Banks both in the US and the UK are keen to drastically reduce the usage of cheques to save costs for themselves and for their business customers. Cheques are physical valuables that need to be ordered, received, stored, retrieved, written, sent, recorded, sent away for clearing and reconciled with bank statements. Consumers and very small companies can deal with these activities at low cost because of the relatively low volumes. For large companies, however, the processing of cheques and maintaining solid controls around them can become quite costly. Banks are faced with the need to deliver on cheques ordered, avoid duplications, manage delivery failures, receive cheques for clearing, scan them and store them long term, and manage errors in collections often caused by customers.
In the UK, it is estimated that cheque processing costs banks about £1 per cheque, while the processing cost of credit transfers and direct debits is measured in pennies. It can be expected that the situation in the US is not very different. No wonder that the replacement of cheques with electronic payment (e-payment) mechanisms is receiving due attention by banks, who are all focused on reducing costs in their payments business.
Cheques in Decline, but Persistently Used by Businesses
Banks in the US, as well the UK, observe that business-to-business (B2B) cheques are declining, but not as rapidly as consumer cheques. Furthermore, there is persistency of usage. A study by the UK Payment Council in 2010 found that:
- More than half (56%) of consumers had used a cheque within the last year, either to make or receive a payment.
- More than eight out of 10 (85%) of businesses had used a cheque within the last month, either to make or receive a payment.
Consumers do use cheques between one another, but the main usage of consumers is for paying (small) businesses. The UK research, which was conducted with over 6000 consumers and 1000 businesses, identified the following three most common reasons for an individual to write a cheque:
- Thirty-nine percent of people who write cheques use them to pay bills by post.
- Almost a quarter (23%) pay tradespeople who come to the house.
- Fifteen percent use a cheque to pay a friend or another person face-to-face.
Businesses use cheques with other businesses and to collect from consumers. The UK study showed that three most common reasons for a business to write a cheque are:
- Almost three-quarters (72%) of businesses who write cheques use them to pay suppliers.
- Fifty-eight percent use them to make ad hoc payments to other businesses.
- Forty-two percent use cheques to pay regular costs, such as rent and utilities.
And the three most common reasons for a business to receive a cheque are:
- Eighty-three percent of businesses that received cheques received them in payment from a consumer for goods or services provided.
- Fifty-eight percent received cheques from another business in payment for goods or services provided.
- Sixteen percent received cheques as a refund from a supplier.
Cheques of High Importance for Minority of Small Businesses
The UK research states that cheques account for 25% of business expenditure and 30% of income. Importantly, those businesses that tend to make a higher proportion of their payments by cheque also tend to receive a higher proportion of income that way, making them heavily dependent on cheques.
The research further shows that size of business (measured by the number of employees) is the most important factor in differentiating how many cheques are used. But in addition it can be noted that even the smallest of companies do not all depend on cheques as payment mechanism.
- One in 10 sole traders that wrote cheques stated that they used them for all their expenditure in the previous month, equating to around 6% of all sole traders.
- Smaller businesses appear to be more dependent on cheques for their income than larger businesses.
- One in 10 sole traders that received cheques stated that they accounted for all of the business’ income in the previous month, equating to around 7% of all sole traders.
- Just over 40% of sole traders did not write any cheques at all in the month prior to the survey.
- Over a quarter of sole traders did not receive any cheques at all in the month prior to the survey.
Cheques Here to Stay as Long as Bank Customers Need Them
In the UK initially all efforts were put by the banks in convincing the government to accept the closure of the cheque clearing in the UK by 2018. By then it was assumed bank customers would have become used to increasingly attractive electronic alternatives to cheques and would have been given enough time migrate. The problem was perceived to be imperfect communication by banks to their customers of good electronic alternatives to cheques.
The politicians, however, this summer decided not to support the possible closure of the cheque clearing in 2018, forcing the banks to continue offering cheques “for as long as customers need them”.
E-payments are Generally Acceptable Alternatives
The UK research was conducted to support the lobby with UK government but also to identify how electronic alternatives could be used and, if needed, enhanced to accelerate cheque replacement.
The research shows that most people who use cheques to pay a bill are aware of an alternative. In general, those people who are able to think of an alternative electronic way of paying tend to find that alternative acceptable. Between 80% and 90% say that alternatives such as internet banking, standing order, direct debit and card payments are either ‘very’ or ‘quite’ acceptable. When it comes to receiving from businesses, similar percentages find direct transfers into a bank account and refunds onto the card used to make the payment ‘very’ or ‘quite’ acceptable.
If money is received from a business (refunds, wages, benefits, insurance settlements or dividends), levels of acceptability of most alternatives are also very high. This is particularly notable for direct transfers into a bank account (very or quite acceptable to 90% of respondents), and refunds onto the card used to make the payment (very or quite acceptable to 82%).
Standardising E-payments and Remittance Information
Both in the UK and US, businesses perceive benefits in using e-payments. But while business-to-business (B2B) cheques are declining, they are not doing so as rapidly as consumer cheques. The US-based 2010 Association for Financial Professionals (AFP) Payments Survey found that a lack of simple, easily adopted standards that automate the reconciliation of payments and remittance data is a key barrier to higher adoption of electronic B2B payments.
