The Federal Reserve’s Payment Study is considered the gold standard for predicting the future health of the common check in the increasingly competitive payments landscape. And a surface view of Fed data could lead you to conclude that checks are riding a greased rail into oblivion. In my blog, “Checks are Dead? Does This Still Count as News?” I argued that checks aren’t disappearing, and that other types of rising payments aren’t poaching off checks. I stand by that assertion.
Let’s take a deeper look into just how the decline rate of checks has changed.
Our latest report, “What Does the Future of Checks Look Like?” addresses the frequently asked questions about ongoing check usage and breaks down checks by payment types; external forces such as technological and regulatory developments; and our own estimates of future check volumes along with research by leading industry authorities.
According to the Fed, check volumes have been declining steadily by two billion items per year for the past ten years – give or take a year. But when you aggregate the drivers of check usage, it becomes easier to believe the prediction by McKinsey & Company that the rate of decline is going to slow down in the near future.
Consider the four payment types in which checks are commonly used:
- Consumer to business (C2B)
- Business to business (B2B)
- Business to consumer (B2C)
- Consumer to consumer (C2C)
Of these four segments, only consumer to business payments have seen a precipitous rate of decline.
It’s the most common use for checks, accounting for more than 40 percent of all checks written, and it’s also the only one truly impacted by the emergence of other types of payment technology, like Apple Pay. This segment encompasses point of sale (POS) use, which is when consumers are most likely to whip out a debit card or credit card if they’re not paying in cash.
B2B payments have declined at a slower rate than C2B.
While POS usage declined here too, businesses have, by and large, been slow to migrate away from paper to newer technologies. Businesses clinging to paper is easy to understand; card transactions cost them more than they do consumers. What’s more, if they’re dealing with a complicated payment scenario (discounts, line-item deductions, etc.,) ACH payments may not measure up to the complexity. Finally, checks provide businesses with a paper trail, something that makes them feel more secure and empowered should they face an audit.
Slowly but surely for B2C
Direct deposit and the launch of the ACH network laid the groundwork for the migration away from checks of business to consumer payments. Payroll cards are the most recent alternative to impact this channel. Declines are likely to continue briskly in this area as businesses step up their promotions of payroll and incentive gift cards.
Last and actually least
Although it represents the smallest of the four channels, C2C payments have seen the least impact compared to other methods, and that’s likely to be the case in the future. A check is still the easiest way to pay a personal debt to another individual or give a monetary gift, despite the existence and moderate success of electronic alternatives like PayPal.
How does all this support my original argument that the payment alternatives rising in dominance are not likely to poach any more activity from checks? These facts illustrate that although it hasn’t stopped, the major bleeding of check volume has at least slowed. Emerging mobile payments aren’t likely to make it any worse because they’re applicable to channels where checks have already lost, rather than to ones where checks remain dominant.