ARE CHECKS STILL A THING? (PART 2)
In our previous post, we explored one of the main reasons Americans still write checks, despite other Western countries turning to electronic payment. We showed how the complexity of the banking system is an obstacle to more efficient payments. In this post, we explain how regulatory complexity, technology, and consumer preferences all play a part in keeping checkbooks open.
2. Complex Regulation
In countries where banking is primarily a national issue, central banks and regulators have more scope to impose or encourage standards for the payments industry. In Australia the Reserve Bank is a member of a self-regulatory body that works to improve payment systems. As of April 1, the United Kingdom has a powerful, specialized regulator called the Payment Systems Regulator. And in 2014, the European Union introduced the Single Euro Payments Area, which allows consumers to use one bank account for euro-denominated transfers anywhere in Europe.
In the U.S., bank regulation is incredibly complex. State-chartered banks are regulated at State level, and have one of several Federal regulators. Federally-chartered banks may be regulated by the Federal Reserve, the FDIC, or the OCC (and bigger banking groups have multiple regulators). While the Federal Reserve is aware that payment systems must improve, it lacks the leverage of other regulators to push for change. And any new system must ensure it complies with a patchwork of regulation across fifty states.
3. Improved Check Technology
Another reason for checks’ survival is that checks themselves have adapted with technology. In particular, the old paper processing system for checks has almost completely disappeared.
Prior to 2004, the U.S. Commercial Code required U.S. checks to be physically presented at the banks where they were drawn on for payment. That required billions of dollars worth of paper checks to be physically trucked and flown around the country every day. After the attacks of September 11, 2001 threw this system into chaos, Congress allowed banks to accept electronic images of checks as payment for the first time.
Today, physical presentation of checks is almost non-existent, and almost all checks are cleared by electronic image processing or Automated Clearing House (ACH) payments. In addition, in 2012, one in six checks were deposited as electronic images.
As Mark Dragiff points out at Finextra, however, there’s a certain irony to all this: “the payment data begins life in an electronic format, is converted to paper for transport and then is reconstituted in an electronic format upon receipt.”
4. Business Comfort
The final big reason for the lack of change is business. While consumers have move towards electronic payments for convenience, businesses are more comfortable with what they know, and often see risk in changing their systems. For some smaller businesses, the knowledge that checks probably won’t be deposited right away is a boost to cash management.
In future, barriers to more efficient electronic systems will eventually be overcome, but checks will continue to be an important payment mechanism for some time.
One area where checks may decline faster is in the consumer to consumer space, as peer-to-peer payment apps gain traction.
As long as checks are still with us, E-Complish can make processing them easier, cutting back on late payments and ‘checks in the mail’. Check out our Direct Check and ACH Processor solutions, or schedule a demo.