The end of Cheques? - Treasury Contents

Examination of Witnesses (Question Numbers 120-139)


16 MARCH 2010

  Q120  Nick Ainger: When you try and address the points that Mr Tyrie and the Chairman have made in terms of cost benefit analysis, will you be taking into account again the evidence from Geoff that moving to an alternative system may well involve senior management within a small business, of being actively involved in making and receiving payments? That clearly is a substantial increase in the costs on small businesses and a diversion of key management to what currently is a relatively junior task; would you accept that that is an issue?

  Mr Locke: I think it needs to be looked at. I would hope that it is a one-off cost in terms of involvement in changing from one system to another, but the transition costs quite clearly do need to be looked at. I think that also bears substantially on the banks in terms of the quality of the information and the quality of the support that they are able to offer. Again, that will be one of the things that we will be looking at because it will quite clearly have a direct influence on acceptability.

  Q121  Nick Ainger: Coming back to costs, Consumer Focus say that one of the advantages for businesses continuing to use the cheque system is that introducing electronic payment imposes significant increases in cost for them, not just in their operational but actually the charges that are implemented by the banks. Do you accept that in fact the banks are acting as a deterrent in their charging structure for electronic transfers? Perhaps Mr Smee will know.

  Mr Smee: I take what Consumer Focus say at face value; what I do believe is that we have tried to cater for this in setting the tests which we have put for 2016. Because if the charging structures are inappropriate—and clearly I do not have a say over charging structures—then alternatives to the cheques will not be being used and the test will fail and the target for closing the cheque clearing will be revised.

  Q122  Nick Ainger: Perhaps you can help us: what is the difference in costs for processing a cheque compared with the cost for electronic transfer, within the banks?

  Mr Smee: I think it is very difficult to give an instantly straight comparison because it is a quite complex sum. I can do a note on the complexity of it—

  Q123  Nick Ainger: Hang on! I think you have told us that within that £950 million cost saving is a significant reduction in processing costs.

  Mr Smee: We reckon—

  Q124  Nick Ainger: You have produced this highly controversial recommendation and yet you do not appear to have done basic analysis. Surely part of it would have been a cost comparison between processing a cheque and processing electronically.

  Mr Smee: The full unit cost of processing a cheque to a financial institution is upwards of £1, it is around £1. The typical cost of moving to something different from that is about a third lower. It is on that basis that we came up with our cost savings for financial institutions.

  Q125  Nick Ainger: So it is about 30 pence compared with £1?

  Mr Smee: Yes.[1]

  Q126 Nick Ainger: Could you explain then why small businesses believe that by moving to an electronic system of payment they are faced with substantially more costs by the banks? Are the banks profiteering on this issue?

  Mr Smee: I think you would have to look at the relationship between the small business and the bank in the round. I think the tariffs are very different between banks and the services which a bank offers is different to different customers. I think that there is a concern—certainly I can understand the concern—if businesses are saying that they are being forced into something which is less economic for them. However, I believe that we have catered for this in our project by saying that the only way in which we would proceed towards confirming the closure of the cheque clearing is if these alternatives are being used; thus the businesses will have to have found them more attractive, for whatever reason, and cost will clearly be an important part in that.

  Q127  Nick Ainger: I come back to the point about the purpose of the various forums on the Payments Council. If small businesses are still saying to you in four, five, six years' time, "Sorry, we do not like these alternatives and we want to carry on with the cheque system" are you going to abide by that?

  Mr Smee: That would be an extremely important factor in coming to a conclusion on whether the criteria were met, and those criteria will be public.

  Q128  Nick Ainger: But the worry is that you do not appear to have taken into account what they have been saying now.

  Mr Smee: With respect, I do not think that is the case; I think we have listened very carefully to small businesses and indeed some of their organisations have said they support this concept of the managed decline as opposed to standing back from the situation. We are very concerned—and are continuing to have dialogue with them—to understand what needs have to be met were the cheque clearing to be closed.

  Q129  Chair: Mr Locke, you have said that banks should come up with alternative systems but surely you should be working with the BBA on this and, as Mr Fallon said, there was no submission from them on that.

  Mr Locke: I will have to defer to my colleague in terms of his perception of the relationship with the BBA; they are a trade organisation which could express interest in the topic, but they have chosen not to do so. We do hear a lot from individual banks, quite obviously.

  Q130  Chair: But they speak for all the banks.

