ChequesReserve andBank the of Payments Australia System Bulletin October 1996

Cheques and the Payments System1

of making payments are included. Countries Introduction that have historical connections with the United Kingdom – the United States, Canada and New Zealand – figure prominently. The United States in particular, with an average Cash and cheques were virtually the only of 237 cheques per head each year, still has a means of payment available to most payments system dominated by cheques. Australians until Bankcard credit cards were Australia, relative to other Anglo Saxon introduced a little over 20 years ago. Only in countries, is now at the lower end of the the past decade or so has there been a credible spectrum in terms of cheque usage. and concerted challenge to the dominant role In contrast, cheques are not widely used in of cheques for non-cash payments. Today we Japan or in most countries of Western Europe. are seeing the emergence of many alternative Italy and Japan’s low use of paper-based payment arrangements; at the same time, banks and others are under pressure to wind back elements of cross-subsidisation and to Cheques Per Capita Per annum 1994 price services to recover costs.

200 200 Trends in Cheque Usage 150 150

100 100 The graph compares Australia’s current level of cheque usage with other countries that 50 50 have relatively advanced payments systems. In terms of the number of cheques written per head of population, Australia, with a figure 0 0 of 55 per year, ranks relatively highly in the international league. The situation does not change very much if other paper-based means

1. Edited text of a speech by Mr N.C. Mackrell, Head of Financial System Department, to the AIC Conference, The Future of Cheques, Sydney, 16 May 1996. 26 Reserve Bank of Australia Bulletin October 1996 payments is in large part explained by their Table 1 shows how the situation has extensive use of cash. Other Western changed over the past 15 years in the face of European countries have traditionally used competition from newer payment direct-entry-style giro systems for making instruments. During this period: payments. The credit transfer characteristics • the share of total non-cash payments made of these giro systems facilitated the migration using cheques fell dramatically to be less of a significant proportion of payments onto than 40 per cent; electronic platforms. Customers wishing to • credit cards became a mature product, make a payment using a giro system lodge an accounting for around 10 per cent of the instruction at their bank, which then passes total number of payments; on the value and payment details to the • automatic teller machines (ATMs) beneficiary’s bank. This process allows the achieved widespread acceptance; paying bank to check the payer’s details (such • direct credit payments increased as the signature and funds availability) before dramatically. (Efforts by the the beneficiary receives the payment. The Commonwealth Government to transfer paper payment instruction can be truncated payments from cheques to direct entry at the beginning of the payment process, with were highly successful by world standards no subsequent need to send it to another and only a handful of these payments are financial institution for verification or other still in the form of cheques); purposes. • EFTPOS emerged as an important new Cheques continue to play an important role payments mechanism, taking a 13 per cent in the Australian payments system. Each day, share of total payments; but around 3 million cheques worth over $17 billion are written by individuals, • in contrast, direct debit payments businesses and, to a declining extent, continued to account for only 4 per cent governments. This represents a little under of non-cash payments. 40 per cent of the number and 35 per cent of There has been no actual decline in the the value of non-cash payments. Fifteen years number of cheques issued over the past ago cheques accounted for about 85 per cent 15 years. In fact, there were roughly of the number of non-cash payments in 33 per cent more cheques issued in 1995 than Australia and almost all of the value. in 1980, a point that is often ignored by those advocating cheaper or more technically efficient alternatives. While the newer Table 1: Types of Payments instruments, especially direct credits, Percentage of total number of transactions undoubtedly restrained the stronger growth that would otherwise have occurred in 1980 1995 cheques, their main effect has probably been to satisfy community needs additional to those Paper (cheques, credit transfers) 85 38 that were being met by existing payment Low-value EFT instruments. Direct credit 3 18 By the mid 1990s, another payment Direct debit 4 4 instrument – specialised high-value electronic ATM 1 17 transfers to settle securities markets EFTPOS Nil 13 transactions and wholesale foreign exchange Credit cards(a) 7 10 transactions – had displaced the cheque as the High-value EFT Nil (b) dominant payment instrument in terms of the value of payments. Cheques and other Total 100 100 paper-based payment instruments accounted (a) Includes paper-based credit card transactions. for around 60 per cent of the value of non-cash (b) Less than 10,000 transactions per day. payments in 1991 (see Table 2). They now account for only around 35 per cent. This is a 27 Cheques and the Payments System October 1996 trend which seems set to continue, with the – through subsequent phases of public introduction of Australia’s real-time gross acceptance, growth and, eventually, maturity. settlement (RTGS) system scheduled for The introduction of bank credit cards in the 1997. 1970s involved a major marketing and educational effort on the part of the banks, Table 2: Value of Payment Instruments trying to convince Australians to change Relative importance in percentage terms patterns of behaviour that were deeply ingrained. The arrival of the cashless society 1991 1995 and the early demise of cheques as the inevitable consequence of the seemingly Paper 59 35 boundless potential of this new payment Low-value EFT 2 2 instrument were widely predicted in the initial High-value EFT 39 63 enthusiasm for credit cards. In reality, there Total 100 100 was only gradual acceptance of credit cards at first, followed by a period of rapid growth during which the public became fully aware Waves of Competition of the potential and the limitations of this form Australia entered the 1980s with cheques of payment instrument. Over a relatively short still the main payment instrument for period of time credit cards matured as a non-cash transfers of value. In practical terms product. Payments made using credit cards there was little in the way of an alternative have held steady at around 10 per cent of payment instrument available to business and non-cash payments for some years. consumers. It was only natural that cheques One reason why credit cards did not displace would be used to fill a whole range of roles cheques other than at the margin was that, and transferring value in a broad range of unlike the United States, Australia had not situations. The fact that cheque services developed a culture of using cheques widely appeared to be virtually costless to those using for point-of-sale purchases at retail and them, and had a solid body of legal entertainment outlets. Credit card payments underpinning, added to their appeal. filled a niche that was served only partly by Since 1980, competition in payments cheques. After a period of adjustment, the services has intensified, given major impetus Australian public reached a position of by decisions to deregulate the financial system balance with credit cards and cheques playing and advances in technology which seems complementary roles. Their points of explicit increasingly to drive the industry. competition are quite limited. But the role of This competition could be seen as having cheques had been narrowed by the arrived in a series of overlapping waves. The competition from credit cards, to be virtually first wave was the introduction of bank-issued excluded from use as a payments instrument credit cards. Subsequent waves have included for point-of-sale purchases. the introduction of ATMs, direct credit The use of ATMs for withdrawing cash has payments and EFTPOS. now also reached a level of maturity. Rapid Typically, new payment instruments have expansion of the use of ATMs saw the role of been introduced into the payments system by cheques as an over-the-counter instrument for banks and other payment providers to meet a withdrawing cash from banks decline perceived customer need (or to reduce costs). dramatically, but this would have represented In marketing terms, the historical record a small proportion of the total growth in ATM shows something of the life cycle of these use. Again, ATMs provided a payment service products. These new products and services additional to that provided by cheques and proceed through the life cycle phases from the role of the cheque was narrowed, sharply their introduction – and all that goes with the reducing its role as a de facto cash withdrawal selling of a new product and a new technology slip.

