Take away checks from a checking account and what do you have left? What you have is a “core banking account” that is cheaper for banks to set up and less expensive to maintain. You also have a paradigm shift in product delivery that banks need to come to terms with in order to stay competitive. While the latest update by the Federal Reserve shows the number of checks processed last year fell 5.2%, banks should get ready for acceleration with the increase in person-to-person payments from the likes of Zelle and Venmo. In this article, we explore these changes and the ramification to banks.
While both the number of checks and the volume of checks have dramatically decreased (below), debit, credit card, and ACH usage have all jumped up (in that order) to more than fill the gap. When P2P platforms such as Zelle, Venmo, Square Cash and others switch over to the Real-Time Payment (RTP) Network from The Clearing House, expect check usage to undergo another major drop. Payments through these platforms are faster, cheaper and more secure for all parties. The advantage of electronic P2P payments is overwhelming compared to checks.
These trends beg the question – Can you call it a “checking account” if there are no checks being processed through the account? The answer has to be no for the sake of preventing customer confusion. At some point, the banking industry will need to decide when to abandon the traditional check and that time appears imminent
Consider that back in 2012 the industry processed more than 120 million in checks. That number is now less than 50 million today. Once consumers get used to real-time payments and start to use P2P platforms for commercial payments as well (B2C), we estimate that annual check volume will drop below 20 million in the next three years. At 20 million checks, the cost of the infrastructure gets too much for each bank to support.
Back in 2012, by our estimation, the incremental cost for most community banks to support that check was a little over $4.00 per item. Now, with less volume and less branch traffic as a result of fewer checks, the incremental, single check, full-loaded processing cost has increased to over $7.00 per item. When volume reaches 20 million, the cost per check will be closer to $20 per item – an unsustainable level.
The Small Business Customer
Businesses will also be aiding in this process. Once businesses learn how much they can save by expanding their use of Paypal, Venmo, Square, Zelle, and others, they will be forced to stop taking checks in order to cut costs. A recent MineralTree study puts the cost for businesses dealing with checks in the US around an average of $35B per year.
This incremental cost, coupled with just the issues in dealing with a payment instrument with a two to five-day lag, will get business to adapt and push for digital payments over checks quickly.
The Checkless Account
Already, more than 25 banks offer a checkless account, and new accounts growth has been strong. What started out as a Community Reinvestment Act-driven product for the underbanked has caught on with mainstream customers that look for an inexpensive account. By our last count, there are more than three million customers that have active checking accounts, that make more than $25,000 per year but have never written a physical check (not counting bill pay with its virtual checks).
The concept of a check is unknown to a vast swath of Millennials and Gen Z. Even balancing a checking account is a rarity these days for all generations. According to StatesticBrain.com, the percentage of people that balance or sometimes balance their checking account is at an all-time low of 21%.
Changes in the ubiquity of P2P and B2C payments will greatly expand these numbers in the next few years.
How Will Your Bank React?
If your bank has not talked about when it might offer a checkless banking account, it should soon. Cutting fees on your current checking account offering will increase that account’s appeal, and the concept of dropping the word “checking” will support the brand notion that your bank is forward-looking.
This is not just styled over substance as banks now how the ability to capture more payment information than was ever was present on a check. This means that banks have a whole new product path to increase the functionality of the core banking account to help more with security, personal financial management, and investment advisory.
The other major item that the checkless account impacts are clearing-related charges. Without checks, clearing, and payments take place more often in real time. As such, there is no need for non-sufficient funds and overdraft charges. While some banks will bemoan the loss of fees, smart banks will embrace the change and realize that they can create an array of new loyalty, marketing, credit and guarantee products that are better for the customer and for the bank.
At your next strategic planning meeting, consider what the future might look like for your bank and products as checks continue to decrease and P2P, B2C and even, business-to-business (B2B) electronic payments increase. The notion of the checking account is about to change radically and banks need to be prepared to use the change to their advantage.
Submitted by Chris Nichols on March 26, 2019