From the American Bankers Association. This is the ABA banking journal podcast. I'm Evan sparks. In 2019 Saturday night live air to sketch called checks, C H E Q U E S and mock bank commercial that plays up the scandalous drama of check writing.
With services like Venmo and Apple Pay, there are so many ways to send money in an instant. And while convenience is great, don't forget, there's also Checks. Checks. Because there's nothing like furiously scribbling on a piece of paper, tearing it, flicking your wrist, and saying I trust this will suffice?
My favorite part is when the actress, Sandra Oh gives a check logistics lesson for unaware youngsters.
Best of all, checks are easy. Hear what day it is. Hear his name. Hear how much. Hear the same, but in letters. And hear the secret.
The humor in the sketch is driven by check status as an anachronism, much like the floppy disk icon that is still the universal computing hieroglyph for save. The Federal Reserve's massive check clearing infrastructure was made largely obsolete by the 2003 Check 21 act more than 20 years ago.
For routine transactions checks, it becomes so marginal that the Federal Reserve survey of consumer payment choice relegates them to a category of "other," which along with prepaid cards and money orders accounted for less than 9% of all payments in 2022. But contrary to a 2023 Washington Post report, checks aren't entirely dead. While the volume of checks written each year has fallen from 50 billion in 1995, it was still at 11.2 billion in 2021.
For high value payments checks are often a preferred choice.
Once you cross over a 500 dollar mark checks are the 2nd, most common form of payment except for bill pay.
That's my American Bankers Association colleague, Paul Benda, our executive vice president for fraud and cybersecurity. Checks account for 43% of payments to contractors, 35% of gifts to charity and 27% of payments to government entities. Although checks have declined in use for payments they're used by criminals as a vector of fraud has shot up.
In 2022 financial institutions filed 680,000 suspicious activity reports related to check fraud with the financial crimes enforcement network, up more than 700% in less than a decade. Checks account for less than 9% of payments, but 66% of payment fraud, according to the association of fraud professionals.
And if the criminals are able to get away with it, the fraud loss is usually eaten by the financial institutions and ultimately by customers in the form of higher costs for payment and credit services. Which leads me as a magazine editor to ask what might be a little bit of a dumb question. The paper check won't die. Is it time to kill it? That's the subject of this special episode of the ABA banking journal podcast, which is presented by Biz2X.
We'll talk to bankers and experts and learn more about the future of the paper check.
Checks are an inherently insecure form of payment. Who would, who would you ever just give, or who would ever give their random person, their name, address, bank account number, and bank account routing number to someone on the street, let alone sometimes they ask for your date of birth, drivers, I mean, you know, all that additional data, but we, we still do it for some reason.
So why do people continue to use what Paul says is an inherently insecure form of payment. I think people have a misunderstanding of exactly how safe checks are. Here's Luanne Cundiff, president and CEO of First State Bank of St. Charles in St. Charles, Missouri.
People always thought checks were safe and putting them in the mail was a safe place to put them until the past 12 to 18 months where that's really come to light that those check collection boxes in the U. S. postal system isn't as safe and secure as the average American once thought. The thing that makes checks less secure is the presence of personal data on a document that can be altered or quote washed.
That's one reason that check fraud continues to skyrocket and why checks and particularly trying to steal them out of mailboxes is such an attractive target to fraudsters. Beyond the fraud risks, checks are expensive both for banks and business clients. The median cost to issue paper checks hovers around 2-4 dollars a piece, while the cost to receive them hovers around 1-2 dollars per check, according to a survey from the Association of Financial Professionals.
Costs to send and receive ACH transactions come in at less than fifty cents per transaction. It also requires expensive imaging and processing equipment on the bank side.
In the mid nineties, it was. "We're never going to have checks after, you know, in 10 to 20 years, we're not going to have any checks in the US financial system." I think they were talking about that before I was born. And, and here we are. And then, you know, we had Check 21, which allowed, because back then you had all your proof machines. And I don't know if you've ever seen one, but they were just these massive pieces of equipment in every bank.
And the machine sorted checks based on routing number and and all of that, and it was just so inefficient. Well, then Check 21 hit. And it created for the first time that electronic clearing of checks so that that created some efficiency. So there was no end to the paper checks. They were just creating more efficiencies and fraud. I mean, although it always exists, it hasn't since I've been in banking, it hasn't been at the level that we saw in 2023 ever. So there was a clear surge in 2023.