28 Reserve Bank of Australia Bulletin October 1996 The introduction of direct credit payments Among the full array of new electronic and tells a similar story. During the introductory card-based payment instruments that have phases the potential of the technology in been introduced over the past twenty years, making payments directly into bank accounts none as yet seems to offer these features in by capturing the details on, and exchanging, the same measure as a cheque. magnetic tape rather than exchanging cheques Many of the electronic alternatives, such as heralded yet another announcement of the direct entry in its present form, lack flexibility imminent death of cheques. Again, the direct and are not sufficiently user-friendly for credit product has matured to a position where general acceptance. Others, such as EFTPOS, it now holds around 18 per cent of all require the use of specialised equipment that non-cash payments. Direct credit payments may not be readily available. In some of the were offered as a substitute for cheques and higher-value payment systems, payments can had a noticeable impact, mainly in limiting only be made during normal business hours the growth in cheque numbers. They when the system is open. effectively displaced cheques in one segment Despite the continuing popularity of of the cheque-issuing market (ie cheques cheques, they are not without their faults in issued for high-volume and repetitive credit the eyes of consumers. transfers such as social security and salary Some, such as the fact that beneficiaries payments). don’t receive certainty of payment on receipt, A Narrower Role and the ever-present possibility of fraud, are As a result of these and other forces, the hard to eliminate entirely. There have been role of the cheque in the payments system has some recent developments (including been narrowed. It is no longer the electronic cheque capture and cheque multi-purpose payment instrument it was in payment approval systems located at the point 1980. Some of the roles it previously had have of sale) that may reduce these drawbacks. been trimmed away, in part due to But by far the most commonly voiced automation. But for the most part, the complaint from consumers centres on the competitive products that moved into industry policy of imposing a week’s delay segments of the payments system where before customers are able to have access to cheques previously had a role have now their cheque deposit funds. This is a reached product maturity. continuing source of frustration and The cheque is still popular with the general annoyance for many consumers, who see the public for a number of reasons: benefits of advanced technology everywhere. Many payments, such as EFTPOS, are • cheques are seen to be a convenient way debited to their accounts immediately. In to make unplanned, ad hoc payments for world terms, Australia has a relatively fast any amount to anybody at any time and clearing system for cheques, with the vast place (they simply require that the drawer majority of cheques being debited to accounts has a cheque book, a pen and adequate on the day of deposit. funds in an account); In fairness to the banks, depositors are • the beneficiary doesn’t require any usually paid interest on the value of cheques purpose-built infrastructure to present the during the clearing cycle, even though the payment to the drawer’s bank; funds cannot be withdrawn. For some • cheques are a payment instrument that customers, access to funds is often given well most people feel comfortable with; and ahead of the clearing cycle having run its • the cheque is seen to be still a relatively course. The industry body responsible for the cheap way to make a payment management of cheque clearing, the (notwithstanding the fact that almost all Australian Payments Clearing Association competing payment instruments cost less). (APCA), has been supporting and assisting

