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The Reappearing Check: Why the decline of paper finally slowed

In 2015, we [Digital Check] made a bold prediction that flew in the face of conventional wisdom: After years of rapidly falling popularity, the paper check was about to experience a comeback – or at least, a leveling-off of its decades-long decline.

It was a risky position to take, given the dismal performance over a 20-year stretch for a payment method that was widely viewed as outdated. From a high-water mark of around 50 billion in the 1990s, the number of checks written per year in the U.S. had plummeted to fewer than 20 billion by 2013 as they were replaced by newer and faster technologies. At that rate of decline, the check would have disappeared entirely by the year 2021, and there was little evidence that the pace was slowing. It had been almost the same each time the Federal Reserve Bank (Fed) released its official figures, dating back more than a dozen years.

Then in 2016, the new numbers from the Fed came in, and the results were stunning even to us. Past trends had pointed toward an expected 12-13 billion paper checks remaining in the U.S.; we had predicted a modest leveling-o to around 14-15 billion instead. The official total was 17.3 billion – our “bold” prediction actually hadn’t been bold enough. The decline of checks hadn’t just slowed down; it had nearly stopped.

What caused such an abrupt turn of fortune? In our 2015 series of white papers titled The Disappearing Check, we had predicted that a handful of key factors would lead to a slowdown in the check’s demise. Foremost among them were market saturation by existing technologies, access issues for some consumers, and sluggish adoption of replacements by small businesses in particular.

Was that what really happened? And will the trend hold, or is this just a brief respite before the check’s next big downturn? In other words, where is the check headed next? We’ll explore the answers to these questions and more in this follow-up to the discussion that we began two years ago.

Why do people switch away from checks?

This is the single most important thing to know if we want to understand the ups and downs of the paper check in America. But too often, that crucial piece of information is overlooked and dismissed with a soundbite: Checks are “old-fashioned” or “not cool,” and “younger people don’t like them” – and that’s that.

All of those soundbites may, in fact, be true. But they’re not reasons why people move away from checks, they’re labels applied after the fact. To put it another way: No one ever paid a bill online instead of mailing a check simply because online billpay was newer. However, online billpay IS more convenient, less expensive to the consumer, and might oer perks like airline miles from using a credit card. That has nothing to do with being “newer” or “cooler” than a check, and everything to do with being better.

This was the bedrock principle of our 2015 projections – the shift away from checks is not happening because of some general trend that drives consumers toward new technology by default. Rather, it is the sum total of billions of individual decisions in which someone considered paying with a check, considered an alternative form of payment, and decided the alternative was better.

In the presence of technology that out-competes it, the paper check will decline. In the absence of such technology, it will stay put. But the check, just like any way of doing things (whether in the payments business or anywhere else), does not go away just “because.”

Now the key to bringing the whole picture into perspective: It is very easy to imagine the demise of checks as the result of an absolute, external force, much like gravity, but that is a mistake. It’s a tempting explanation because they have been declining for so long at such a steady rate. In reality, though, the displacement of checks occurred because of a series of four separate events– by pure coincidence – were spread out almost exactly evenly over the past thirty years, and which each attacked a different part of the check ecosystem.
  • - Direct deposit arrives in the 1980s and replaces payroll checks with ACH payments
  • - Point-of-sale card terminals gain widespread adoption in the 1990s and replace the check with credit and debit cards in retail settings
  • - Online billpay arrives in the early 2000s and replaces many C2B payments with card or ACH transactions
  • - Prepaid debit cards gain widespread adoption in the late 2000s and replace many B2C or G2C payments.

… so what appears to be a slow, steady general trend of decline just happened to look that way thanks to an accident of timing. “Checks are old” became the go-to explanation, but “something better took over” is the more accurate one. And the none that also, it happens, sheds light on why checks suddenly, mysteriously stopped declining so fast recently:

Technology took the year off from attacking the check

At face value, this sounds absurd. “Payments technology is developing faster than ever!” you’re likely thinking – and of course, it is. But what have been the big headliners in payments lately? Apple Pay. Bitcoin. Chip-and-PIN cards. Smartwatches. Mobile wallets. Security issues of all shapes and sizes.

The one common theme: Virtually all of them are electronic payments technologies that affect other electronic payments tech. Card transactions competing with other card transactions. For all the record-setting progress that took place from 2013 through 2016, almost none of it directly impacted the paper check.

