Is Time Up For the Paper Check?

By: David Lacey, Marketing Manager with Orchid Systems

If paper checks were eliminated today, would your business be ready? If you think that’s a hypothetical question, the odds are you are in denial, in North America, or perhaps both! The paper check has a long history, but global trends suggest it may well be going the way of the dodo.

Checks seem so deeply embedded in the financial systems of the US and Canada that it could be hard to imagine life without them. You don’t need to look too hard, however, to find evidence that doing without them, or even doing away with them, is happening all around us.

Checking in (and out) Around the Globe

In many countries, checks have become increasingly marginalized as a payment method, or have been completely phased out. Let’s look at some examples.

• With a few exceptions, notably France & the UK, Europe has been at the leading edge of check elimination. Finland was well ahead of the game, farewelling them in 1993, followed by Poland in 2006, Denmark in 2017, and The Netherlands in 2021.
• I was surprised to learn that South Africa formally retired checks at the end of 2020. A key part of their strategy was to gradually reduce the maximum permitted value of checks, making the final step of elimination much less painful.

Closer to Orchid’s home in Oceania, the direction of travel is very clear, even in countries where the check was king for most of the 20th century. The New Zealand check-clearing system was decommissioned in August 2021, and the Reserve Bank of Fiji recently announced plans to begin a phase-out in 2024.

Here in Australia, our Reserve Bank is yet to set a date, but has started the conversation as a response to dramatic changes in the ways Australians choose to transact:

• Personal check use is now virtually non-existent, with what remains being almost exclusively the domain of the over-65 cohort.
• The value of check payments has dropped by over 95% in the past 30 years.
• The COVID pandemic triggered a further 40% decline as people rushed towards contactless, paperless payment methods, and there doesn’t appear to be any rush back.

What about the US?

With check payment volumes still measured in the billions, it’s easy to think that the US is marching to the beat of a different drum, and the paper check will be around forever. A closer look at the trend tells a rather different story. This 2019 Federal Reserve Payments Study shows that, while the volumes are still huge by international standards, the trend is clear:

• Between 2000 and 2018, the volume of check payments dropped from 42.6 billion to 14.5 billion (a 66% reduction).
• 2018 marked a tipping point, with the volume of Automated Clearing House electronic payments exceeding that of check payments for the first time.

This CPA Practice Advisor article from 2017 provided some very interesting insights about the US experience:

• Before 9/11/2001, huge volumes of paper checks, representing about $6 billion in payments, were being flown to clearing houses around the US each day.
• Technology for same-day electronic check clearances had been around for decades but was stalled due to outdated legislation requiring checks to be physically presented.
• The grounding of domestic flights after the 9/11 attacks created havoc with check processing, and huge impacts on both businesses and consumers.
• This triggered the Fed to progress the “Check 21 Act”, eventually adopted in 2004, which enabled electronic clearance using of digital images of checks.

The resulting efficiency dividend, with substantially faster collection times and reduced processing costs, opened many eyes to the benefits of electronic payments.

And how about Canada?

The numbers are smaller, but the trend is remarkably similar to the US, as illustrated by Payment Canada’s Canadian Payment Methods and Trends Report 2022. Some relevant points it made:

• Check payment volumes have fallen by 49% over the past 5 years, and 66% over the past 10 years (see table below).
• They now make up only 2% of payments by volume.
• They still make up 30% by value, largely due to the perceived need for certified checks when purchasing properties.
• Check usage is also tied to generational differences, with many (but far from all) older people preferring paper due to familiarity.

Many mid-market businesses have already switched from checks to EFT (Electronic Funds Transfer) payments to cover business expenses such as payroll, rent, and government payments.

Time to say goodbye to the paper check?

As the examples above illustrate, banks, businesses, and consumers are voting with their feet when it comes to the paper check. In many countries, the last check has already left the building. Let’s put the check on trial, and make closing arguments for and against an exit.

The Case for Caution

Getting rid of the check completely is clearly possible where alternatives are well-established and widely accessible. It gets much harder when the use of checks is firmly embedded, particularly for the “last 10%” where a transition to electronic payments is problematic. Examples of challenging use cases include payments to a recipient:

• Whose physical address is known, but not their bank account
• Who doesn’t have a bank account
• Who is not digitally engaged (e.g. elderly, disadvantaged)
• Who lives in a remote location with poor (or no) internet coverage

This UK Case Study provides a cautionary tale:

• In 2010 the UK Payments Council, representing the interests of financial institutions, announced their intention to phase out checks by late 2018, arguing they were in terminal decline.
• Following protests from charities, small businesses, and older people, they were forced into a humiliating backdown, announcing in 2011 that “checks will remain for as long as customers need them”.
• A Treasury Select Committee described the matter as a debacle, and the Council was disbanded in 2015.

The Case for Exiting Checks

The Payment Canada report referred to above put it quite succinctly, saying “Individuals and businesses replaced checks with digital payments…because of perceived convenience, speed, security, and cost.”

In South Africa, drivers also included an unwillingness to invest in aging interbank check processing infrastructure given the rapidly declining use of checks.

A more philosophical objection is that checks represent a fundamentally inefficient method for transferring funds. I like Wikipedia’s explanation of why this is so. To paraphrase it:

• The writer of a check is pushing on a rope – they cannot force money out of their account and into the destination account.
• They are handing the far end of the rope to the payee, who will pull on it in their own good time.
• By contrast, with EFT (as with European giro systems and other wire transfers), the payer pushes their money away, toward the payee.

EFT Processing for Sage 300

While the life of the paper check may have some way to run in the US and Canada, small and medium-sized businesses have been taking matters into their own hands for years. The benefits of replacing paper checks with EFT are clear, particularly where most payments are business-to-business, or to employees, and the impediments listed in the Case for Caution above tend not to be an issue.

EFT Processing, the leading Sage 300 add-on from Orchid Systems, has helped over 5000 businesses make this transition. Fully integrated with Sage 300 Accounts Payable processing, it creates EFT files in the format required by your bank. 800+ bank formats are already supported, with new ones created on request.