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The end of Cheques? - Treasury Contents


Written evidence submitted by Which?

EXECUTIVE SUMMARY

  1.  Cheques are due to be withdrawn from usage in 2018. This follows a steep declining trend in the volume of cheques issued since the 1990s. However, even by 2016 there are forecast to be over two million cheques issued each day. This is a significant number.

  2.  Cheques are still considered a very useful form of payment by many groups in society such as the elderly and are used widely to pay money to trades men, for subscriptions to clubs and societies or when a householder is housebound among others. Which? can only support the full withdrawal of cheques when suitable alternatives are in place that would not leave those groups who still use cheques disadvantaged.

INTRODUCTION

  3.  Which? is an independent, not-for-profit consumer organisation with around 700,00 members and is the largest consumer organisation in Europe. Which? is independent of government and industry, and is funded through the sale of Which? consumer magazines, books and online subscriptions.

  4.  Which? welcomes the opportunity to submit our perspective on this issue to the Select Committee. The withdrawal of cheques is an important issue for certain sections of the population. The impact of the end of cheques could be substantial and needs to be thoroughly thought through before their abolition is decided upon.

  5.  Which? does not oppose the abolition of cheques. However, suitable alternatives must be identified and processes to develop and implement them must be put in place first before a firm date for the phasing out of cheques is set.

  6.  Those who support the abolition point to two main arguments to support their case:

    — The first is that the market is bringing about a natural decline in cheque usage.

    — Cheques are an outdated method of payment. They involve significant transaction costs for the economy. The introduction of alternatives would deliver potential savings for the money transmission industry and both consumers and businesses.

DECLINE IN THE USE OF CHEQUES

  7.  The first argument needs to be more nuanced. It is true the headline numbers of usage have fallen but it is too simple to say that the market is therefore making the cheque redundant. The cheque remains a vital payment method for some sections of the population and is particularly well integrated into the consumer payment landscape for certain types of services.

  8.  The volume of cheque issues have fallen from 11 million per day in 1990 to 4.4 million per day in 2007. This is forecast to fall to 2.3 million per day 2016.[29] This is still a significant number. Some of the reasons for this include:

    (a) The dramatic fall in the use of cheques for paying bills. This has fallen from one in three bills paid by cheque in 1995 to only one in eight in 2006.

    (b) Only 4% of retail spending is now done by cheque.

    (c) In 2004, £11 billion was spent by cheque, by 2007 this had fallen to £7.4 billion. By 2016 only 2.3% of all non-cash payments will be made by cheque.

    (d) The British adult made just 1.4 cheque payments per month in 2007. Compared to 2.9 per month in 1997.[30]

  9.  There is significant variation in the distribution of cheque issuance across the population. Abolition would disproportionately hit these people:

    (a) Women are disproportionate users of cheques. Over 40% of women make a payment by cheque at least once a month. Within this figure, 55% of women aged between 35-44 pay by cheque once a month and 53% of women between 45--54 pay by cheque at least once a month.[31]

    (b) The elderly are also heavy cheque users. Over 50% of individuals over 65 pay for something by cheque at least once a month.[32]

    (c) A range of situations remain very popular for paying by cheque. These include:

    (i)  Paying tradesmen.

    (ii)  Payments to or from SMEs.

    (iii)  Person to person payments.

    (iv)  Postal payments eg gifts and to charities.

    (v)  Subscriptions and other payments to clubs and societies and schools.

    (vi)  Payments made by (or on behalf of) the housebound or those with physical impairments that make using alternatives difficult.[33]

  10.  There appears to be significant overlap between the groups of people still using cheques and the situations where people prefer to use cheques. For example, the high usage among women between 35 and 54 ties in with the fact that they are highly likely to be mothers. They will be paying cheques for school trips and their child's membership of sports and other types of clubs. Similarly the old are more likely to be housebound or physically impaired as well as being more socialised in the use of cheques.

  11.  It is clear that there is still a role for cheques. The issue of over four million a day is still a significant number. The forecast of a fall to just over two million a day by 2016 is not an insubstantial figure. Their withdrawal risks disenfranchising significant proportions of the population, especially women and older people.

  12.  The only way to ensure this does not happen—and consumers can benefit from the savings in transaction costs—is to have alternative methods of payment in place.

ALTERNATIVES TO CHEQUES

  13.  There may be important benefits for consumers from the efficiency gains of switching to more electronic forms of payment methods (if the cost savings are passed through). However, these transaction costs savings will only materialise if there are alternatives that meet the needs of consumers in the same way that cheques have for a long period of time.

  14.  Alternative methods of payment have to be able to deliver the same benefits as cheques eg their flexibility and usability. Any new method has to be secure. It is not clear that the alternatives on offer at the moment (or that are likely to emerge in the short-term) will necessarily fill the gap left by the abolition of the cheque.

  15.  These new payment methods include:

    — Electronic transfers eg over the internet, telephone or direct debit.

    — Mobile phone technology

    — Pre-pay cards

    — `Wave and Pay' (contactless) cards.

EACH METHOD HAS ITS OWN DRAWBACKS.