So I think that's what's getting everyone's attention. So today the check clearing process is a lot more efficient than it was before Check 21, clearly. And the cost has gone way down. But when you consider the fraud costs on top of it, particularly in the last year to year and a half yeah, if that continues, it's not going to be a cost effective alternative by any stretch.
Saturday night lives. Joking aside, writing a check actually is easy. Regardless of the risk, a check is still the easiest way to transfer a large amount of money for no added fee. The recipient pays no interchange as it would with a debit or credit card. And customers aren't limited to transaction amount caps that banks often have for card and other transactions. There's no need to set up an ACH. In fact, ACH is basically the inverse of checks. Convenience.
A paper check is more cumbersome for payees, though. It does put the pay order data at risk while ACH requires that pays do less to receive the payment, although they must disclose more information. D.J. Seeterlin: there are inherent headwinds when it comes to how the business needs to make a payment. That's DJ CSeeterlin chief innovation and strategy officer at Chesapeake bank in Kilmarnock, Virginia.
D.J. Seeterlin: A check offers the ability for me to send you a payment without knowing anything about you other than your name. So I can hand it to you. I can put it in the mail. All I need is your, your physical address and your name and I can send you a payment and there's no other existing method for businesses to make those payments. Moreover businesses and consumers alike benefit from the float between whenever the check is written and when it is settled.
Businesses and really consumers wanted that float. They wanted to write a check and have the delay of five to seven days. Well, Check 21 hit and that sped up that process. But even today, there's still this concept of float. When a business customer writes a check, it's not going to clear immediately. They have to send it to the recipient. And then the recipient may sit on it for a day or two or a week or whatever. So they still have access to those funds.
So that's still a clear benefit in a business customer's eyes and a consumer of the paper check. D.J. Seeterlin: I would say that the biggest challenge is with the commercial accounts with the business accounts. that's the bigger hurdle to climb. That's where the real demand is is on the business payment side. For that use case, the real gap that we've got to overcome as an industry is the lack of of directories for business payments.
What do you see as the solution to a lack of, as, as steps that would help the industry tackle these? D.J. Seeterlin: there's a huge opportunity for some form of either centralized directory or federation of directories to make it accessible For businesses to make payments and by federation, I mean, there's other directories that exist.
And so a directory of directories, as it were or some centralized organization, whether it be through industry associations coming together to form a solution, like the ABA created the routing number system years ago, the ABA created CUSIP years ago, it's a great example of industry associations and solving a problem for routing payments. So I think there's an opportunity for the industry to push something forward around solving the problem of a lack of a directory.
I asked my colleague, Steve Kenneally . Who's a senior vice president for payments policy here at ABA about the prospect of such a directory proposal and the way the DJ outlined it.
It is interesting to see that we're seeing a lot of talk about faster payments with FedNow and TCH, but unlike Zelle, they don't have a directory, so they function more like ACH payments where you need the bank routing number and individual account number to send one of those transactions now. what would be a huge jump is if someone creates a huge nationwide directory that can associate your bank account with whatever payment is being applied,
but we don't have that. And it's not, not on the horizon.
Zelle is probably the biggest when it comes to bank accounts. They've got about 2000 banks live, you know, that's all proprietary information.
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We've talked about one proposal a directory or a directory of directories that could mitigate some of the challenges to moving toward more electronic payments. But checks continue to be easy to use. So is there a single financial solution that can provide similar or greater convenience and protection? Let's take a look at the idea of checkless checking. checkless checking products have been around for a long time.
In fact, the Bank On national account standards encompass checkless products as something that meets basic financial inclusion needs. Use of paper checks is actually one of the biggest triggers of overdrafts because of the uncertainty about settlement time, which can have a negative financial inclusion in effect. But we're still a long way from checklesss accounts becoming universal.
D.J. Seeterlin: We, as a lot of banks, do offer a checkless deposit account for our customers to use debit cards and offer bill pay services and the like. But those are definitely the outlier for the customers that adopt that. What about wire transfers? Are wire transfers a suitable substitute for checks for the high value payments.
Some banks have removed fees for domestic wires, making them competitive in cost to checks and a wire eliminates the risk of fraud from a check being stolen or altered. Then here's my ABA colleagues, senior vice president, Nessa Feddis, who I believe has forgotten more about, consumer checking account compliance than I've ever learned.
It gets a little bit complicated. Because if you take a check and you swipe it, say at a merchant's, and then they convert it into an ACH, that is covered. Yes. Similarly, if you do online bill pay and you initiate the transaction on bill pay, and let's just say it's some, you know, small condominium association and they don't take ACHs and the bank instead, or they're not in the system, the bank instead creates a draft and then sends that draft like a process, like a check.