Because remittance information is typically sent with a paper cheque, reconciliation and posting of paper payments is easy. However, this simple process breaks down when payments are made electronically. When remittance data flows with an e-payment, it may not be forwarded to the corporate receiver with the notification of the payment. When remittance data flows separately to the corporate receiver, the receiver may not have sufficient information to reconcile it with a payment.
The US banking industry, supported by the FED, is focusing on further standardising payment processes and the exchange of related payment information between trading partners. Such standardisation is needed to originate and deliver electronic remittance (e-remittance) information to all sizes of businesses that can be easily associated with a payment, enabling straight-through processing (STP).
At the moment, there are too many alternatives for remittance exchange and too many remittance data standards, which results in difficulties for bank customers in adopting e-payments and the inability to achieve STP.
The UK study shows that the areas to focus such standardisation of data exchange are payments for goods and services, rental payments, utility payments and the payment of refunds to suppliers.
More Required than Standardisation of Data
Even though standardising the data exchange in remittance information is important, it will probably not be enough. In the UK study, when they find alternatives to cheques unacceptable, consumers and businesses quote the following reasons:
- Concerns over security and fraud, resulting in a reluctance of consumers to hand over their card details to others.
- Worry about loss of ability to keep track of money. Not knowing whether the money is in the account until they next receive a statement is a reason why people find direct transfer and refunds onto a bank card unacceptable.
- Businesses are also concerned about higher costs and the administrative burden, where they perceive cheques are easier to administer.
- Some people also talk about loss of control, particularly in relation to direct debits and standing orders.
- They also feel that these options do not give flexibility over how to use the money.
Upgrading Bill Payments to Service SME Payments and Collections
To ensure the standardisation of remittance information, it is advisable for the banks not only to design standards for remittance information, but also to allow bank customers to exchange standardised remittance information in conjunction with e-payments. This requires bank-supported solutions for those who define what they would like to collect (payees), as well as for those who decide what they pay exactly (payers).
Banks have invested in recent years in bill payment solutions that in fact structure remittance information from payees (often utility companies) and payers (generally the consumer customers of utility companies). Payment processing with bill payment solutions costs the banks not much more than the processing of any other e-payment and definitively far less than the processing of cheques.
Given the persistence of cheque usage by small companies, it is advisable for banks to upgrade these billmpayment solutions for B2B payments and in particular for collections by small businesses from business, as well as from retail customers. And given the fact that sole traders are the main culprits of using cheques, banks should focus on solutions that can be used by such sole traders to collect money electronically from their retail customers securely and quickly.
SMEs’ Requirements for Bill Payment Solutions
Using the input from the UK survey, here are a few suggestions for US and UK banks in order to ensure that their bill payment solutions meet the requirements currently covered by cheques:
- Widely enable e-payment of bills. The highest proportion of cheques written by consumers is for paying bills by post. Online bill payment solutions are widely available in the market but not actively supported by most UK banks. It possibly requires focus and a small budget for the UK banks to quickly rollout a bill payment solution that is connected to payment mechanism that are more convenient for retail customers than posting cheques through the mail box.
- Enable submission of their bills by sole traders. Sole traders are the main culprits of writing and receiving cheques. Their customers are uncomfortable with handing over card details or bank account details to strangers but sole traders themselves often are not enabled by banks to collect through cards anyway. Small companies often do not have access to card collection solutions or direct debit due to the perceived credit risk involved.
- By enabling small companies to collect through bill payment solutions where payment occurs by payers via online or mobile credit transfer, there is no credit risk on the small business payee for the banks involved. Their customers at the same time could easily pay online without informing any bank details to the sole traders. Further benefits for the payers are that they would have an audit trail of what they paid to whom and reversely sole traders can be contacted easily for repeat sale of their services. In case such bill payments would be enabled via mobile phones at affordable rates for the sole traders, they can be paid without their customers needing access to a personal computer.
- Implement payment notification for the ‘tracking of money’. Bill payment solutions can easily be configured by users to notify themselves via email and/or text message about payments made and received on bank accounts. The result is that payer and payee do not need to receive bank statements or access their e-banking solution to know what they paid or received.
- Implement dispute management functionality to give control to payers. Understandably cheque users are pleased that they do not pay more to a supplier than they believe they should. Electronically bill payment solutions can be updated such that payers are not at all times forced to pay the entire bill, but can under certain circumstances been given the option to pay bills partially and inform their suppliers what they paid and why they not pay in full.
- Offer financing of bills submitted for bill payment. When paying via cheque, the payer can suggest that the “cheque is in the post” and delay payment. When introducing bill payments as a collection mechanism, payees receive more transparency over their collections but in return could extend payment terms. This provides an opportunity for banks to provide invoice-based financing through the bill payment solution with minimal operational costs.
- Provide standard interfaces to accounting solutions. Some users of cheques perceive cheques as easy to administer. Businesses will still have to manually account for what they paid and collected. By connecting bill payment solutions to many available online accounting solutions and by offering a standard interface to accounting software, small businesses would be provided with a nearly fully automated account entry solution, which should be more convenient than manual entries and deliver better control for small business owners.