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Credit Unions: Will 2017 be the year to eliminate checks?

Credit Unions: Will 2017 be the year to eliminate checks?
Posted: Mar 15, 2017
Comments: 2
Author: Lou Grilli

20% of U.S. households still take pen to paper to pay their bills.

Check usage still remains a favorite way to pay by many credit union members, and not necessarily just older members. While online bill pay has been taken up by 4 out of 5 households that still leaves 20% of the population writing checks to pay bills. And we’ve all been behind the person in the grocery store line waiting for the final item to be scanned before pulling out the check book, register and a pen.

As recently as 2014, half of the 16.3 billion individual bill payments paid by Americans were paid by check, totaling $4.3 trillion. A large portion of these were B2B payments, but that still represents a large volume of checks written by credit union members. And this is costing the credit unions money. The first cost element is based on missing out on the interchange associated with using a credit or debit card to pay bills, both online and in store. The second element is the cost to process the physical check, comprised of the fee from the credit union’s processor, plus the ACH cost per payment. As an example of the tradeoff, rather than make 22 cents in interchange on a debit payment, the credit union is paying 25 cents for the member to write a check, despite the fact that in either case, the members pays the same amount. Granted, no payments between financial institutions are settled based on paper checks anymore. Check 21, which took effect 2004, allowed paper checks to be replaced with a digital version which eliminated the need to handle and transport paper documents and also eliminated the return of the canceled check. It also paved the way for remote deposit capture, scanning a check on your mobile to make a deposit. Many other countries have abolished paper checks completely. Finland was one of the first to do so in 1993 while other countries followed throughout the 2000’s. It is safe to say that the U.S.  lags behind in this particular area of fintech.

How can credit unions correct this imbalance?

First, it’s necessary to explore why people still use checks. While many people who write check may have their own personal reasons, fear of fraud, lack of options when it comes to P2P, habit, and universal acceptance are the biggest four reasons.

1. Fear of fraud. Most check writers mistakenly believe that checks are somehow safer. If their purse or wallet is stolen, their cards can be used without them being present, but checks are “safe” because they require a signature.

2. Lack of options for person-to-person (P2P) payments. When a group travels together, splitting costs, the easiest way to pay back the person who paid for the condo is for everyone else to write a check. There are several P2P payment platforms in place with PayPal being the largest and Venmo being the most common among millennials.   P2P requires all parties to the transaction to be on the same platform and if the funding source is a credit card, the platform deducts a somewhat hefty processing fee.

3. Habit. Being able to update the check register and seeing the revised account balance immediately, as well as having a copy of the information written on the check in the form of a duplicate, provides a paper trail that many members rely on.

4. Universal acceptance. Many landlords require a check for the rent since accepting credit or debit cards requires being set up for merchant acceptance, something out of reach for single unit landlords. And while the majority of Americans are getting away from writing checks, anyone can accept a check for payment, even if the payee does not have a bank account (Amscot and other check cashing services fills that need).

With those factors in mind, there are a several best practices credit unions should adopt to expedite the decline of checks.

1. Don’t give out starter checks. Most credit unions still give out a set of “starter checks” when a member opens a new checking account. Some money market accounts also include starter checks. For both cost savings purpose as well as modifying payments behavior, this practice should be ended in favor of educating members to use debit cards and online bill pay (see Educate members below).

2. Rewards. Rewards programs should be used to modify and encourage behavior favorable to the credit union. Two examples that help to discourage check usage is to reward for debit signature transactions, and reward for online bill pay usage (for example, points after 10 bill pay transactions each month).

3. Educate members. Counter the mistaken belief that checks are inherently safer than debit cards. Show the member that the account number and routing number is on each check, whereas debit signature transactions have zero liability. Checks can be washed or forged or duplicated, and according to the Office of the Comptroller of Currency, the checking account owner has 30 days from statement date to notify their financial institution if they suspect fraudulent checks were used against the account; after 30 days liability for losses lie with the checking account owner. And, finally there is no cost to use a debit card, whereas stamps, envelops and ordering checks all cost the check writer real money.

4. Paper trail. Many check writers like having a register that is updated at the POS and with each paid bill. Show the member the use of online banking, and even if their phone doesn’t support mobile banking (i.e. a flip phone), help the member get set up with purchase alerts from Visa or MasterCard, along with account balance updates.

5. Provide a cheat sheet to set up and use bill pay. Show new members or members unfamiliar with bill pay the convenience and ease of using online bill pay. Emphasize that bill pay is not just for utilities; it can be used to pay a landlord, a friend, anyone else the member would ordinarily hand write a check to. And once the payee is set up in bill pay, future payments is just a matter of typing in a dollar amount and clicking “confirm”.

6. Instant issuance of debit cards. The best way to counter check writing is to start the habit of using debit cards early – as soon as the member leaves the branch – by providing an instant issue debit card. Rather than leaving the branch with starter checks and having to wait for a debit card in the mail, have the member leaving the branch with debit card in hand, and mail checks only if the member orders and pays for the initial batch.

Paper checks were born out of convenience in the 1700s as an alternative to carrying large, heavy quantities of gold and silver and really came into widespread usage between 1890 to 1930 with the advent of check clearinghouses being established in every major city. Today there are many better, safer, and cheaper alternatives. Let’s work together to make the death of paper checks happen a little sooner.

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Lou Grilli

Lou GrilliLou Grilli

Lou is the Director of Payments Strategy at CSCU and is responsible for providing leadership to the organization for emerging payments and industry trends, as well as managing the product portfolio.

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2 comments on article "Credit Unions: Will 2017 be the year to eliminate checks?"

Glen Sarvady, 3/28/2017 8:33 PM

Lou- We're usually so closely aligned that it's kind of refreshing to offer a dissenting view for once :) Full disclosure- I've worked on both sides of this battlefield, at a check printer as well as an online bill pay provider.

1) It may be a tough putt for a CU to convert a check to an interchange opportunity, since most CU-issued credit cards are not top of wallet. Cleaner to migrate to debit, even though it offers less upside.

2) Likewise, most P2P solutions do not give rise to an interchange opportunity. And Venmo has pretty much established the price- zero.

3) Therefore, it seems check elimination would be mainly a cost play- and as you point out, nearly all these items are already processed as images.

I'd be wary of dropping the starter checks unless you know where you're migrating those customers. Checks (and debit) are two activities consumers still perceive as "working through the bank." There's a risk of eroding the member relationship if the landing point turns out to be Venmo, PayPal, Amex, biller direct, etc.

I agree with you re: interchange opportunity, but I think there's greater potential at this point in improving top of wallet status and fostering conversion from cash.

Appreciate the perspective, as always!


Lou Grilli, 3/29/2017 9:59 AM

All valid points, Glenn. I selfishly want check usage to turn into card usage, so I don't have to wait for the person in the grocery store in line in front of me to write out a check and update their register.

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