You might not yet have seen the results of the new Federal Reserve Payments Study; after all, the summary was released just before the long Christmas holiday. But when you do, one thing that will stand out is the tremendous good fortune of the check – which had been on a collision course with irrelevance for decades, but which now suddenly appears to have found a sort of unexpected stability.
The data are unmistakable: As of the last Fed report in 2013, the number of check payments in the U.S. had declined by almost exactly 2 billion per year for each of the previous 10 years – from the high 30-billion range all the way down to 19.7 billion*. This time, the number was 17.3 billion, a decline of just 0.8 billion annually. All of a sudden, checks are disappearing 60% more slowly than they were before.
Digital Check obviously closely follows industry trends that might affect checks, and in fact, we are on record more than a year ago predicting that the decline of checks would slow. But the magnitude even caught us off guard – the previous trend would have suggested 12-13 billion checks this time around; we predicted about 15 billion; and the actual number was even higher than that. So what happened?
Technology let the check off easy this time
The surprisingly strong showing was a booming repudiation of every smug remark out of Silicon Valley to the tune of “The check is already dead.” But while such obituaries may have proven premature, it’s not because checks gained some newfound invulnerability. They’ve got the same strengths and weaknesses that they’ve always had, but for the first time in decades, no new technology is attacking the check right now.
What do we mean? Well, as we noted in our previous research, people don’t stop using checks “because they’re outdated,” or “because checks are going away.” Those are catchy soundbites, but the real reason why people switch away from checks is because something better takes their place.
And in that respect, the past 20 years have been brutal for checks – look all the new technologies that have come along, one after another. Direct deposit replaced paper paychecks by the billions. Inexpensive card terminals all but eliminated checks at the retail point of sale. Online bill pay did away with billions of C2B check payments. And most recently, the prepaid debit card replaced another huge chunk of B2C and G2C checks.
But now? There’s simply not a lot going on that affects the check. What have been the headline stories in payments tech for the past three years? Apple Pay. Bitcoin. EMV chip cards. Mobile wallets. Security issues of all shapes and sizes.
In other words, it was mostly card technology competing with other card technology. Nothing new was introduced between 2013 and 2016 that directly targeted the paper check, and so what we’re looking at is the tail end of all those previous technologies’ effects. Also of note in the Fed report: ACH growth was slow. Growth in prepaid debit cards all but stopped. Credit card payments continued to rise by about the same proportion as payments in general.
After they spent 20-plus years getting pummeled by one new technology after another, it was only natural to assume that checks were simply unpopular and that something new would always be there to keep up the assault on paper payments. But this time, the focus was elsewhere, and so checks got a break.
Make no mistake: It’s not that things like direct deposit and online bill pay have ceased being effective. But as they approach full participation, the number of checks that they replace trails off eventually. Since nothing else was introduced in the meantime, right now is “eventually.”
What happens next? Are checks stabilizing, or still on the way out?
Essentially, what the last three years have shown us is the natural rate of decline for checks, absent any major disruption. That is to say, how many checks are going away by voluntary choice, and due to decreased activity or death among older consumers.
At the previous rate of decline, 2 billion per year, paper check usage would have dropped to zero by the year 2021. At the current rate, that extends well into the mid-2030s, and probably longer, since the marginal difficulty of displacing the last remaining pieces of a product or service tends to increase the closer we get to zero.
But – and this is a big BUT – this slower rate of decline depends on no new technology being introduced that could disrupt the check further. This is the new normal if no new disruptor arrives – but we are quite possibly just looking at a temporary pause while the check waits for the next hammer blow.
Flickers of such up-and-coming disruptors already exist. The great majority of paper checks still written are used to pay businesses, with small businesses taking the lead. Why are they still so popular? Because accepting them requires no setup (like online bill pay does) and does not incur a percentage fee (like card payments do). A new electronic payment method that delivered on both of those fronts would make a strong push into check volume for certain. A cheap or free, email-to-email or mobile-to-mobile payment method that needs little setup or previous relationships is probably the next great disruptor.
Several recent twists on mobile wallets and P2P payment technology already have the potential to do just that – but, as with most new payments tech, the model tends to be allowing free low-limit transfers for consumers as a loss leader, with fees for business users serving as the someday bread-and-butter revenue generator.
This is probably a mistake since from a small business’ point of view, competing with the check means competing with zero, or at least the perception of zero, from both a cost and an effort standpoint. One of the main traits that have kept the paper check alive for so long is that it is virtually the only payment method provided as a courtesy, rather than a straight fee-for-service model.
To a bank, the value of a check is the account behind it; to a card issuer or a new payments startup, the value is whatever fees can be extracted from the user. For that reason, fee-based replacements may face a steeper uphill climb to displace the last remaining checks — or the model may simply prove incompatible, and it will eventually be not Silicon Valley but the banks themselves who wind up offering their own fee-free replacements.
At this point, we’re doing more guessing than prognosticating, but the message to us is clear. The recent Fed numbers are great news for checks; they got at least a temporary reprieve from the scrap heap. The next new-tech replacement is already on the horizon, but it may take several years to work out the right model. While the march of progress continues, doomsday has been avoided, for now.
* The Fed’s initial figure in the 2013 Payments Report was 18.3 billion paper check payments; this was later revised upward. In either case, while the starting point has changed, the overall trend remains the same: Checks are disappearing about a third as quickly as before.