For foreigners, it can be hard to believe the U.S. financial system, the world’s largest, still seems to write checks. In other Western countries, fast—often instant—electronic payments have left checkbooks gathering dust, and most young people have never had one: in one survey, just 3% of British 18-to-24 year olds valued having a checkbook.
While the U.S. is abandoning the check more slowly than other wealthy countries, check use is declining. As recently as 2006, checks were still the dominant form of noncash payment, but credit and debit cards have since overtaken checks, with business-to consumer checks showing the steepest decline.
Even so, Americans wrote 18.3 billion checks in 2012, to the value of $26 trillion. U.S. businesses paid half their bills with checks in 2014, and consumer-to-consumer check use was actually steady through 2012.
Behind these trends is a complicated mix of factors that includes regulation, the nature of the U.S. banking industry, and the ways technology has both undermined and accommodated the paper check—as well as the human factor of habit and comfort. In our next two posts, we’ll explore what’s keeping Americans’ checkbooks open in an age where everything is on-demand.
1. Size and Fragmentation of the Banking Industry
One obstacle to simpler online payments is the sheer size and diversity of the U.S. banking system. In smaller markets, it’s easier for a handful of banks with large market share and national reach to introduce electronic payment standards.
In Canada, for example, debit card payments are dominated by a non-profit corporation called Interac, which was founded by Canada’s five biggest banks. The Big Five’s market power not only made Interac the de facto national standard, but created pressure on smaller institutions to adopt the technology.
Likewise, Australia’s four big banks, who hold more than three quarters of all deposits in Australia, co-own BPay, a system for electronic bill payments. BPay now covers 95% of the consumer banking market and is used by over 22,000 billers.
By contrast, varying State regulations long hindered the creation of truly national banks in the United States. There are still 6,420 commercial banks and savings institutions, many operating just in their home states or regions. While some U.S. institutions are decried as too big to fail, they’re small in relative size: despite huge growth, the five leading American banks held only 44% of all bank assets in December 2014—and that was an all-time high.
In such a fragmented market, the biggest American banks don’t have the same national reach or market power to impose standards among themselves as their counterparts in smaller countries.
They also don’t have the incentives. Economic research from the San Francisco Fed suggests there are ‘network externalities’ in electronic payment networks. Essentially, this means that when one bank joins a network, the network becomes more valuable because it has more users, which has spillover benefits to other potential users—just as a social network gets more useful when more users join. That’s good, of course, but it also means there’s not much incentive to be the first to jump in.
A bank, or group of banks, that have a lot of market power can capture more of the spillover benefits that come from having a comprehensive network, so they have an incentive to build it. That’s what seems to happen in countries like the UK, Australia, and Canada.
The lack of incentives to improve payment systems is a real problem, because the costs of upgrading existing systems are high, and banks have to pay for them upfront. Banks are understandably reluctant to make big investments when both the level of adoption and the returns are uncertain. That’s where regulators may need to get involved—a factor we’ll explore in our next post.
In the meantime, E-Complish can help you overcome the frustrations of checks and avoid delayed payments with our Direct Check and ACH Processor solutions.