US cheque dependency: Time for a change

The US leads the way in cheque usage among most countries across the globe, with about 11 billion items issued according to the most recent in-depth study available (2021). That’s a dubious honour, to be sure, though that annual item number has continued to drop over the past three years. Only France got anywhere close to the US in terms of per capita cheque usage in that 2021 study, and then only about half the figure of 30 cheques per capita during that year.

Another report from the Atlanta branch of the Federal Reserve Bank using 2021 data shows that “two-thirds of cheques by number and three-quarters by value were paid to businesses,” and another report from its parent explains that cheques still represented more than $27 trillion in value that year, or 21% of total noncash payments value in the US, so it’s clear that cheques, even as they decrease in both volume and value overall, are still important to the US economic system.

In our first story on this topic, we discussed statistics on cheque usage in the US over the past quarter-century. We also addressed some of the many questions from industry observers and internal and external customers of the US financial systems surrounding why these instruments still command a still significant, though steadily declining share of the commercial transaction volumes in the country.

Cheques and present financial inclusion challenges

As the annual AFP fraud survey and other sources have pointed out for years now, cheques are slower for businesses to issue and process, cost more, especially when all factors involved in their issuance and clearing are considered, are historically and even now much more prone to fraud and crime, and they’re also more environmentally damaging (paper requires trees) than other payment types. Furthermore, in light of efforts to improve the efficiency and speed of payments and receivables processes for both consumers and business, cheques – except in the case of simple, one-off payments with minimal invoice detail required – stand as a stubborn obstacle to digital transformation, and an impediment to automated or at least faster and better reconcilement of financial transactions at every level.

As the Washington Post points out, cheque usage in the US – at least on the consumer side – is also curiously divided according to race or culture. Wealthy and white individuals are much more likely to use cheques, regardless of age bracket, though it’s common knowledge that those older than 30 or 40 use cheques much more often than anyone else. But the race differences point to another issue that cheque usage raises, and that’s the fact that financial inclusiveness, or not, plays a part.

More white people, even if skewed towards older individuals versus the younger generation, use cheques now on a percentage basis than any other race by a substantial margin. This likely indicates their comfortability with cheques as a payment mechanism and greater access to accounts at financial institutions that allow them to do so. So, if we truly want to open up the financial system to more participants of lower income and traditionally excluded segments of society, getting rid of cheques as a means of payment probably won’t harm the effort.

Helping speed commerce in the US, encourage efficiencies and growth

Where the US business community’s continued usage of cheques really hurts, however, is in the message it sends to the country’s global commerce partners. It signals that the US isn’t quite open or ready for ‘prime time’ when it comes to international expansion and the opportunities advances in cross-border commerce can bring to societies and clearing systems eager to jump onboard with common standards and practices.

This is especially true when it comes to electronic payments made using the fastest, most secure, least expensive, and most robust channels in terms of information exchange possibilities. In this regard, we could be talking about new ISO 20022 standards that promise to normalise payments domestically and even across currencies. Most importantly for businesses, they will allow for incorporation of remittance details in the same transaction as the payment to aid reconcilement for business invoices.

Providing a common language and syntax to ensure money always travels with the data that explains its source and reason for being sent, facilitating its proper application to accounting ledgers – whether payables or receivables ­– is critically important to advance the speed and effectiveness of transactions. It could also help to build healthier, more equitable, and more resilient business relationships down the road.

Many don’t realise that what some businesses take for granted – that even complicated multi-purchase invoice details can be matched relatively quickly and easily to payments made by customers. This is often only true because of elaborate arrangements, outside of the bounds of the payments themselves, to send and share this data using complex and often expensive bank or third party-provided remittance information channels and networks. So, under ISO 20022, what was previously the province only of the wealthy or well-connected larger businesses and their trading partners can now be available to all in a universally understood, common language and practice. Especially given the expansion of the use of APIs (application programming interfaces) within the financial services industry and its customers, providing more and more openly published and shared avenues to information exchange and integration. But they have to want to do it.

The most common purposes for issuing US consumer and business cheques

Utilities, rent, charitable donations, taxes and fees, gifts, and building contractors still get paid via cheque more than most other consumer obligations or transaction categories. But cheques represent just a shadow of the consumer payments marketplace versus their share of the pie even 15 years ago.

It’s possible that consumers don’t really care like businesses do about new remittance exchange developments. As their habits have shown, they are typically paying bills or making limited purchases, and in most cases, they just want their payments to be fast and efficient, and to happen when they plan them.

That’s probably why most US consumers, according to the Fed studies cited, don’t use cheques at all anymore. Instead, they increasingly favour electronic methods, mostly ACH and card payments, whether debit or credit transactions, except for in very limited circumstances and often for specific, usually higher-value transactions.

