The end of Cheques? - Treasury Contents

Examination of Witnesses (Question Numbers 60-79)


16 MARCH 2010

  Q60  Mr Tyrie: Is this Annex B?

  Mr Smee: Yes.

  Q61  Mr Tyrie: Is that the sum total of what is in the public domain on this subject? I just want to clarify whether there is other material which is not in Annex B.

  Mr Smee: That is what we have published, yes.

  Q62  Mr Tyrie: Let us take a look at Annex B. Annex B says, "Quantifying the existing benefits of cheque use in comparison to other benefits is harder", in other words, harder than calculating the benefits, that is, the savings, to corporates and banks. If you read on in that paragraph, and I am on page 26, you do not make any estimate of that amount at all. So what you have done, have you not, is write in the benefits to your firms, to the corporate side, but you have not written in any costs to the users, that is disbenefits of loss of the cheques? There has been no quantification of that loss.

  Mr Smee: It is difficult to give a quantification because at present most banks do not actually make—

  Q63  Mr Tyrie: The number is surely not zero, is it? There must be a number which you should write in. In any cost/benefit analysis you should write in a shadow cost, should you not?

  Mr Smee: The key will be what alternatives are made available and the support that is put into that to ensure that consumers can use those alternatives. We do from our research feel that consumers have accepted that cheques are declining and are willing to consider alternatives if they are properly explained and properly justified to them.

  Q64  Mr Tyrie: But that is not the question I asked. I asked you what is the disbenefit of losing the convenience and the familiarity and the other benefits that cheque users enjoy at the moment. What estimate have you placed on that in your cost/benefit analysis? You have told me, "We do not know", have you not?

  Mr Smee: I have, but—

  Q65  Mr Tyrie: So what value can we ascribe to your cost/benefit analysis? That may be more than the £1 billion that you have ascribed as the gains, the £950 million, to corporates and banks.

  Mr Smee: That is why it is crucial that the alternatives should meet the needs of consumers preferably in a better way than cheques currently do, because then there would be a benefit to all concerned and that is why the triggers which we have set for confirming closure of the cheque clearing have been set so high.

  Q66  Mr Tyrie: Do you not think that the next stage, if you are going to make any serious case at all, frankly, is to have your cost/benefit analysis put out to independent verification by a body specialising in this kind of microeconomic cost/benefit analysis which can then write in some proper shadow costs? Otherwise Annex B, frankly, is not worth the paper it is written on. You have only analysed half of the picture, have you not?

  Mr Smee: We have only analysed the part which is capable of numeric computation at the moment.

  Q67  Mr Tyrie: It needs to be written in. The fact that the consumer benefit of using cheques is hard to estimate, as you put it, and I agree with you, does not mean to say that you just abandon all attempts at doing so. Clearly you have got to write something in; otherwise the cost/benefit analysis is meaningless. That is what economists mean when they talk about shadow costs, is it not? Have you got an economist on your team to do this work?

  Mr Smee: Yes.

  Q68  Mr Tyrie: Has he not made that point to you?

  Mr Smee: Yes.

  Q69  Mr Tyrie: And what response did you make?

  Mr Smee: He felt that this was the most effective way of demonstrating the issue at our current state of knowledge. What we will be doing in the course of the rest of this year is coming up with the detailed criteria which need to be met if the three tests which I referred to earlier are going to be justified in 2016. We are doing that in consultation with those who are affected by the change, particularly the user groups, and we will be making that public.

  Q70  Mr Tyrie: I do not mean this disparagingly, but may I ask you if you understand why it might be that this Committee, having listened to your answer, which is that only half of the cost/benefit analysis has been produced and that there are no numeric counterweights to the figures you have produced for the benefits to firms, will have to conclude in our report, and I do not want to pre-judge what other members of this Committee may say but on the basis of what I have just heard from you, `case not made'?

  Mr Smee: I think it depends what the case is that you are referring to.

  Q71  Mr Tyrie: It is whether the disbenefits exceed the costs of the removal of cheques, and since we have not got any figures for the benefits of cheques in your calculations we cannot possibly answer the question.

  Mr Smee: But the key case which we are seeking to set out is a challenge to the payments industry that as cheque usage declines there has to be positive and proactive assistance for those affected by the decline in cheques.

  Q72  Mr Tyrie: I was going to make that my last question but, since you have talked about this positive, proactive assistance, when you said that "the best outcomes may often be achieved through the operation of market forces alone" in your own consultation paper of 2008, did you exclude this particular area or is this one area where you feel market forces should be substituted with what you have described as the management of decline?

  Mr Smee: I feel in this particular area that the management of decline is important if those who are most reliant on cheques are to have their interests taken care of.

  Q73  Mr Tyrie: This is an area where market forces should be suspended?

  Mr Smee: I would not say they should be suspended because I think in many cases the alternatives will come about through market forces, but I do not think it can be exclusively left to those forces.

  Q74  Mr Tyrie: It just so happens that this is one area where the operation of market forces alone—I am quoting—"should not be brought to bear".

  Mr Locke: One of the key objectives is to set those market forces within a clear framework and that is what the Payments Council has been seeking to do by setting the 2018 and then the interim 2014 and 2016 deadlines, making it clear that we expect innovation to arise from market forces but with the very big carrot of there being the option of terminating the cheque clearing system at the end of that if and when the alternatives have arisen. Coming to this as an independent, I have been very concerned that the rate of innovation in this sector generally has been too slow and that consumer needs have not been fully met, and that is another part of the cost/benefit which has been complicated.

  Mr Tyrie: I agree it is very complicated. Do you not think it would be a good idea now if you went away and did a proper cost/benefit analysis, and have it independently verified and publish that?

  Q75  Chair: I think as Chair I would ask you to do that and I would ask you to submit it to us in the next few months because you certainly have not made the case for a cost/benefit analysis. In fact, it seems contrived, your approach.

  Ms Quinn: It is certainly something we could do and one of the things we will be doing later this year, of course, is publishing the key criteria for how we are assessing.

  Q76  Chair: Okay, but I am asking a very specific question as Chair of this Committee. Will you go away and agree to do what Mr Tyrie has asked you and put it out to independent professionals and then share that with us so that we can share it with the public?

  Mr Smee: I would be happy to do that. I think it is important that several of the figures will be more of an art than a science, but that is the case with cost/benefit analysis.

  Mr Locke: I think it is important also to include in that—

  Q77  Chair: That is what we are asking for, right. Can I ask then, have you done any work on the fraud levels of different types of payment? For example, cheque fraud is declining. Is that correct?

  Ms Quinn: We issued cheque fraud figures last week and that showed a decline from £42 million to just over £30 million, yes.

  Q78  Chair: But card fraud is going up?

  Ms Quinn: No, that is not true. We saw last week that card fraud declined from £610 million to—

  Q79  Chair: Give us the figures.

  Ms Quinn: £610 million card fraud in 2008 declined to £440 million in 2009. That is a drop of £170 million.

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