It will be covered under Reg E unless you've disclosed to the consumer that it isn't. So it gets a little complicated, but as a practical matter, I think most banks are going to treat those sorts of checks converted to EFTs as Reg E items. Now, wire transfers are not covered under Reg E and I think we want to be careful here. My question is how the consumer know that this is actually using the wire system versus ACH. I'm a pretty sophisticated consumer banker bank customer.
I don't know always did they use ACH? Did they use faster payment system? Did they use FedNow? Did they use a wire? How am I supposed to know? It's not as though they're not, there aren't other protections. There are protections under Article 4 of the UCC, but under Reg E, if you're fraudulently induced to provide your passcode, which is what happened in these cases, it's not as though they sent money voluntarily to a fraudster. They received a phone call saying, "I'm from the bank.
And I need you to give me this number because there's been fraud in your account." The sort of things that we've been seeing. Somebody spoofed the bank's phone number. So it looks as though it's coming from the bank. Well, under Reg E, if you're fraudulently induced to provide your access device, you're not liable. Now, if you're fraudulently induced to provide a payment, you are.
So there's a difference between fraudulently induced to provide your access device or your passcode and fraudulently induced to send money. And the former, the consumer is protected, and the latter, consumer is not.
In the absence of a killer app to replace paper tracks, there are still several things that bankers can do to mitigate the risk of fraud.
More and more banks are realizing that implementing technology to uncover fraudulent transaction is a good use of dollars. Right? So that's 1 thing. And another thing is encouraging their client base to take responsibility for reviewing their statement more often than once a month or once every other month or however often they were, they were reviewing their accounts and by the use of additional technologies, such as positive pay, they need to take some responsibility for that.
So it's really a partnership sharing in the broad detection.
Here's how positive pay works.
the business has to reconcile the checks before they get paid. So you have to do it within like 24 hours. That's why businesses don't like it because they have to like constantly look at this and then they have to agree with the bank. "Yes, you should pay this check. No, you don't pay this check." So it creates an administrative burden on them. "Payee positive pay" is even better because it actually shows it matches the, you know, does the name match who you were supposed to pay?
Unfortunately, the technology, you know, everyone knows OCR isn't as good as it, you know, we'd like it to be. It can be a little clunky to use but the criminals have figured out how to evade positive pay and so payee positive pay really is the best way to do it. And it's only been for businesses. It's cumbersome for both the bank and the customer, you know, who's writing the checks. But it is the really one of the ways to mitigate it. One of the only ways that we can mitigate it.
And like I said, banks charge, you know, 20 to 30 a month. A lot of times for small business customers, we are recommending they waive that fee. But we're also telling banks that and we've heard many banks doing this that if a business customer refuses to use Positive pay that they sign an indemnification agreement that means the the business customer is now responsible if their checks get washed and stolen and altered.
It adds an extra step and thus a little friction in the payment process. Is positive pay a fit for consumer accounts.
You could see that I think and the challenge we've got though is I think for people like you and me who probably use checks very rarely We would easily adopt that for those that are your check writers like my 86 year old dad. He could never do Right, you know, he just couldn't you know, that's that's some of the you know My dad still likes to go to the branch and he likes, you know, and he writes his che he still sends me checks You know, for my birthday
But while Paul notes, that this is one of the best tools we have now to mitigate the risk of, check fraud, is it really the best thing we can do?. Is the best we can hope for tinkering around the edges. Here's my colleague. Steve . Luanne Cundiff: I hate to do one more thing to enable checks. I think it's much better to send it faster and safer electronically than try to send a paper check in a slightly better way. Behind the scenes ABA has developed the check fraud.
Warranty breach claim directory. A free resource for all banks that provides access to the best contact information. And the desired formats for submission, when a bank needs to file a warranty breach claim, you can find the directory at aba.com. It can only be accessed by banks that provide information for their own institutions and our experts believe this can really streamline the backend process for the related to check fraud that causes headaches for financial institutions.
Now bankers say that it may not be realistic to kill the paper check in the short term. And that's in part because banks continue to invest a lot in helping the system work better for clients.
We've actually enabled the check writing to be easier by the use of technology. We have mobile check deposit now, right? They don't have to come into the bank. They don't have to mail it. They can just take a picture of the check. So it's a lot easier for them to transact that check. They can order checks online, they used to have to come in and, you know, handwrite information to, for us to order checks. So we've enabled it to be a lot easier just to enhance the customer experience.