29 Cheques and the Payments System October 1996 work being undertaken by financial operations tend to be costly. It is likely that institutions which may shorten the clearing Australia will follow overseas practice and see cycle. Development of common industry more of these shared-resource initiatives standards for the electronic presentment and emerge in the future. electronic dishonour of cheques is well On the revenue side, banks generally feel advanced. But the industry has focussed more they are undercharging for cheque services. on providing alternatives to cheques which They are, they claim, effectively being forced fully exploit new technology (such as to cross-subsidise cheque-clearing services, EFTPOS) rather than on trying to improve and that this, in turn, works against an efficient the clearing cycle for cheques. allocation of their resources. The result is that progress towards a shorter It seems inevitable that over time both the clearing cycle for cheques has been painfully fees charged for the use of cheques and the slow. Industry focus on this issue needs to be costs incurred by banks in providing them will much sharper, if further damage to the adjust to a position where cheque-clearing industry’s stock of goodwill is to be avoided. services return an acceptable profit to the From an industry perspective, the cheque banks that offer them. is a costly payment instrument to offer. Despite advances in technology, there are still significant costs associated with the encoding, Do Cheques Have a Future? transportation and storage of cheques compared with other more advanced payment instruments. Banks generally claim that in the current low inflation climate, the income they Competition in recent years has driven receive on their cheque account business is cheques into what has emerged as its core role not sufficient to cover the costs of providing – general purpose ad hoc remote payments. the service. In this role, cheques do not face credible A range of measures is being taken by competition from payment instruments that individual banks and across the industry as a are currently available. whole to lower the costs associated with the There are, however, still niches where the issue of cheques and improve customer use of cheques has yet to be fully challenged: service. At an industry level, APCA is • Direct-debit services generally have not coordinating several important initiatives, been embraced by the banking industry. including: There are signs that this is changing as • electronic presentment of cheques where banks begin to promote the use of direct the bank at which the cheque is deposited debit to pay utility accounts, insurance captures the details in an electronic format premia and the like. and transmits them electronically back to • Financial Electronic Data Interchange the issuing bank. The benefits of this services – which combine payment system lie not only in cost savings but also instructions with associated electronic in a significant saving in time taken to clear sales orders and invoices – have not been a cheque; and well embraced by banks, although slow • electronic dishonours will enable a cheque progress is being made. that is to be dishonoured to be ‘returned’ An important milestone for the Australian immediately to the bank of issue by payments system will be the implementation electronic transfer rather than by using the of Real Time Gross Settlement (RTGS) in traditional and time consuming paper 1997. This will offer new opportunities and methods that still represent the industry new competition in the area of high-value standard. payments. It will enable banks to make A number of banks are also seeing benefit payments between each other for immediate in pooling resources. Cheque processing and irrevocable value. This will result in new 30 Reserve Bank of Australia Bulletin October 1996 payment products and instruments based they are using cheques because they have no around the concept of irrevocable transfer of real alternative. credit funds – an efficient and virtually riskless It may be that some particular institution, service provided on equal terms by all banks. or group of institutions, will be able to fashion The Australian public may be looking for a such a service around the core high-value general-purpose payments service that has payment system offered by RTGS. Until then, some of these characteristics: wide availability; cheques are likely to retain their important finality of payment; low risk; and available for role in the payments system. smaller sized payments. At the present time

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