Christine J. Jenkins, Senior Vice President, Wells Fargo Global Payment Services
Since their adoption in the mid-20th century, checks have been a cheap, easy, and relatively fast way for consumers and businesses to make payments. While the use of checks in business-to-business payments has declined in the past 10 years, 51 percent of B2B payments are still made by check.1
When compared to international standards, however, progress toward the extinction of checks has been insignificant. The U.S. lags other countries where checks are far more infrequent and, in some cases, nonexistent. In 2012, American businesses and consumers wrote 21 billion checks — more than four times as many as were written in the European Union’s 28 member-countries combined that year. Our international partners in many of the countries that have migrated away from checks toward alternative payment methods wonder whether the U.S. will ever stop using paper checks altogether.
A dramatic abandonment of the check is unlikely to occur in the foreseeable future because checks are intrinsic to the behavior of U.S. consumers, businesses, and government entities.
While U.S. consumers are driving a trend toward debit, credit, and electronic payment methods, checks are still preferred for making large payments for expenses like rent and payroll. Meanwhile, U.S. companies are finding ways to introduce alternatives into their business processes, but they are still paying about half of their invoices and bills with checks.2 U.S. companies will continue to resist the shift away from checks because there are powerful incentives for them to continue using them.
Why do companies still use checks?
While some companies find that electronic payments allow for better control, predictability, and visibility across accounts, businesses trust checks because of their predictability. Many companies have structured their entire treasury management infrastructure and operating policies — to pay invoices and match transactions — around checks. As financial institutions know through their own experience, changing legacy infrastructure and behavior takes time as well as an external catalyst, such as regulatory action or a game-changing market event.
Checks also provide the corporate treasury manager with advantages. Checks can contain more information than electronic payments, which allows companies to easily match payments with goods sold. An invoice can be attached to a check, whereas invoice details are not always included via wire transfers or automated clearing house (ACH) transactions.
Additionally, check processing timelines create a liquidity advantage. While the time it takes to send and process a paper check has declined as electronic check collection has become the primary method of collecting checks, checks still require more time than electronic payment alternatives. This may seem like a disadvantage, but companies can benefit from the additional time it takes to deliver a check by mail and complete the authentication process. Companies gain days of liquidity as the check travels through the mail and can benefit from interest on those invested funds.
Aside from the incentives companies have to continue using checks, there are few reasons U.S.-based companies would stop using checks in favor of alternatives. Issues like fraud, perceived safety, and cost have not provided the momentum needed to shift companies and consumers away from checks entirely.
Even as their overall use declines, checks are still the payment type most susceptible to fraud, according to a 2015 Association for Financial Professionals (AFP) survey. The same survey found that 77% of organizations affected by payments fraud in 2014 said that checks were targeted.3
But, will security concerns around checks cause consumers to stop using them altogether when impostor fraud and new electronic fraud schemes emerge?
It’s important to remember that checks are not the only instrument that is subject to fraud. In the wake of recent high-profile data breaches in the retail sector, for example, consumers are likely to ask themselves whether they consider credit or debit cards to be safe. They may seek alternative payment methods.
In the future, new payment methods will progressively replace the use of checks in the U.S., making international payments easier. Although existing initiatives to increase security and end-to-end payment speed have opened a dialogue about global payment system improvements, checks will persist in the U.S. until the behavior of check users shifts and security is enhanced in electronic payment methods. A paradigm shift away from checks to alternative payment methods is beyond the reach of the Federal Reserve, so global financial institutions should be prepared to see checks continue to comprise a portion of payments into the future.
1 Association of Financial Professionals. “2016 AFP Electronic Payments Report.” 20 September 2016.
2 Monga, Vipal. “U.S. companies cling to writing paper checks.” Wall Street Journal. 10 March 2014.
3 Association for Financial Professionals. “2015 AFP Payments Fraud and Control Survey.” March 2015.