Much has been written in recent weeks about the USA's Check Clearing for the 21st Century Act (Check 21). Some have lauded the improvements it will bring to the US payments industry, and the Act certainly will make cheque processing more efficient. Few, however, have bothered to ask whether this goal is actually worth pursuing.
It must be recognised that Check 21 is a compromise that avoids making the hard decision to promote electronic payments and the cultural changes necessary to discourage usage of an outmoded payment instrument. As a result of Check 21, American banks and technology vendors are building new technological infrastructures to replicate a paper-based process. The creation of a new, duplicate infrastructure has some interesting parallels to Europe's journey towards a Single European Payments Area (SEPA). But, first let's get clear on what the Check 21 Act does.What does Check 21 change?
Until a few weeks ago, each US cheque was legally required to be physically exchanged for clearing. The Check 21 Act creates a new and legally binding payment instrument, a substitute cheque, which is an image of the front and back of a cheque. Check 21 does not establish a scheme for cheque truncation or specify clearing procedures or infrastructures. It does not abolish cheques, nor does it in itself encourage or discourage the use of cheques. Rather, it enables banks or merchants to unilaterally decide whether to scan their cheques for clearing. Other banks must be able to receive and process substitute cheques, but the law requires no more.American attitudes and behaviours
Europeans might view the US as the land of the credit card, but actually it's the land of the cheque. Americans wrote an estimated 40 billion cheques in 2002, according to BIS. This means that Americans write four times as many cheques as the rest of the world combined! They commonly write them at the point of sale, for regular bills, businesses pay each other and their employees with them, benefits and pensions are paid with them, and so on. While there were 40 billion cheque payments made in 2002, there were 18 billion credit card payments, 16 billion debit card payments and seven billion ACH payments.
But they don't just write them, they also get the cheques they have written given back to them! Some 85% of current accounts offer the service of returning original paid cheques back to the account holder. Imagine, 40 billion cheques not just being cleared but also sorted by account number and dropped in the post along with monthly account statements.Check 21 and the decline of the cheque
The American love affair with the cheque has even led to new ACH payment types being marketed as 'e-cheques', a term used by the American ACH association, Nacha, in its effort to encourage more widespread use of the ACH. E-cheque transactions reached 23% of US ACH volume in Q3 2004 and Nacha predicts that there will be one billion e-cheques this year.
Consumers and businesses have been migrating toward electronic payment alternatives in the United States for a long time, and cheque volume has been falling by about three per cent annually since the late 90s. Dove Consulting has argued that Check 21 will cause cheque volumes to decrease for two self-reinforcing reasons:
Investments in image-based cheque clearing
- Check 21 will shorten clearing cycles and cheque writers will lose the float advantage that they have enjoyed. Banks are also likely to continue charging for bounced cheques. These issues make cheques less advantageous and more costly than electronic alternatives.
- As cheque volumes drop, the unit cost for processing cheque images will rise. Banks may raise prices for cheque payments as a result, further depressing demand for them as a payment product.
Check 21 is encouraging the creation of new infrastructures that duplicate existing ones that are already best of class. The sheer volume of cheques in the US could not be handled immediately by ACHs, but neither can existing cheque image clearing infrastructures. It is disappointing that so many providers, such as Endpoint, the Federal Reserve Banks, Fiserv, NetDeposit and SVPCo, are investing heavily in cheque image clearing networks. It is equally disappointing that no one seems alarmed that there is duplication of ACH infrastructures just to be able to see images of cheques on the other side. In essence, through Check 21 a cheque becomes like a one-time ACH direct debit, but it will be cleared and settled through cheque clearing channels. Surely it would be more effective to invest in an ACH infrastructure that would outlive the demise of the cheque? A European perspective
In Europe, we have long since given up on improving the infrastructure for clearing physical cheques. In most countries, mandatory truncation has been taking place, for a long time, at least for low-value cheques and for good reason. In this day and age, passing paper around a clearing system is anachronistic. Passing around images of paper is even worse! America has missed a rare opportunity to modernise its payments infrastructure. The Check 21 Act recognises customer behaviours and does not pretend they will change massively overnight. However it does not even encourage migration toward more efficient payment types.
What is more, America does not plan to use existing electronic infrastructures to clear cheque images and it is this that has echoes of Sepa (Single European Payments Area) because we are on the verge of making the same mistake in Europe.
Present efforts around achieving Sepa are focused on building a new infrastructure for pan-European payments, leaving the experience and skills of existing national ACHs behind. Europe's existing electronic clearing infrastructures are robust, flexible, scalable and mature. To replace them is as unnecessary as creating a wholly new infrastructure for clearing cheque images.
In contrast, the successful linkage of national ACHs would respect the diversity of payments preferences around Europe and enable market forces to deliver to consumers the best and most efficient services. Just as payment preferences in the US and Europe differ from one another, countries within Europe prefer different types of payments. If we can learn the lessons Check 21 has for shaping the payments market and reflect these in Sepa, Europe has the opportunity in the next few years to maintain its lead over the United States in this critical piece of our economic infrastructure.