House of Commons - Treasury - Written Evidence

The end of Cheques? - Treasury Contents

Written evidence submitted by Consumer Focus

EXECUTIVE SUMMARY

1. We welcome the Treasury Committee's inquiry into the Payment Council's decision to phase out cheques by 2018. It is a progressive decision but not without controversy and genuine concerns need to be addressed. In order to overcome resistance to change the significant savings to be made by the abolition of cheques need to be passed on to consumers in terms of accessible, user controlled, efficient alternative payment methods. Education and information about the alternative methods and their benefits and suitability for different segments of the population will be needed in making the transition. It is important, therefore, that the Payment Council targets and timelines are met and that clear responsibility for meeting these objectives is shared by industry, Government and regulators.

2. Our responses to the call for evidence in relation to the proposed abolition are as follows:

Trends over time in the use of cheques as a payment mechanism, including estimates of likely usage over the next five to ten years

3. The Payments Council has recently reported on the decline in usage of cheques as a payment mechanism.[5] It is likely that the decline will continue, but unlike in most European countries and in countries like Australia and New Zealand, volumes of cheque usage in the UK are still significant.

4. The efficiency and functionality of cheques is becoming more limited, with more businesses and retailers refusing to accept cheque payments, the rise of e-commerce hastening the trend towards e-payments, and the move away from automatic inclusion of a cheque facility with all bank accounts. As, by nature, cheques cannot be processed as efficiently as other means of payment, the use of cheques in a cross-border context is increasingly discouraged.

5. In a study of low income families in Wales, very few people we spoke to said they personally wrote cheques these days.[6]

The advantages and disadvantages of abolition, including the impact of abolition on particular groups in society

Advantages

6. We are supportive of a managed decline in cheque usage, however it's critical that appropriate and affordable alternatives are in place before total abolition. Other countries have seen the abolition of cheques and the movement to faster, more efficient payment methods. Innovation in payment methods in the UK has been limited and has not therefore been a driver in the way it has elsewhere. However it is a way of enhancing reputation and distinguishing brands so that some trust and confidence can be restored to the system. For cost reasons there is a genuine public interest in moving to alternative payment methods.

7. The uncertainty of when a cheque is going to be presented and cleared, with clearance times taking up to six days, causes difficulties for consumers and businesses alike in managing their budgets (although we are aware that some people use this to buy time on payments). The penalties and fees associated with bounced cheques are another reason to avoid their use and move to more efficient and easily controlled methods of payment. Fees currently range from £5 for each cheque to £35 per cheque and then there is the risk of additional fees on top of these for going into unauthorised overdraft. Electronic payment methods trusted and initiated by the consumer, in real time, can provide a better way of managing budgets, giving information on balances and credit, and the capacity to better time and defer payments without the risk of punitive fees and charges.

8. Cheques are particularly difficult for the blind, those with arthritic conditions or mobility impairments, those with English as a second or other language and those with poor literacy, and for those in remote areas without easy access to a bank branch. The use of online or key pad options for these groups often enables greater accessibility and functionality.

9. In most European countries, cheques are now very rarely used, even for third party payments. In these countries it is standard practice for businesses to publish their bank details on invoices in order to facilitate the receipt of payments. UK businesses, big and small, who want to see business growth and remain competitive in the European and domestic market will need to adapt their payment systems accordingly.

Disadvantages

10. The Payments Council research among consumers and small and medium enterprises (SMEs) cites habit, tradition and inertia as the key drivers behind the continued use of cheques, combined with lack of awareness and confidence in other payment methods.[7] These factors themselves don't constitute disadvantages of the abolition of cheques but do present challenges to the implementation of alternative systems.

11. In particular cheques are more commonly used by older people,[8] those who are housebound or who live in homes, and electronic payment methods by the more affluent[9] and so the socio-economic divide indicates that those already vulnerable or on low incomes may have greater difficulties with transition. Information and education work needs to be focused on particular segments of the population. (Although a regional split of how people make payments seems to indicate greater cheque use in the South and particularly in London than the North, with the fewest cheques issued in Scotland). Given the long phase-in time and the planned reviews, the effectiveness of education and information work can be assessed and adjusted accordingly.