  16.  Which? has received correspondence from members pointing out the advantages of cheques compared to using electronic methods. One wrote:

    I believe the proposal to discontinue the use of cheques without precisely identifying and exhaustively testing a suitable replacement is typical of the... "financial services" industry... I find that I write approximately 140 cheques per year mainly to pay bills, credit cards and local tradesmen. We live in a small village without any banking facilities... as a result, most of these payments are made by post and enclosing a cheque is a quick and convenient way to pay. I also do not need to know any details of the recipients bank account which is both convenient for me and provides an element of security... cheques have proved their use over many years... while I do have internet access at home, I do not wish or intend to use the internet for financial purposes... [I] ...do not believe that internet security is adequate for banking applications.

  17.  As the above extract shows some consumers do not feel confident in the security of the internet and electronic transfer methods. Others will not have access to the internet at all. This will be a salient problem for those over 65 and those in deprived communities and the non technical savvy. Relying on the internet and electronic transfers will mean these sections of the population will be excluded from the money transfer system.

  18.  Mobile phone technologies are not yet sufficiently developed to act as an alternative. An effective infrastructure will take time to put in place.[34] Part of that infrastructure is the security. It is vital that security is at the core of any mobile payments system.[35] Key security principles, such as strong user authentication, mutual authentication, strong cryptography, trusted user interfaces and usability need to be at the core of the development of mobile payment technology. Like the internet, relying on mobile technology also requires individuals to own a mobile phone. Among certain demographic groups this is unlikely to be the case eg the elderly. Therefore they will be excluded by any system relying on mobile technology solutions.

  19.  Pre-pay cards also have drawbacks.

    — Pre-pay relies on the individual being able to "top-up" their card with money. For those housebound this will not be possible unless someone is allowed to "top-up" on their behalf. As described above, the elderly (who are the most likely to be housebound and impaired) are the least likely to be able or inclined to do this. Others (as evidenced in the letter from a Which? member) will not like the exposure to the security risks of electronic transfers.

    — Some Pre-pay cards involve significant fees. These can be levied per payment, or they can be a maintenance fee or to reload the Pre-pay card among others.[36] These fees can act as a disincentive to take up.

    — Which? has concerns that Pre-pay cards may be used by banks to remove their least profitable customers from their customer base. Thus excluding them from mainstream banking services.

    — There are also unanswered questions about the protections the money held on a Pre-pay card may have. Money in bank accounts is protected by the deposit protection scheme, credit cards by section 75 of the Consumer Credit Act 1974 and cheques through the Bills of Exchange Act 1882.

    — In order to get Pre-pay cards to a stage where they can credibly play some role on replacing cheques the points raised above need to be tackled. In the meantime those who rely on cheques would become excluded if they are phased out by 2018.

  20.  "Wave and Pay" cards also have issues to resolve before they can adequately replace cheques.

    — They will require a significant infrastructure investment to install the readers. It is vital this infrastructure is interoperable. This will take many years to happen. If it is not up and running before cheques are fully phased out, a potentially damaging payment gap may open up. Those who would have used cheques will not be able to make payments in the ways they would like to.

    — In order to take up a new type of payment consumers will have to be relatively confident in its integrity. Cheques have a long history of reliability. Therefore data handling and security have to well designed and integrated early into any "Wave and Pay" system. A series of important security principles such as strong user authentication, mutual authentication, strong cryptography, trusted devises and user interfaces and improved usability need to inform the development of "Wave and Pay" infrastructure.

    — Questions need to be answered on the protections that will be afforded to money paid by "Wave and Pay" cards. As above cheques have fraud protections through the Bills of Exchange Act. What will "Wave and Pay" cards have?.

    — If the amount of money that can be paid out on such a card is as low as £10 (as is talked about) then this seriously questions their usefulness as cheque substitutes. Much greater amounts can be paid out through a cheque. A low limit will make them useless for many of the operations cheques are currently used for.

March 2010














29   Cheque and Credit Clearing Company (2009). Cheques and Cheque Clearing: The Facts-The guide to cheques and the British cheque clearing system from Industry Update Seminar 2009, pub: CCCC. Back

30   Cheque and Credit Clearing Company (2009). The Great British Cheque Report from Industry Update Seminar 2009, pub: CCCC. Back

31   Cheque and Credit Clearing Company (2009). The Great British Cheque Report from Industry Update Seminar 2009, pub: CCCC. Back

32   Cheque and Credit Clearing Company (2009). The Great British Cheque Report from Industry Update Seminar 2009, pub: CCCC. Back

33   Cheque and Credit Clearing Company (2009). The Great British Cheque Report from Industry Update Seminar 2009, pub: CCCC. Back

34   McKitterick, D and Dowling, J (No date). State of the Art Review of Mobile Payment Technology, pub: Department of Computer Science: University of Dublin, accessed at http://www.docstoc.com/docs/20969946/State-of-the-Art-Review-of-Mobile-Payment-Technology. Back

35   Agarwal, S et al (No date). Security Issues in Mobile Payment Systems, in Towards Next Generation E-Government, pub: Computer Society of India. Back

36   Other fees may include: paper statement fee, a fee for any refund processing, additional card fees, replacement card fees, a PIN replacement fee, a charge-back fee and a card-to-card transfer fee. Source: Financial Consumer Agency of Canada (No date given). Pre-paid Cards, pub: FCAC: Ottowa. Back


 
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Prepared 16 April 2010