And on top of it, there's really no cost to the consumer. So banks in and of themselves have created this favorable environment for check writing, but now with the increase in fraud, banks are starting to reevaluate their contracts and their disclosures with business customers primarily to make it clear that, you know, they have to take responsibility for the safety and security of those checks in addition to the bank.
To improve the check writing process further and reduce risk, banks can focus on two tactics: first promoting the use of bill pay and second minimizing the issue issuance of government checks. So let's start with the bill pay.
the banks have done a good job of for certainly for larger businesses, the bill pay allows them to do an electronic payment. You're doing a check. So, like, for Washington Gas, it never goes into a check. Right, right. But for small vendors, like I, you know, where I store my boat, I do the bill pay. That actually gets converted to a paper check and gets sent out to them.
Now, that is generally more secure because that check comes from the actual bank and they have obviously secure mail pickup, goes directly into the postal service transit mechanism and doesn't go into the blue boxes, doesn't go into the carriers until it starts getting deliveries when it goes. So, I mean, that is a generally more secure way to send checks just because it, it avoids that front end piece of going into a post office.
It avoids the front end piece of blue box or, you know, for God's sake, the mailbox in your driveway. And really is only vulnerable at the last mile of delivery. If you do have to write a check, bill pay is probably 1 of the best ways to do it.
The second tactic involves cutting down on us government checks in circulation. We just finished the 2024 tax filing season. In advance of that season, aBA coordinated with the IRS on a webpage for banks to help consumers get their tax refunds by electronic funds transfer.
It's just encouraging banks to tell their, their customers how to find their bank routing number and account number.
How many paper checks, how many tax returns or tax refunds are sent by check?
About 20%. So, I mean, in about, what's it, 25 years ago, they're about 45 billion paper checks. Now we're down to somewhere under 10 billion. So we've made great progress, but we've still got a way to go to get that shorten that long tail.
And there's still some more low-hanging fruit in terms of how the federal government sends payments.
the Bureau of the fiscal service, which is part of the treasury that does incoming and outgoing payments just published a final rule that would it amends the rules having to do with their EFT 99 initiative, which was to eliminate paper checks by the federal government. And so what they've done is they've increased in 2007, they were 78 percent electronic.
Now, they're up to 96%, but now they're trying to squeeze that last bit out of that 4 percent that's remaining by narrowing the waivers that federal agencies can give to someone signing up saying they don't have a bank account, or they forgot their checkbook. So, and they're actually going to start assessing financial penalties against agencies that don't don't comply with the rules. So that's positive.
And just on a, on a personal note, I admit that I was, I was part of the team at treasury 25 years ago that failed miserably in the EFT 99 goal, which was to get to 100 percent by 1999.
Well, that's yeah, you know, the archaic payment methods stick around for a long time once we, once we develop them. So,
yes, eliminating the traveler's check was the last thing we eliminated,
you know, I, I do wonder, you know, and I don't know, this is, I will invite your whimsy here, but we, ABA invented the routing number. And we've, you know, we were involved, we were involved in like. Whatever the MICR, right?
The magnetic ink.
Yeah, the processing language for all these checks. What could we do as an association to drive the next industry utility that's going to be the universal app, the killer app for to get us to whatever, whatever they're going to think that's going to last for another 30 years and work for consumers and businesses.
I don't think the product is out there now. That would be like, the 1 for 1 replacement. Because I think, well, most importantly, because in order to do an electronic payment, you need a bank account. So we're always going to have that whatever 2 to 5 percent of the unbanked that need to be. That problem needs to be solved, but I think we can use a combination of ACH, zelle, FedNow, the Clearinghouse real time payments product to, to, to definitely reduce it around the edges.
And I think what's really important here is if we could, if we could get the number of checks down from 10 billion to, I don't know, 3 billion I think that'll really help, especially with the fraud mitigating the fraud risk. Cause there's, there'll be fewer checks and you'll be able to spend more time reviewing that we want to make it unusual to receive a check.
Thanks for listening to this episode of the ABA banking journal podcast. And thanks to all my guests for helping to tell the story. You can check out the print version of this story. It's the cover story of the may June issue of the ABA banking journal, which is currently on our website at aba.com/banking journal. Go check it out. Take a look, share it with your friends, help spread the word. Is it time to end the paper check?
Thanks again, to Biz2X for sponsoring this episode, we'll be back with you again very soon.