US cheque dependency: How we got here

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US cheque dependency: How we got here

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Why does the US lead the world in the use of paper cheques? And why haven’t these traditional payment instruments simply ‘gone away’ given all the tremendous advances that have been forged in the financial services ecosystem, especially over the past 20 years or so? In many countries, they simply don’t exist at all, and in some, financial institutions and/or regulators have taken strong stands to advocate their elimination, such as Bank First in Australia. But we’re talking here about banking expectations and practices in the USA, and that’s a different matter.

The answers to these questions about US cheque usage really describe a tale of two customer types: consumers and businesses. But it’s also an old story, one that’s been talked and talked and argued about in American society and even abroad since at least the 1980’s. These arguments have pitted cheque-adherents’ values of perceived control and deposit timing, even pride, against modern movements and electronic conversion campaigns emphasising advantages in speed, efficiency, and decreased expense.

Yet, even these debates don’t fully explain why the use of cheques to pay for all sorts of things in a variety of transactions still persists in a highly-evolved financial system sporting the world’s most traded currency.

How do US outsider think about all the cheques?

American bankers get asked “Why all these cheques?” all the time, especially by their cross-border customers doing business or unfamiliar with local practices and seeking to expand into the US marketplace. While it’s true that there are other countries where cheque payments still play a major role in financial systems, the number is dwindling.

Non-US based companies and their leaders, eager to conduct commerce efficiently in one of the most prosperous and technologically advanced countries in the world, look at the usage (even required in some cases) of cheques in the US and scratch their heads at why paper instruments still play such a major role in financial clearing systems like those maintained by the Federal Reserve:

  • US outsiders ponder why even lower cost, electronic alternatives like ACH transactions, focused on traditionally “lower value” (though mostly not limited now) payments haven’t driven cheques completely out of existence. (For the record, US ACH payments exceeded cheques in total value beginning in 2009, according to the Federal Reserve.)
  • They question why most payments other than the very most critical and time-sensitive don’t just move through NACHA rails – or via the National Automated Clearing House Association, which governs ACH payments. These transactions are now executed as soon as the same business day for a fraction of the true cost of issuing and processing payments via cheque. Interestingly, cheque issuance costs have steadily risen based on numerous industry studies – and that doesn’t even account for the fraud risks cheques bring, which at about 65% of the total of all fraud incidents are highest among all payment types every year and again in 2023, according to the Association for Financial Professionals’ (AFP) annual Payments Fraud and Control Survey of more than 500 treasury practitioners.
  • They can’t understand why cheques are still customarily issued – at least some of the time - in a number of higher-value use cases in place of even the vaunted instant, more expensive, yet much more secure, and mostly irrevocable wire transfer.
  • They wonder why there has not been much faster adoption among US businesses of the growing Real Time Payments channels offered by industry consortium The Clearing House (TCH) and its Federal Reserve competitor FedNow.

What’s really behind the enigma of continued cheque usage in America?
Is there any likelihood of cheques completely disappearing from the US marketplace, anytime soon?

The answer to headline above is: It’s complicated. And the answer to the second question is: Not quite yet.

There’s lots of formal and informal research on why cheques persist, principally now for business usage, and especially in certain industry sectors and even more specifically where small business payments are concerned. It’s most helpful to dig deeper into the “why” and “who” questions surrounding continued insistence on cheque usage, especially by businesses, once the “what” – meaning the scope of usage and statistics for volumes and values - are evaluated from the present to the past.

First of all, recent trends show a dramatic decrease in both categories since cheque usage peaked – probably in the late 20th century - but they don’t answer just why certain segments of society use more cheques to make payments, large and small, than others. The Washington Post explored this topic in late 2023 and found some fascinating demographic details surrounding American cheque writing from the government statistics and studies it researched, and the AFP’s fraud studies cited above have shared ongoing figures on cheque issuance by corporate entities, including finance professionals’ rationale for their continued usage, for 20 years now.  

Fast facts: Cheques are decreasing markedly in usage since 2021 and declined at an annual rate of 7.2 percent per year from 2015 to 2018. This downward trend has accelerated in recent years. Consumer usage of cheques in 2018 was only 5% of the US total for all transactions in that general demographic, and continues to drop much faster than in the business sector. Increasingly over the past five years, the lion’s share of the value of cheques written in the country is by businesses from small to large, including even many that are huge in size and multinational in reach.

Why haven’t business and banks eliminated cheques?

If we focus on the commercial sector, according to the Federal Reserve Bank’s Atlanta branch, which issues a report on this topic every calendar quarter, business cheque volumes have decreased almost 82% from 2000-2023 (up to the last full year available for comparison). Meanwhile, over the same period, commercial cheque values in aggregate have dropped by just under 40%

In case you’re interested, of the 45 billion cheques written by both US consumers and businesses in 2000, almost 17 billion, or 38% of the total, were issued by businesses. That same year, cheques written by those businesses were worth almost $19 trillion in value, vs. 3.1 billion cheques valued at $8.5 trillion issued by US business entities in 2023.

Why hasn’t overall commercially-issued cheque value dropped as much as volume? One answer might be that inflation, according to official sources, has lowered the buying power of the US dollar by about 46% during that same 23 years – meaning about $1.81 in late 2023 buy you today what $1 would have bought you at the beginning of the new millennium.

Other factors also come into play, like amounts per cheque increasing because of very specific high-value use cases for the remaining cheques written. However, it’s clear to see that there has been a drastic drop in cheques issued (and their inflation-adjusted total value) over the past (nearly) quarter-century.

The current percentages, according to the same Atlanta Fed report, show only about 4-5% of all US non-cash payments in their most recent full study are made by cheque. So, does this mean we’ll be talking about zero cheque issuance soon in the US?

The answer is: It’s not quite that simple, nor is change expected overnight. But we’ll talk more about the ‘why’s and ‘how’s and what needs to be done to change the US business community’s predilection for issuing cheques in the next chapter of this story, coming soon in Finextra.

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