January 25, 2017
People like to talk about the death of the checkbook, and from initial perceptions, they’d mostly be right. The check book has been on the decline for many years now and a new generation has determined it’s not the vehicle they want to use to dispense their money. But despite the decline, the death of checks will be slow and arduous…and likely will stay in a coma, but never truly die.
After World War II the monetary elite wanted a different way, other than cash, to pay for goods and services. The check was born and it ramped up in usage between 1945 and 1959. By the time the early 1960’s had rolled around the banks began to feel the cost of processing so much paper. Unless a check was deposited at the bank it was written from, it had to be sorted by hand, computed by an adding machine and was touched at least six times before it was cleared. It was determined that 18% of all bank employees were dedicated to check processing. A better method was needed and it involved machine processing.
The MICR (magnetic ink character recognition) standard was created which provided the machine readable numbers at the bottom of each check, via special magnetic ink, allowing fast processing, but it reached a point of diminishing returns. Again, something better was needed.
Reaching a peak where 86% of non-cash payments were made by check, new technologies began to be applied to the problem. We saw new payment processing mechanisms grow over the next 50 years to address the growth of money and the mountain of paper checks. Thus, checks, despite being carried in a wallet along with cash and coin, became relegated to the “old technology” seat while new one’s were adopted, but it never went away. We even suggest it's time to remove checks from your wallet as part of an audit. As can be seen in the chart below, the payment methods merely cannibalized its dominance through technology scatter.
But it wasn’t technological “natural selection” that made the leap happen. It was due to the 2001 terrorist attacks, which created one of the most revolutionary changes in check processing history. Called the “Check 21 Act”, it provided banks the ability to use electronic images of checks instead of paper. During the 9/11 events, when all flights were grounded due to the attack, it put $6 billion in money in limbo as all paper checks were transported by air at the time.
With "Check 21" in place, as of 2011, the Federal Reserve has said that “practically zero” transactions were conducted via paper between banks. The monetary savings translated into $1.2 billion to banks every year and $2 billion to consumers whose transactions were processed faster.
In 2012 there were 18.3 billion paper checks written which accounted for 15% of non-cash payments that year according to the Federal Reserve. Thus, declining it might be, but gone the checkbook it is not.
One reason is that businesses are slow to adopt new technology in the United States. Think that mobile application payments and online payments dominate the checkbook? You’d be wrong. Of the 27 million small businesses in the United States, only 55% accept a form of digital payment. Micro-operators who don’t have a store front or those who do and don’t like paying the 2-5% processing fees for credit and debit cards would rather take your check or cash.
Another problem is that technology hasn’t caught up with how people pay and the situations where they use a checkbook. What if you need to split a check? Sure, there’s an app for that, but not everyone has one, and a simple direct payment via check is easier than the app setup.
But technology has taken its toll on checks. Mobile payments are faster and more convenient, retailers are phasing out checks in favor of technology, as check processing can be more cumbersome. And with the incentives of online banking, many choose to take the offers from their bank to use digital payments than checks.
But despite the rush to new technology, the adoption has been slow, which has not made much economic sense to business. Research has shown that an average business will spend between $5-25 on processing a paper check when all factors are taking into account versus $1-2 when processing the same payment electronically. So why aren’t they moving faster? Well, their customers are driving them that direction whether they like it or not.
The largest reason, however, that checks are declining, and will continue to do so, is demographics. Millennials abhor checks, they’d rather cut off a finger than write one, since most don’t even know how to write a check. The 2014 GoBankingRates poll showed this disparity when it found that over 60% of respondents ages 18 to 24 said they never write checks, compared to 75% of people ages 55 and older. Another point that’s always present, to make this a concerning is security. Even the bellwether check has security issues.
Another question about the death of checks is “are digital payments dominating?” The answer is no. If you look at the distribution of payments (see graphic below), you’ll find that cash is still king.
The most telling research on checkbook decline is a 2013 survey which showed that 52% of millennials never use a check (validation from several polls/surveys), but more interesting, is that 64% of consumers write fewer than 3 checks per month, up from 35% three years earlier.
So the declines are steady, but I suspect checks and checkbooks will take LONG time to truly die.
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