The banking industry should think twice before dispensing with paper-based cheque payments, says Ian Benn, managing director, Emea payment services, Fidelity National Information Services.
With the Payments Council proposing to kill off the cheque (UK's Payments Council proposes end to cheques
), and many arguing that they are as good as dead already, it seems worthwhile to contemplate the joys and pains of the whole business before we quietly consign our chequebooks to the business scrapheap along with the inky ledger book and the VAT ready reckoner.
Cheques are not terribly fashionable amongst the cognoscenti of financial services. Paper-based, hand-crafted and defiantly non-digital, cheques lumber slowly through the banking process at a galleon’s pace and – being tangible – cost money to send, handle and process.
According to the Payments Council, in 2006, only 4 of every 100 payments made in the UK were by cheque (Apacs says 9% because they, rightly, do not include CHAPS payments in their statistics) - clearly we will hardly notice their absence. But wait… by value, cheques were the second most popular of all consumer payment types – behind only cash which is, let’s face it, the most ancient of all transaction types. And, according to Apacs, cheques are used for 44% of all business to business payments.
So what is it about cheques that make them attractive in the face of more modern alternatives? Well the cheque has the benefit of simplicity – anyone with a bank account can write a cheque, everyone understands how they work and everyone with a bank account can accept them. Try sending a birthday card to your auntie with a credit card number scribbled inside and an invitation to spend £20 on her favourite book with it! Cheques work for everyone; cards don’t.
From a business perspective, cheques are still the lubricant for Britain’s entrepreneurial machinery – those smaller businesses which collectively drive our economy.
For smaller businesses, cheques are a simple way to make and receive large payments without the need to enrol in acquiring schemes, access the web or have any other infrastructure in place. The traditional trades, much undervalued, run on cheques from end to end. The few days it takes between promising, writing and posting a cheque and the money leaving the business account provide life-giving cash-flow advantages to tens of thousands of businesses every single day. Who’s paying?
Interestingly, cheques may be perceived as expensive to process by the banking community, but for the user, they may be the cheapest form of payment there is. There is no interchange fee for a cheque, no terminal to rent and no PIN pads to be trained to use. In fact, cheques and cash are the only payment mechanisms where, other than paying-in charges, the processing cost is borne by the banking system, not the merchant.
So, if we move to an electronic payments economy, are we are increasing the cost of trade for everyone? The processing costs don’t go away, they just move to the merchant community and ultimately, back to us. Now objectively, cheques may cost more to process than credit or debit cards, but with a card, there are more parties involved – and each has a margin to make. For example, if I buy something with my bank-issued card, Mastercard or Visa makes a margin, the acquirer makes a margin, the acquirer’s sales partner (if there is one) makes a margin, the telecoms provider makes a margin, the terminal manufacturer makes a margin, the till roll people make a margin and so on. The price of efficiency
Physical documents will always cost more to process than electronic transactions, but is efficiency the only thing that matters?
I would argue that if it were, we wouldn’t have bank branches any more, only off-shore call centres, websites and IVR. According to Abbey’s November 07 research into customer behaviour, 93% of their customers still use the branch for banking, albeit increasingly infrequently. This represents a far higher percentage overall than any other channel (Internet came second at 84%, mobile banking just 8%). We may not use our branch very often, but overall, we can be relied upon to visit the branch more than we can to use any other channel.
So what brings all these people into their branch? Next time you are in your branch, take a look at the people in front of you in the queue. Chances are, the vast majority are there waiting to pay in one or more cheques.
As the retail banking industry continues to fight to turn its branches into places to engage with customers and drive sales, the most important thing it needs is traffic. It doesn’t matter how good the systems, the training or the brand – if people don’t come through the door, you can’t sell them anything. I suspect that if cheques stopped tomorrow, more than half the UK’s bank branches would be shut within a year. I wonder what that would mean to customer retention, cross-selling ratios, new business development and threats from new market entrants? Putting a value on that traffic is difficult, but it is certainly significant.The fourth estate
As an enthusiastic devourer of newspapers, I know that I am using a faintly preposterous tool for gathering knowledge about the world around me. I know that I can get more up to date information for free straight from the web. I know that using electronic media will give me a more detailed picture of events; will be vastly more environmentally friendly; will not leave me with hands that look as though I have just emerged from an open cast coal mine; will enable me to get a mix of views rather than risk having my world view subtly tinted by the prejudices of any single proprietor. And yet I’d take The Times over any web site.
Cheques are equally archaic and inefficient, yet they have an even more important place in our lives.
Abstinence may be good for the soul, but let’s think very carefully before we choose to give up the joy of cheques.