12. However there are areas where disadvantage could occur if the transition is not managed well.

13. Cheques are often favoured for consumer to consumer transactions or small business transactions. Older or vulnerable people, those with particular disabilities, or those who are not comfortable or competent in utilising electronic methods will find the transition difficult, even though for many people electronic or phone payments provide a better alternative. Remembering PINS and passwords can be a challenge even for those who feel comfortable with electronic methods.

14. For SMEs, particularly your local small tradesperson, cheques are a usual method of payment but not necessarily a convenient form of payment given the need to take time to bank them and the delays involved in receiving payment. Direct Debit or e-payments are the easiest solution but the use of card payments is inhibited by the significant charges banks place on facilitating these for businesses, despite the fact that this sort of processing is much cheaper for the banks than cheques.

15. Careful supervision of institutions will therefore be needed to ensure unfair or unjustified fees and charges for cheaper payment systems do not creep in and that current fees and charges are more reflective of the cost of the service.

16. The current lack of universal access to affordable and functional internet services is a further barrier to the abolition of cheques. Proposed universal service obligations in relation to internet access[10] may assist but these are long term and have no guarantees on affordability so there will still be those left outside the net having to utilise expensive and slow payment options.

The development of alternative payment mechanisms

17. The continuing failure of many UK financial institutions to provide systems for instant payments and a range of alternative payment methods has been an obstacle to the pace of natural attrition seen in other countries. There has also been a relative consumer disadvantage in the failure to offer the consumer mechanisms to control timing and amount of payments in the electronic methods currently offered. The abolition of cheques should come with commitments from all institutions to real time electronic payments initiated by the consumer, and to provision of alternative payment methods with all bank accounts.

18. While the Faster Payments Service was intended to provide commitments for electronic payments to be made in real time, it has not delivered. There are different conditions as to what qualifies for faster payments processing in different banks and not all banks are members, so a payment can go out fast and then ramble around a receiving bank's system for days. A real and enforceable commitment to real time processing of all electronic payments and transfers (including on-line faster payments in e-commerce) needs to enforced. The Payment Services Directive as a harmonised standard requires execution of payments throughout the community within a maximum one day execution time;[11] it is unlikely that all UK institutions are currently in a position to comply even with this standard. While the Payments Council has set a number of targets, there needs to be co-operation from the industry, and if there is no co-operation then a means to secure it. It is estimated that the abolition of cheques represents £200 million per annum cost savings to banks and £750 million per annum to large corporations and the public sector in 2018.[12] These cannot just be absorbed into bank profits or bankers' bonuses but need to be invested in more efficient and effective payment methods controlled by the user, into specifically designed accessible payment methods for particular segments of the population, and returned in savings and competitive bonuses for consumers.

19. Current options for payment need to be extended to enable access and availability. Access to cash machines, Direct Debit facilities and a Direct Debit card should be standard on all accounts and are regarded as an essential feature, particularly amongst low income consumers.[13] Real time processing of payments needs to be assured. The availability and access to ATMS should be extended and services offered should include the ability to make payment to third parties.

20. It is clear that new payment methods are being developed and adapted to meet development needs. Increasingly micropayments systems for our £1 daily newspaper online will become the reality and iPhone applications and personal mobile devices will be the future medium for most of our daily transactions. Smart cards and RFID technology will play a greater part in offering convenient payment systems.

21. As the Payments Council recognises, new payment mechanisms will have to be developed for a variety of transactions that are currently largely made by cheque payments, such as person to person, person to sole trader or community group and business to person payments. There appears to be some consumer reluctance to share account details with a person or business they did not know well in order to receive an automated payment. Assurances about security or development of payment methods that do not require this information are required.

22. Furthermore, alternative payment mechanisms designed for the mass market will not necessarily be suitable for everyone and so innovation needs to provide tailored solutions for those with different needs.