Real time payments have become increasingly popular in the consumer sector as well, thus Zelle, CashApp, Venmo, and PayPal (which owns Venmo) continue to grow in transaction volume and value each year, especially among younger consumer age groups in the US. Despite all these reasons and advantages for electronic payments, cheques persist and are still used for certain applications.

For businesses, the most common cheque applications, and in fact consistently and persistently much higher in both number and value than for consumers, include payments for vendors in general, rent, payroll – especially to temporary workers, schools, tax remittances, insurance premiums, professional services, construction and contractors, refunds & rebates, charitable donations, and dividends. Some businesses also use cheques to pay for large equipment purchases or real estate transactions – the latter also an area where there is continued consumer usage of cheques, though this application has been decreasing in recent years with wider adoption of wire transfers to fund property purchases.

Given that payments in most  of these categories can now clearly be managed and processed very securely and effectively through electronic means, what’s keeping those pesky cheques in use among American businesses?

Why some businesses say cheques should stay around 

Here's a brief list – in no particular order – of some of the reasons (and counterpoints, as they often apply) why US company finance managers say they prefer to keep issuing cheque payments instead of processing transactions electronically. They may not be completely realistic, and they may be strongly subject to bias or signalling unique or outdated perspectives, but they do exist:

1. No need for the receiving party to provide account information to get paid. Only the address is needed, and a cheque can be machine or hand-printed, hand-delivered, mailed, or couriered to the payee. (True, but an ongoing and strong relationship could surely support and warrant the exchange of account details between parties).
2. Cheques may be deposited without fees at the payee’s bank, unlike electronic payments (yet this is often not the case, as there are often explicit or even ‘hidden’ fees for deposited items, the latter in cases of bundled, no-interest accounts or where only partial compensation is given to balances held to offset transaction fees.)
3. Payments often get converted to cheques by online bill payment processors anyway – when the bank or processor doesn’t have data on the account number used by the receiver and must instead send a cheque on behalf of the paying company. (This is still true, though becoming less so as company account databases expand and credit and debit transactions grow in frequency.)
4. Cheques “just work”, they’re “proven,” and they provide a “paper trail” that’s easy to follow for reconciliation and in cases of fraud, loss, or dispute (It’s true that a two-part cheque image and voucher panel is common for business cheques in the US – and banks and clearing systems accommodate this, even for online reporting and verification purposes, but again, it’s not truly free as described re: fees charged or bundled/paid via compensating balances above)
5. In some applications, credit to the payee’s account (usually by governmental and some private entities) based on the date postmarked on an envelope, but debits of the amount paid come later due to slow back-end processing by the receiving party or their bank. This means mailing a cheque might provide one or several days’ more float on funds in the payor’s account than electronic transfers, which are debited immediately, or within one day at most.
6. Security versus cash payments. The cheque, once signed, perhaps by two company authorities, computer-issued, securely mailed and later paid through automated lockbox scanning and application of funds to the proper account by the payee company (with an image available to validate its authenticity from the bank) provides a tangible, signed, secure, self-documenting transaction, which is certainly better than paying cash. (However, this benefit is the same with most multifactor authenticated or dual-authorised electronic transactions, and the information available to match the payment amount is usually much more complete than can be included in a single cheque voucher, especially more complex payments with multiple invoices referenced to one amount. ISO 20022 adoption should dramatically increase the depth and breadth of remittance details available to accompany electronic payments in the future )
7. Image and marketing. Most business cheques provide the capability for a business to incorporate a company logo and/or name on the face of its cheques. When payments are made (especially if on time, according to agreement with the payee business) this easy recognition of the payee’s brand and image can help strengthen relationships and sometimes improve future payment terms.

Pushing cheques over the edge to improve US commerce and business payment efficiency

Can these reasons and justifications be overcome? Certainly, most can, and in the past several years, there have been major strides in efforts to convert persistent cheque issuers among the US business community to electronic methods and channels. That said, neither the Federal Reserve, nor any other authority or company involved in almost constant campaigns over the past 50 years to convert cheque issuers to electronic payments will say that the end is coming soon for cheques in America.

Old habits are very hard to break, though cheques continue to incur the highest levels of fraud of any payment method. This is exacerbated by the fact that most cheques are sent to payees via mail and the US Postal Service has been especially hard-hit in recent years by theft of cheques directly from corporate and community mailboxes.

It’s possible that the time is drawing near when the costs of printing, securely storing, issuing, mailing, and processing cheques – not to mention dealing with risks of lost, stolen, or altered items – will just become too high for companies to bear versus faster and more secure current and emerging alternatives available.  For the continued expansion of the efficiencies and access to global ecommerce – and to ensure the US’s continued competitiveness in international business – most industry observers would say that day can’t come too soon!