  Mr Smee: I think generally in the area of payments they have deferred to the expertise of the Payments Council. They do send in a lot of submissions to committees on various topics.

  Q131  Chair: That is the first time I have heard the BBA deferring to anybody! Come on, give us another one!

  Mr Smee: Perhaps I should change the word!

  Q132  Chair: Exactly!

  Mr Smee: But they have at times not expressed a view on payments issues.

  Q133  Mr Fallon: But would it not be much more honest to have worked with the banks and the BBA, to have looked at all the different alternatives to this to see if there were viable alternatives before coming along and proposing an end date?

  Mr Smee: I think we have found that three things have happened because we proposed an end date. First of all, we have had a much richer dialogue with groups who have come forward to us. It is very difficult to get people interested in an abstract concept of payments. There has been a far greater contact and dialogue since we made the announcement. Two, I believe that by setting a target we are going to encourage innovation. I think there is a lot more interest now in developing the alternatives to the cheque. Three, I think we have helped those who wish to move away from cheques—and I do not think we should ignore the fact that there are many businesses who wish that the cost of issuing cheques did not fall on them. We have enabled them to plan with some certainty. I do believe that setting the target date was right. It was a close call but I think it was right because it will enable us better to meet the needs of those who currently rely on cheques.

  Q134  Mr Fallon: When you say it was a close call, do you mean some members of the Council were unhappy about it?

  Mr Smee: No; but it was a decision over which we agonised and decided this was by far the best means because it enabled us to manage what was going on.

  Q135  Mr Fallon: It was a unanimous decision, was it?

  Mr Smee: I think there was one anti voice—it was not an independent director.

  Q136  Mr Fallon: Was this taken before you lost your Chairman?

  Mr Smee: No, it was taken under the interim chairmanship of Martin Cave, but the previous Chairman had been very involved in all the discussions leading up to the decision.

  Q137  Mr Fallon: But you do not have a Chairman at the moment, do you?

  Mr Smee: We expect to make an announcement imminently.

  Q138  Nick Ainger: Coming back to this issue of consultation, I was referring to small businesses and their feeling that perhaps they had not been properly consulted, but they were not alone, were they? The National Pensioners Convention also was critical of the poor quality of the consultation. Clearly there have been serious problems with a number of the consumer organisations. First of all, what lessons have you learnt from this process so far? What guarantees can you give us that the consultation process will be much better when we are moving towards a decision on the abolition?

  Mr Locke: I have been very concerned throughout that the consultation process is as fully inclusive as it possibly can be. We have absolutely no interest in ignoring people's views—none whatsoever. Certainly in terms of the Consumer User Form that I chair I have been very active in identifying new participants and those who have a contribution to make. I am sorry that the National Pensioners Convention, for example, simply did not raise their heads at the appropriate time, but if they wish to make representations and they wish to talk to us and they wish to participate, of course we will be happy to do that. The fact is that this issue has become more interesting—I believe one of the achievements we have made—because of the plan that we have introduced and the way in which it has been set, and it is often easier for bodies to get involved in discussions about something relatively concrete than in strategy, with a small "s". As time goes on I expect the number of interested parties to increase and that is positively welcome. Certainly as far as my role is concerned I will seek to make it as inclusive as I possibly can.

  Q139  Nick Ainger: What do you mean by that? Are you going to sit back? Okay it has become a controversial issue and people are now expressing an interest, but what I am getting at is are you going to sit back and wait for them to contact you or are you going out proactively and seeking their views?

  Mr Locke: We are perfectly capable of being proactive and actively seeking people's views and responses, and indeed prompting them in a way that they have not done so. We have held, for example, a number of events where the National Payments Plan, which was the precursor to all of this, was discussed in some detail. Those were very well attended, but quite clearly as we progress and hold such further discussions we need to make sure that those are even more inclusive than they have been up to now. From some of the bodies you have already heard from I think there is a feeling that it has actually been quite an inclusive process. We have indeed done some survey work amongst members of the forums in terms of how they feel about the forums, how they feel about the agendas and how they feel the meetings have actually gone, and the responses to that have been very positive. Clearly we can do better and if there are people who feel excluded then we have more work to do.

1   Note by witness: The OFT Cheque Working Group Report included data on a couple of case studies on the costs of cheques for corporates, which found that cheques were 70p more expensive than debit cards and £1.40 more expensive than direct debits. Back

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