23. Our research supports the following additional payment methods in relation to low income consumers:

Modified bill payment and payments in systems

24. The modified bill payment facility would enable low-income consumers to make automated bill payments for utility bills with confidence. The account holder would be able to set the frequency of payments, including on a weekly or fortnightly basis. Outward payments would be synchronised to follow the receipt of regular inward payments, and the payments would only be made if the account holder had sufficient funds in his/her account. No fee would be liable to the account provider if a payment was missed, therefore overcoming the consumer fear of punitive charges.[14]

25. Other bill payment options currently exist on line, for example, bank account linked bill payment services such as B-pay in Australia or the independent PayPal network which might pave the way for further innovation in small consumer transactions.

26. The DWP is currently undertaking a procurement exercise to identify alternatives to the green giro scheme,[15] citing the disproportionately high costs associated with this option compared to other payment types, this is taking place on the basis of competitive dialogue, with the DWP seeking to identify procurement-led solutions that will enable vulnerable consumers to continue to receive pensions payments easily as well as more cost-effectively. Industry should monitor the outcomes of this exercise to scope alternatives for those reliant on cheques, and for whom other existing payment models may be unsuitable.

Prepaid cards

27. Prepaid cards do offer a number of opportunities to financially excluded consumers, particularly those without a bank account or those who are reluctant to use a standard current or basic bank account to its full potential eg being able to transfer a set amount of money onto a prepaid card can potentially help them to manage their budgeting needs while at the same time, allowing them to use ATMs; buy goods on-line or over the phone or use the cash-back facility in shops. However there are a number of consumer protection issues regarding the prepaid card market, primarily concerning "open-loop" cards.

28. Currently there is a big variation between providers on how the fees and charges associated with the use of the cards are applied (eg monthly fees; top-up fees; transaction fees; ATM withdrawal fees)—some of which may be more openly advertised than others. More "hidden" charges may include replacement card fees (due to the limited lifespan of most cards), inactivity charges and charges for refunding money held on a card. A transparent and cost reflective fee/charging structure for "open-loop" prepaid cards is critical.[16]

29. We agree with the Financial Inclusion Taskforce[17] that it is important for government, regulators and providers of prepaid cards to minimise the danger of consumers losing funds stored on prepaid cards due to fraud, physical loss or the insolvency of the card provider.

30. In addition it is likely that some groups will need alternative payment methods which may include some form of paper based payments. In the Netherlands, Austria and Germany, all kinds of invoices are commonly accompanied by so-called "acceptgiro's' (Dutch) or 'überweisungen' (German), which are essentially standardised bank transfer order forms preprinted with the payee's account details and the amount payable. The payer fills in their account details and hands the form to a clerk at their bank, which will then transfer the money. Also, it is very common to allow the payee to automatically withdraw the requested amount from the payer's account—'Lastschrifteinzug' (German) or 'Incasso' (machtiging) (Dutch)". Though similar to paying by cheque, the payee only needs the payer's bank and account number.[18]

February 2010

5 Payments Council UK, "The Future of Cheques Report" December 2009 Back

6 Consumer Focus Wales, The Cost of Cash, November 2009, p7 Back

7 Payments Council UK, "The Future of Cheques Report" December 2009, p13 Back

8 http://www.ageconcern.org.uk/AgeConcern/payment-council-response-151209.asp Back

9 "Personal Current Accounts in the UK", An OFT Market Study, 2008, Glossary Report Back

10 Digital Britain, Final Report, BIS, June 2009 Back

11 Directive 2007/64/EC, para 43 Back

12 Payments Council UK, "The Future of Cheques Report" December 2009, 6 Back

13 Consumer Focus Opportunity Knocks, Providing alternative banking solutions for low-income consumers at the Post Office, January 2010 Back

14 Consumer Focus response to the BIS consultation on developing the financial and banking services available at the Post Office Back

15 The DWP developed the "green giro" exceptions service to ensure those who were unable to receive their pensions and benefits through a standard bank account or a POCA could continue to receive their payments through a cheque-based solution Back