The cheque is dead – long live the cheque
Although UK cheque volumes are projected to steadily decline from a still-high base, a large number of consumers, businesses and other organizations will continue to use the payment instrument in the coming decade for some of their transactions, underscoring the importance of the nascent adoption of mobile payments.
Once scheduled for extinction, cheques continue to feature in the UK payments landscape. In December 2009, the UK Payments Council announced that cheques would be phased out by 2018. However, the proposed abolition of cheques proved controversial and pressure mounted from consumer groups, charities and small businesses to reverse the decision. Following an appearance before the House of Commons Treasury select committee, the Payments Council announced in July 2011 that the move had been cancelled and that cheques would “continue for as long as customers need them”.
Since then, cheques have continued to play a role in UK payments, although volumes have steadily declined. A report published this week by the Payments Council, “UK Payment Markets 2013”, states that in 2012, for the first time, the number of card payments made by businesses was greater than the number of business-to-business cheque payments. In the same year, cheque volumes dropped by 12.6% to 848 million – one fifth of their 1990 peak of 4 billion.
This trend is expected to continue. The report suggests that cheque volumes will fall further in the coming decade and that by 2022 they will constitute only 1% of non-cash payments, down from 4% in 2012. According to the report, 341 million cheques will be written in 2022, to a total value of £517 billion.
At the same time, the report predicts that the value of consumer payments will rise from £1.3 trillion in 2013 to over £2 trillion in 2022. During the same period:
• The number of consumer card payments will rise from around 10 billion to almost 17 billion. • The use of consumer direct debits will increase by 20%. • The number of cash payments will drop from 21 billion to 14 billion.
On the one hand, the continuing decline of cheque use is good news for the transaction banking industry – cheques are time consuming and expensive to process, difficult to reconcile and prone to fraud. On the other hand, many in the industry are less than enthusiastic about the expectation that cheques will still be used in their millions in 2022.
“I’m disappointed to think that cheques will still be around in 10 years’ time,” says Chris Skinner, chairman of the Financial Services Club. “Obviously this is not what [the Payments Council] wants, or what the banks want.”
Although overall cheque volumes are shrinking, the Payments Council’s report shows that many individuals and businesses are still using them. According to the report, cheques are used by 45% of adults, particularly older ones. Over 90% of businesses still make some of their payments by cheque. Volumes are low, but a lot of people still use cheques at least some of the time.
As other payment methods become more prevalent, cheque volumes are likely to diminish accordingly. Skinner argues that the report's predictions might be somewhat conservative in the area of mobile payments, underestimating the value of this payment type. According to the report, mobile payments and internet banking will contribute towards the growth of one-off payments from consumer accounts from 256 million payments in 2012 to 1.5 billion in 2022.
Skinner says that the Payments Council is “lowballing it” with these predictions, particularly given the planned launch of a new mobile payments service in spring 2014. The report states that “the collaborative Payments Council project marks the first service with the potential to link up every bank account in the country with a mobile number” and will enable holders of UK current accounts to make payments directly between their accounts via their mobile phones and without using a sort code or account number.
According to the Payments Council, eight financial institutions representing 90% of current accounts in the UK have already committed themselves to offering the new service and more financial institutions are in discussions about joining the project.
Cheques are unlikely to disappear until there is a suitable alternative for the people currently using them, and one of the factors that derailed the plan to phase out cheques was the lack of such an alternative. However, this is beginning to change as technology develops. In addition to the mobile payments service, mobile point of sale (MPOS) solutions that allow small businesses to take card payments might also contribute to the demise of the cheque as they gain wider acceptance. A number of MPOS initiatives are steadily gaining ground, from QR-code based apps to hardware that enables smartphones to act as chip & PIN devices. Such solutions have much to offer small businesses, which have historically relied on cheque payments.
Meanwhile, Skinner observes that the topic of mobile payments tends to focus too much on the use of mobile devices, when in fact other chip-based devices such as watches, jewellery and key rings might increasingly be used for payments. “All of those things transacting in some form wirelessly over the mobile network will give us a much greater wave of mobile payments than anyone is expecting right now,” he says.
Whether or not the Payments Council’s predictions turn out to be accurate, it is clear that cheque volumes are continuing to decrease – but cheques continue to be used by a large number of consumers, businesses and other organizations. Cheques may be heading towards extinction, but without any formal abolition of this payment instrument it is likely to take years if not decades for it to disappear altogether.