What time is cheque out?

One of the staples of big sporting and charity events was the giant novelty cheque. Surprisingly, these cheques are actually legal tender. The recipient can bung one on a trolley and wheel it into the local bank branch to cash it.

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You don’t see the novelty cheque so much these days. And indeed, in most markets around the world, you don’t even see ordinary cheques. Just last month New Zealand actually killed off the cheque altogether - they are no longer issued or accepted by banks or government authorities.

"The question is when will cheques disappear and that has more to do with public preference and politics than economic efficiency.”

Cheques – or “checks” as they are known there – remain a major part of the US financial system, largely due to the fragmented nature of the infrastructure in the US but use is declining even there.

And in keeping with global trends, a massive surge in digital banking during the coronavirus pandemic has accelerated the decline in cheque use.

Cheques, after other once popular vehicles for value exchange such as one and two cent coins, will eventually disappear. They are expensive to process, susceptible to fraud and non-payment, slow and, in almost all cases, inferior to alternatives.

So the question is when will they disappear and that has more to do with public preference and politics than economic efficiency. But if the trends of the last 18 months with digital payments endure, the novelty cheque really will become a novelty.

In Australia, cheque usage has declined by around 20 per cent annually over the last five years - and by 27 per cent in 2020. Today cheques account for only 0.1 per cent of all payment transactions by volume and not much more by value.

According to the Reserve Bank of Australia (RBA), the cheque system has passed its use-by date.

Digital elders

Over the last decade there have been numerous rumblings in Australia around the conditions to phase out cheques, notably by the RBA Payments System board, but community anxiety has stayed the hand.

Stakeholder groups presumed to be most affected by the end of cheques include older citizens, remote communities, small business and real estate. Yet in all cases viable and more efficient alternatives are available.

Nor is it true older citizens are averse to digital banking. Many older Australians have already shifted to alternative payments and are tech-proficient, a trend which accelerated in the last 18 months. Even before the pandemic, research by National Seniors in 2019 found more than two thirds of older people do not get frustrated with technology.

Meanwhile real estate transactions are now digital, connectivity issues in regional Australia – while still a problem – are rapidly improving and it is more an assumption than a fact that small businesses prefer cheques.

For all businesses, physical cheques introduce delays and friction into the payments system. Indeed, Australian businesses face the slowest invoice payment in the world – invoices are paid on average 26.4 days late. That is a genuine hardship for any business relying on frequent cash flow, not just small businesses.

Moreover, various surveys confirm small business in fact doesn’t prefer cheques because they are:

  • Expensive in comparison with alternative digital payments
  • Complicit in slowing down cash flow
  • Prone to fraud and difficult to manage, track and reconcile
  • Time consuming given cheques need to be presented in branches, ATMs or Post Offices
  • Susceptible to being rejected due to funds being unavailable

Any decision to phase out cheques will probably be made by individual financial institutions but it will ultimately be driven by customer behavior and preferences.

While the decision, under current structures, may rely on individual financial institutions, the Australian Bankers Association (ABA) is coordinating an industry-wide proposal to address the costs to the economy of maintaining cheques.

Money better spent

The ABA cited RBA research showing personal cheques are very rarely used for consumer payments.

“These trends are seen across all age groups, cementing Australia as a nation of ‘early adopters’ of new technologies,” according to the ABA. While all cheque payments in a 2019 RBA survey were made by people over 50, even for consumers aged over 65 personal cheques represented less than 1 per cent of their number of weekly payments, down from about 2 per cent in 2007.

“There is a significant opportunity cost for Australia in maintaining legacy payment and financial market infrastructure,” the ABA argues. “These investments in legacy systems would be better spent on enhancing and developing additional functionality that utilises new payments infrastructure such as the New Payments Platform (NPP).”

The NPP allows near real time payments and the ability to add richer data which also aids business.

The ABA ran through a list of benefits which come with more digital payments and noted during recent bushfire crises the RBA was able to directly credit emergency payments to those affected. In such times, physical cheques are much less efficient and more problematic.

Beyond the opportunity cost of maintaining expensive and increasingly less-used payments infrastructure is the direct benefit of greater efficiency and security.

The ABA research identified reduced accounting administration costs through better data matching with e-invoices; more remittance data that can be matched automatically with electronic invoices, avoiding manual reconciliation; a much lower risk of non-payment for services/goods as cheque payment is not instantaneous; removing the cost of “bounced” cheques; alleviating the uncertainty created by multi-day cheque payment times which also removes the issue of cancellation.

The ABA also cited the RBA’s 2014 Payment Cost Study which examined the costs borne by merchants, financial institutions and individuals in the use of different payment methods.

“If the RBA’s costs were applied to the number of cheques used in 2020, the ABA estimates that phasing out cheques reduces costs to the economy of up to $A250 million a year and those savings sit alongside other economic benefits,” the ABA.

Against those costs the ABA noted there have been technology advances that have likely lowered cheque processing costs however, because cheque payments are an inherently physical payment, they “likely to still be the highest-cost and slowest payment type for business and customers”.

Shifting usage

In that RBA study, the central bank tracked the decline in cash usage noting “cheques were the most important non-cash payment method in Australia a few decades ago” but since 1980, when cheques accounted for 85 per cent of the number of non-cash payments and almost all of their value, usage – and the reasons for use – have shifted dramatically.

“With changing consumer preferences, the growth of other instruments such as debit and credit cards, and increasing technological payments innovations such as direct credit payments, the use of cheques has declined significantly over the past few decades,” the RBA said.

“As a result, in 2016 cheques represented about 1 per cent of the number of non-cash payments, and – reflecting the higher average transaction size than for other payment types – about 7 per cent of the value of such payments.

“Today, cheques represent a very narrow segment of the payment system and are no longer used by the majority of the general public.”

Ironically, among those who still do use cheques are banks. Refunds by banks and on behalf of other institutions remain a significant category – but banks are obviously focusing on digital solutions to their own need to mail out cheques.

Even five years ago, when managing the decline of physical cheques surfaced in discussions, stakeholder groups were quick to argue for their retention. But with use continuing to plummet and the community using digital alternative more and more, check out for cheques is approaching more rapidly.

Andrew Cornell is Managing Editor of bluenotes

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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