CHECK IS KING, BUT FOR HOW MUCH LONGER?
Analysts And Insiders Disagree On Payment Trends
June 5, 1998
ITEM PROCESSING REPORT -- How long will paper checks
reign?
Banking analysts and consultants have diverging
opinions on whether electronic banking will curtail the
dominance of paper checks in the near future. There is
also some disagreement about whether banks will
encourage a massive transition to electronic payment
methods.
The number of checks used in the American economy is
growing at a 2 percent annual rate, according to Mary
Donadoni, managing director of Millersville, Md.-based
PSI Global. By the end of this decade, however, check
writing will level off, Donadoni predicts. Shortly
thereafter, the use of paper checks will begin to steadily
decline, she says.
"Twenty years from now, checks could account for only
50 percent" of U.S. non-cash payments, Donadoni
forecasts.
Various forms of electronic banking will combine to
dethrone the check from its position as king of U.S.
payments, Donadoni says. The increasing popularity of
debit cards, the automated clearing house (ACH)
payment system and online banking will result in a
significant drop-off in check writing, she adds.
Donadoni predicts these systems will gain more users as
Americans become comfortable with the technologies
and learn to appreciate the enhanced convenience they
offer. In fact, Donadoni says she foresees the day when
paper checks will not be used at all.
Not So Fast
Alan Lipis, CEO of Global Concepts, a payment systems
consultancy based in Norcross, Ga., takes issue with
some of Donadoni's predictions.
He does not believe usage of electronic payment
systems will grow quickly enough to create a substantial
reduction in paper checks anytime soon. The largest
electronic payment method, the ACH payment system,
only handled $4 billion worth of funds transfers last
year, as compared to $64 billion transferred by personal
checks in 1997, Lipis says.
Even if ACH transactions increase by 300 percent over
the next decade, they still will make up a relatively small
percentage of non- cash payments, Lipis says.
The same is true of other technologies, such as debit
cards and online banking. Lipis estimates that online
banking transactions totaled approximately $70 million
last year.
The rapidly expanding economy also will prevent a
decrease in the number of paper checks, the CEO adds.
'Incredibly Arrogant' Predictions
Lipis doesn't buy Donadoni's assertion that paper
checks may constitute only half of non-cash payments
by the year 2018.
"It's incredibly arrogant to speculate about what's going
to happen 20 years from now," he says. "You really can't
make predictions about what will happen so far in
advance."
David Medeiros, director of research at the Newton,
Mass.-based Tower Group, also sees paper checks
dominating for a while. In fact, he says that check
writing will continue to increase over the next five years.
"The new payment technologies - such as ATMs, debit
cards, EDI, electronic benefits transfer and virtual and
cybercash - will serve to limit the growth of checks over
the next five years to 2 to 3 percent," Medeiros says.
He adds that an expansion in the total number of bills
due to the proliferation of new services such as cable
television will enable new payment technologies and
paper checks to increase simultaneously. Although
Medeiros was reluctant to speculate on the future of
paper checks beyond the year 2003, he did say a gradual
reduction in the use of checks might begin in five to 10
years.
Don Mullineaux, a professor of banking and financial
services at the University of Kentucky in Lexington,
predicts check volume will level off within the next three
to five years. He forecasts a subsequent decline in
check writing as more individuals and businesses begin
to use electronic banking.
He also believes banks will accelerate the adoption of
electronic banking by eliminating the monthly fees
usually associated with electronic bill payment.
At least one industry insider predicts banks may not
seek to replace paper checks with various electronic
banking instruments. Lipis says he is encouraging
banks to resist any transition away from checks.
Ultimately, he says, banks will realize that the check
payment system is more profitable than electronic
banking alternatives.
Banks Hold A Monopoly
With the current check-dominated system, Lipis says,
banks enjoy a monopoly. If electronic banking is
implemented on a large scale, non-banks - including
computer software companies, insurance companies and
brokerage houses - may be able to compete with banks.
"Everybody will want to play the electronic banking
game," Lipis says.
Donadoni agrees banks will have to consider
competitive issues before trying to replace checks. Like
Lipis, she believes that non- banks may take the
opportunity to compete with banks in the electronic
banking arena.
Mullineaux and Medeiros disagree, saying that software
companies and others won't try to enter the electronic
banking industry.
"Going into banking probably wouldn't be as profitable
for other companies as expanding in their core
businesses, so we're not going to see competition from
non-banks," Mullineaux says.
Another disadvantage of eliminating checks is the loss
of revenue from overdraft fees and float that will result.
"Banks stand to lose billions of dollars of revenue if
electronic payment replaces checks," Lipis says.
Medeiros counters by claiming that, overall, banks lose
money on the current paper check payment system.
Even with the revenue they accrue from fees and float,
the paper check system costs banks $4 billion every
year, he says.
Mullineaux, Medeiros and Donadoni all believe that
encouraging customers to switch to electronic payment
systems will save banks a great deal of money, at least
in the long term.
Donadoni says banks will enjoy reduced shipping,
handling and labor costs if they begin to reduce their
check-processing infrastructure as more customers make
the transition to electronic banking services. Banks also
will be able to reduce the number of tellers they hire and
close branches as the number of paper checks that must
be processed drops, Donadoni adds.
However, the analyst admits that implementing
electronic banking services on a large scale will require
banks to make sizable initial investments as components
of the new payment systems are built and installed, or
outsourced to third-party service providers.
Shattering The Myth
Lipis, by contrast, doesn't believe that encouraging
customers to use electronic payment systems will help
the banks realize substantial profits or savings anytime
soon. He said that checks, contrary to what several
economists have reported, only cost banks about 4
cents each to process. He questions whether the
electronic payment systems would be more efficient.
"I've never seen any proof of this concept that
electronic systems are somehow more efficient than
paper," he says. "It's a myth."
Lipis also points out that new technologies have often
been loss leaders for many years before becoming
profitable.
"The credit card was out 15 years before people figured
out how to make it profitable, ATM was a money loser
for 10 years and home banking has been a loser for 20
years," he says.
Bankers don't know what to expect if the newer payment
systems are implemented on a large scale, while paper
checks are stable and secure, he adds. (Mary Donadoni,
PSI Global, 410/987-4728; Allen Lipis, Global Concepts,
770/300-9400; David Medeiros, Tower Group,
617/965-9090; Don Mullineaux, University of Kentucky,
606/257-2890. |
