Where checks are weakest to contactless, mobile payments

If a checking account doesn’t come with checks anymore, can it still be called a checking account? It’s a valid question that the financial services industry should be asking itself.

Today it’s common to open a new checking account that comes with only a debit card — no paper checks — especially for teen accounts and starter or budget checking. In some cases, banks will pre-print a handful of starter checks and then ask customers to order and pay for a box of personal checks.

But don't take these trends as a sign of the check's demise. There are many factors weighing against the future of checks, but also many keeping it afloat.

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Check usage in the U.S. peaked around 1995 as it approached almost 50 billion written that year, just as the internet and debit cards were starting to dawn. In the 1990s it was quite common to write paper checks at the point of sale or to repay someone for a shared meal – something cards and person-to-person payments services such as Venmo and Zelle have largely replaced. Non-millennials have also migrated to using Zelle, as the bank P2P service reported last year that half of new P2P users are over the age of 45.

According to the Federal Reserve Bank, there were 42.6 billion checks written in 2000, of which 12 billion were “on-us” (within the same bank) and 30.6 billion were interbank. Fast forward to the Federal Reserve 2019 Payments Study, which found only 16 billion paper checks written in 2018, of which 1.5 billion were converted into ACH transactions at the POS — a total checks-written decline of over 60% between 2000 and 2018. The remaining 14.5 billion checks were split between 11 billion on-us checks and 3.5 billion interbank checks.
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The biggest threats to the long-term viability of paper checks have been a combination of the attractiveness of debit and prepaid cards in-stores and the shift in consumer shopping habits to e-commerce.

Transactional interchange has always been a lucrative driver for banks to promote debit card usage among consumers, even after a rate cap imposed by the Durbin amendment took effect in 2011. Debit card usage has grown from 8.3 billion transactions in 2000 to 72.7 billion transactions in 2018, according to the Federal Reserve. Similarly, prepaid cards have gone from just 500 million transactions in 2000 to 13.8 billion transactions in 2018 — almost matching the number of check transactions.

Since e-commerce largely precludes cash and checks, it’s been the realm of payment cards including debit and card. In the fourth quarter of 2019, e-commerce accounted for 11.4% of total retail sales according to the U.S. Department of Commerce. E-commerce sales grew 16.7% in the fourth quarter of 2019 compared to total overall retail sales growth of just 3.8% for the quarter in comparison to the same quarter in 2018.
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As fewer consumers and businesses write checks to settle bills, those that continue to be written tend to be for larger values. According to the Federal Reserve, the average value of a check written in 2018 was $1,779, up almost 11% from 2015 when it conducted its previous triennial payments study. The average value of a check has almost doubled in the last 20 years, from $945 in 2000.

Cash and contactless cards are winning share for small-value transactions. This is particularly true with the rise of contactless payments in major mass transit systems such as Transport for London (TfL) , New York’s Metro and most recently in Miami, Florida. Additional cities around the globe are promoting contactless cards and mobile apps to speed customers along the way.

Business usage of checks to make B2B and B2C payments, which both tend to be large, are also under heavy competition from digital alternatives. In 2018 Ingo Money added Safelite Solutions to push B2C insurance claim payments to digital payment distribution in lieu of paper checks and ACH. This followed an earlier announcement of Ingo Money partnering with Key Bank to target the $160 billion annual insurance claims market.
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Even older consumers are starting to follow the young ones in giving up their checkbooks. While few young consumers still write checks according to the 2017 and 2019 Federal Reserve Bank of San Francisco’s Diary of Consumer Payment Choice, one of the biggest changes has been among seniors aged 65 and over.

Consumers under 25 used checks for 4% of their total payment instruments used for bills and purchases in 2017, and less than 1% in 2019. In comparison, consumers 65 and older used checks for 13% of payments in 2017 and dropped to just 9% in 2019.

Despite heavier check usage by older consumers, one of the most telling indicators of likelihood to write a paper check, according to the Federal Reserve Bank of San Francisco, was if a consumer was described as a person who preferred to use cash for purchases vs. credit or debit. Cash-preferring consumers were almost twice as likely to write checks for purchases and bill payments than debit card users.
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When it comes to writing checks to pay bills or make purchases, three merchant categories stand out from the rest as continuing to accept check payments as standard fare. According to the Federal Reserve Bank of San Francisco, housing/rent, government and medical/educational categories had heavy check usage in its latest survey.

Based on data from the Federal Reserve Bank of Boston, checks accounted for 42% of households in how they pay their monthly rent, followed by cash and money order.

Several companies are working to automate the monthly rent check including Yapstone, Zillow and Cozy so checks are under pressure. Despite Winnie the Pooh, Scooby-Doo and Disney being on the most popular check designs at check printer Harland Clarke, the most likely renter check writers are millennials who have been increasingly growing up with “checkless” checking accounts. In fact, more U.S. households are renting in the last 50 years and 65% of households under the age of 35 were renting in 2017, according to Pew Research, up from 56% in 2007.