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Cheques and balances

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Will the global economic downturn prevent the demise of cheques as a method of transferring money or are their days numbered?

Trillions of dollars, euros, yen, yuan, pounds and scores of other currencies ceaselessly move in and out of accounts across the world each day without a single banknote changing hands.

Electronic funds transfer make this possible today, but for centuries the token that enabled this key economic mechanism to function was a small piece of paper bearing an amount of money and a verifying signature – the cheque.

This relic from an age when much of the world’s transferable wealth and trade were generated by and confined to a small number of states and business enterprises would seem unable to compete with the multiple means that now exist for moving money around the globe.

However, the paper cheque continues to show great resilience in many parts of the world – and may even experience a modest revival as a simple and secure instrument during difficult economic times.

Electronic rivals

In Britain, cheque usage has fallen steadily for many years. According to the Office of Fair Trading (OFT), the peak of personal cheque transactions was in 1990 when nearly four billion were processed.

By 2007 this total had fallen to around 1.3 billion – or 12 per cent of all non-cash transactions (against more than 40 per cent in 1995) – with annual falls of up to six per cent forecast until 2015. If this projection is accurate, by this date the personal cheque will have effectively ceased to exist in the United Kingdom.

The main reason for the decline in cheque-based transactions is falling consumer usage, reflecting the advance of electronic payment systems and the accessibility of cash machines, as well as the reluctance of retailers to accept payment by cheque.

When Marks & Spencer banned the use of cheques in its 600 UK stores in March this year, it cited the fact that their use slowed down the shopping experience for others. It pointed out that less than two per cent of transactions were made by cheque. Asda, Currys, Boots and Argos are other UK stores that have stopped accepting cheques.

Banks also have a strong economic incentive to reduce cheque usage in order to reduce labour intensive handling and processing costs.

A survey conducted for the VISA credit card issuing company reported that payment by cheque accounted for barely two per cent of retail turnover in Britain during 2006. The same study – using data complied in 2005-06 – estimated that cheques cost British retailers over £100 million through increased transaction time, back office handling and fraud.

By contrast, the OFT noted that business use of cheques in Britain, while in decline, had not fallen as sharply as among individuals. This reflects a number of factors, ranging from limited investment in electronic account processing by small businesses, schools and charities to personal preferences of controlling payments through tangible instruments such as cheques.

There is also a striking difference in how countries that are often economically closely linked have dealt with chequing issues. As the chart indicates, cheque usage in the United States in 2004 was almost double that of France, the next major economy most resistant to changing its payment methods.

The relative rate of decline in usage also points to the longevity of cheque use in both countries. While the information may be dated, the trends continue to appear relevant.

The cheque is now virtually extinct in Sweden and the Netherlands. The Dutch began discouraging the use of personal cheques through rationing and charging policies more than ten years ago, finally abolishing them – with very little consumer resistance – when the country adopted the euro in 2001.

The Swedes also used rationing and charges to reduce demand for cheques, although the country’s size and its many small settlements meant electronic alternatives were not as available as in the small and densely populated Netherlands.

The continuing high rate of cheque usage in the US also reflects that country’s size and scattered communities, as well as a large number of local banks and traditional concerns over electronic fraud. The difference with Canada, with its even more remote settlements, is attributed to innovative and often government-supported schemes to transfer money – including by e-mail.

Could trend reverse?

Banks and electronic payment companies will continue to emphasise the cost benefits of individuals and businesses moving away from cheques, and there is little doubt that their volume will continue to decline – albeit faster in some countries than others.

In Britain, for example, the use of debit and credit cards and direct debit payments are forecast to reduce annual personal cheque payments by around 392 million units by 2016, against 1.3 billion at present – or an average of five million each working day.

G4S handles many of these cheques as part of its cash transfer business. However, G4S Cash Services in the UK does not have the capacity to process cheques, though its director of cash centres, Kevin O’Connor, explains that it can, in some circumstances, calculate the total number of cheques received before sending them on to the relevant bank or clearing house.

Until recently the future of cheques – certainly in Britain but probably in much of the rest of the developed world – was closely linked by some analysts to demographics.

A survey by APACS, the UK trade association for institutions that deliver payment services to customers, reports those aged 65 and over write an average of 50 per cent more cheques per person than the rest of the population.

The decline in cheque usage, however, could be slowed or even reversed by a number of other factors. The principal systemic challenge to electronic money transactions is fraud and the fear of fraud. Any move by banks to reduce protection offered to customers, or any significant technical advances by criminals to access on-line banking, could lead to a revival in cheque use.

Recessionary pressures, including falling consumer spending and reduced access to credit, could also see increased use of cheques.

For many, the act of writing a cheque may well be seen as a more direct means of controlling household budgets and business transactions than a few key strokes on the computer.

Cheque usage in selected countries: 2004

Average cheque usage per adult
per annum 		Volume decline
per cent
per annum
US1614
France852
New Zealand626
Canada514
UK435
Netherlands07
Sweden0n/a
Source: Office of Fair Trading
This page is an edited version of the Gavin Greenwood article featured in the December 2008 edition of International.

Download the full article: application/pdf Cheques and balances
Cheque

Long history

Differing myths are associated with the origins of the cheque.

Some experts cite the Roman praescriptiones, issued in the early days of the empire, as the first cheques.

Others attribute its origins to the more sophisticated saqqs – an early letter of credit – offered by the proto-bankers of Persia’s Sassanid Dynasty in the 3rd century.

By the 9th century it had become routine for traders in some Middle Eastern countries to be able to draw money from a counterpart in China, based on cash held in their home cities.

The practice spread across Europe, with pilgrims travelling to the Holy Land in the 12th century carrying encoded documents issued by the Knights Templar, the self-appointed guardians of Christians in the region, that could be redeemed for cash in Jerusalem and other cities.

These documents contained much of the same information recognisable in modern cheques. Fragments of cheques found in Egypt from the period were small, made of paper, gave the name of the issuer and instructed the recipient to pay the bearer a stated sum of money.

It took another 500 years, however, for the cheque to be adopted in England. The first recorded handwritten example was issued in London in 1659. Printed cheques were introduced about 1700 and personalised cheques a further century later.

The process of clearing cheques between London-based issuing banks began in 1770 in Lombard Street’s Five Bells tavern.

Settlements were made in cash until 1833, when a purpose-built clearing house opened in Lombard Street and settlements were then made through accounts administered by the Bank of England. This system continued until 1985, when the Cheque and Credit Clearing Company took on the work.
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