But what about all the other replacements for checks that already exist?

We just mentioned four landmark technologies that replaced paper checks, and all of them were very effective. However, they’ve each had at least 10 years to ramp up to their full potential. Most people who would benefit from them are already using them. They’ve replaced billions of checks permanently, but the land-rush phase of adoption is over, and their ongoing effect is more of a slow trickle.

The figures for other payment methods in the latest report from the Fed seem to bear out this theory.
  • - ACH payments, which experienced rapid growth in the early 2000s during the rise of online billpay, regressed to a modest pace – slower than the average growth rate for all types of transactions, actually.
  • - Credit cards, as they usually do, moved in lockstep with payments as a whole. (They actually grew slightly faster in percentage terms, but part of this was making up for a big decline during the 2008 financial crisis.)
  • - Prepaid debit cards showed hardly any growth at all.
  • - The “big winner” – and, in fact, the only segment that grew faster than payments in general – was the ordinary debit card, which has become the dominant method for executing low dollar-value transactions of all kinds.
Right now, what we’re probably seeing is the “natural” rate of decline for the check – in other words, how fast people voluntarily switch to other payment methods without any compelling new technology being introduced.

But will it last?

You could say that checks dodged a bullet this time around – or more accurately, several bullets. On the surface, it appears that their life expectancy has greatly increased. At their previous rate of decline, they would have disappeared by the early 2020's; at the new rate, that takes place in the late 2030's instead.

That new outlook is the result of a precarious peace, however. Change happened all around the paper check in recent years, but not to it. It’s far from certain that that state of affairs will continue indefinitely – in fact, it’s downright unlikely.

The check is only safe until the next “great disruptor” arrives, and the further into the future we look, the more that becomes a question of “when” rather than “if.” When the next new technology arrives, whatever form it may take, the check will probably go right back to the quick decline. Is there a way we can tell when that new disruption will arrive, or what it will look like? Not precisely, but we can make some excellent guesses.

Who is still using checks, and why?

It’s a common assumption that most checks are written by those who are simply unwilling to change their ways – which is true in a sense, because checks aren’t exactly taking market share away from the newer payment methods. But who is still using them, and why?

The stereotype is that it’s all old ladies and stubborn traditionalists who hang on to them for no reason other than force of habit. However, that’s not the story the numbers tell. The answer, overwhelmingly, is small businesses. As of the last Fed report in 2013, fully 88 percent of all check payments involved businesses on either the paying or the receiving end, with the bulk of those going to pay bills or invoices. Virtually every large company is set up to accept payments – but most small businesses are not, and the great majority of small businesses (91 percent) also pay their own bills by check at least some of the time, making it their first-choice payment method.
We can hear the counterargument before it’s even made: Why wouldn’t they use electronic payments? Everyone knows they’re better!

So why wouldn’t they make the switch? Is it just because they’re stupid? You can take that point of view if you’d like, but a more rational explanation probably exists. What could possibly make the check more appealing than an ACH or card transaction?

For one thing, setting oneself up to receive online payments is usually neither free nor effortless. Once enabled, it may make things go more smoothly; however, below a certain critical threshold of transactions, it may not be worth the fixed cost to set up.

The percentage fee charged for processing credit-card payments is another commonly cited factor that limits adoption. Outside of the retail space, a day’s work in many professions often involves a small number of high-value transactions. A fee of, say, $20 (or potentially hundreds of dollars) for each payment makes the idea of cards a non-starter. These businesses also tend to fall into the same category as the ones we previously mentioned: Few transactions per day, and therefore little incentive to go to the trouble of setting up online payments.

One major bank that we spoke with had begun an outreach program to educate small businesses in particular about the benefits of using online payments to replace paper checks, and found the majority were aware but uninterested.The fact is, small businesses are less interested in ditching the check – not because they’re stuck in the past, but because they don’t find the alternatives appealing enough.

We can call their behavior stubborn or unsophisticated, but the fact is, to them, the motivation just isn’t there yet. And when attempting to influence their behavior, what matters to them is all that counts. Alternatives to the paper check are readily available to nearly any small business that wants them. But what’s available now isn’t making them come rushing to the table. To wean small businesses off the check, the banks and the payments industry will have to actively bring it to them.

Read the rest here.