advantage of the new limits of £100,000 (offered by the FPS from September 2010). As a result, organisations are not prepared to fully adopt this service. On the consumer side, the lack of promotion means they have not realised this is a feasible alternative to cheques. Where cheques have been used to send payments through the post, the FPS is the obvious replacement mechanism and banks’ need to raise consumer awareness of this.

New Technology

Mobile phones are also becoming increasingly powerful and are already an indispensible method of making payments for many. One option for mobile payments uses accounts from organisations such as Amazon or Apple to make the payment, with the consumer providing a code to the retailer for the successful transaction. Funding of the account can be from a bank or card account. Technology is now available to turn a mobile phone into a payment terminal, which may well change the way we pay tradespeople who normally accept cheques (although the continuance of the black economy may see a proportion of payments remaining in cash). New initiatives in mobile account-to-account payments and the development of a service for payments to online retailers by internet banking is another alternative that needs to be made ‘viable’ if it is to support an easy and sensible end date for cheques. Or there is also the option to use it for simple person-to-person (P2P) payments for customers who wish to send money to family and friends via email or text message.

Then there are contactless cards that allow you to make purchases of £10-15 or less without entering a personal identification number (PIN) – you just hold your card in close proximity to the reader making it quick and easy to pay and is an option for replacing small value cheques and cash transactions. However, consumers need to be convinced of the security of these services, although many customers do feel happy in the knowledge that the card never leaves their hand and that they are not carrying cash.

In the UK, Oyster card holders are used to ‘tapping in’ at a terminal and therefore accept the same methodology for using a payment card. However, as with FPS, the UK has not done a great job of rolling out the service, with many major retailers not offering the service because of interchange issues and a failure to generate a positive business case for upgrading their point-of-sale (POS) systems because they sell cash back to the banks at a negotiated rate for them to use in their ATMs, effectively subsiding their cash transactions.

The list goes on: PayPal too could become more dominant, although with fees higher than that of credit cards it is unlikely to take cheque or credit card volume. We also have bank-branded prepaid cards that can be used both by businesses and individuals, but these have also not made a major impact on the UK market where closed loop gift cards from retailers dominate the market.

As increasingly smart technologies are introduced into our everyday lives, businesses will be able to use a variety of intelligent devices that use mobile, wireless or even biometric technologies to capture payments. That the pace of change driven by technology will have an impact is not in dispute – what is unclear is where the impact will be felt, and it is hoped that in 2015 this will be better understood as the many alternatives to cheques gain traction.

Throw into the mix a growing number of non-traditional payment institutions created under the Payment Services Directive (PSD), the increased presence in the payments market of players such as Google, Facebook, Amazon and most high street supermarkets – the latter now offer banking and have their own ATMs, while some even own their own mobile phone service – and you begin to understand the complicated nature of phasing out a tried and tested payment method. The other certainty with so many factors at play is that the destiny of payments, going forward is no longer just in the hands of the banks.

Revolutionising the Way We Spend

What is clear today is that there is a new generation of payment methods that will revolutionise the way we spend, but at the heart of the problem is a lack of planning and collaboration between the providers, industry and stakeholders. Telcos, banks and mobile handset manufacturers, for instance are not undertaking the necessary discussions to develop a cohesive programme for the industry as a whole and it’s difficult because each sector has its own set of business goals to meet. For example the telco’s see the offer of payments on their phones as a methodology to reduce churn, one of their major business challenges. Collaboration across the industry was a key reason the introduction of Chip and PIN, the last major change to the UK market, progressed so well.

Only in collaboration will the practicalities of the new payment methods be worked through and a clear strategy established for assuring the key user – the consumer – that the payment method is safe and secure without specific information campaigns, advertising and education regarding the new solutions available, how to use them, ease of use, speed and how secure they are, and an industry focus on any major implementation issues the new methods will not achieve the mass adoption that is needed to enable the phasing out of cheques and cash.

Conclusion

Once businesses and consumers are convinced that the new solutions suit them and they recognise the reliability and cost effectiveness of moving away from cheques, the whole industry will be more comfortable. The fact is that solutions offering an alternative to cash and cheque payments are in place, and until the banking industry is clearer on their own strategies for these and they are working in unison with the ambitions of these other emerging players and the new technology on offer, it’s anyone’s game to win the consumer over.

1The Treasury Select Committee research shows 1.4 billion cheques on average are processed every year in the UK, nevertheless incentives for the industry to phase them out remains and the reality is they are expensive to process, prone to fraud and, unlike credit cards, do not allow banks to take a cut of the transaction.

 

 

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