International Finance
Banking and Finance Magazine

Cash is king, but it’s not ‘cheque mate’ yet

IFM_ Cash is king
Cheques are an outmoded and expensive holdover from the labor-intensive banking era

Our economy has suffered dramatically over the last few years. However, in terms of how we conduct business and function moving forward, COVID has been a defining element. Our traditional high street is in danger because of the central banks’ hasty retreat as they try to change the status quo and get customers to “Go Digital.” However, we were already on the verge of change because new and emerging FinTech companies made it easier to pay online and with mobile devices.

The shift to electronic banking

COVID and the fact that we don’t like to touch cash or coins helped speed up the inevitable move toward digitization. Good technology helps us expand and increase efficiency. For example, making the most of Open Banking and PSD2 gives us new ways to deliver goods and services in an omnichannel setting. But we shouldn’t abandon people. We shouldn’t just throw something away because it’s no longer helpful, efficient, or stylish.

Cheques are here to stay

Cheques are an outmoded and expensive holdover from the labor-intensive banking era. However, there are compelling arguments for maintaining them. People don’t always trust digital payments, and it has been shown repeatedly that they can be affected by fraud, cyberattacks, and power outages.

Mainly the weak and old believe cheques might be more dependable than electronic payments. There are no PIN codes to keep track of, and seeing numbers on a screen does not require 20:20 eyesight.

An old woman used hers to give gifts to her great-nieces and nephews. She has lost faith in the internet because she has read so many stories about people scammed out of money and couldn’t get it back. But it’s getting harder and harder for her to use checks for everyday things like grocery shopping.

Checks now make up less than 1% of payments made to retail banks; there were 185 million transactions altogether last year versus 272 million in 2019. Cash usage is also declining; it made up only 6% of United Kingdom transactions in 2018 compared to 23% in 2019.

However, it matters to the minority of people who routinely spend cash. According to consumer advocacy groups, 1.9 million consumers make almost all purchases with notes and coins. Money and checks are necessary if the internet or our power supply is compromised.

However, that does not stop the government from gradually trying to phase out both conventional forms of payment. For example, when some of the 22 million people who owned Premium Bonds refused to give their bank information to get their prizes, National Savings and Investments (NS&I) tried to stop giving out tips by checking the year before and had to change its mind.

Still, a lot of holders switched from using checks to using bank transfers. Cheques were distributed in July 2021 in 319,752, down from 1,009,165 in July of the previous year. Nearly 90% of awards were deposited directly into customers’ bank accounts or used to purchase additional Premium Bonds.

The consumers of banks who depend on cheques have been ignored. Recently, an old woman from Lincolnshire had run out of cash and could not pay for birthday presents. Her bank had shuttered the final branch. The phone support line was utterly useless. Due to the pandemic, a recorded voice advised that there would be a lengthy wait to speak with a staff member. She tried to use the automated system but couldn’t because she didn’t have an online banking code.

She talked to the Co-operative Bank after repeated attempts to get in touch with the bank. According to our systems, the bank reported that a new chequebook has been triggered and is on its way to her. Once a specific number of cheques have been cashed from the book, they are automatically requested.

Cheques are still a safe way to make payments to people when you don’t know their bank account information. In 2020, there were 185 million transactions with just £12.3 million in cheque fraud. However, scams involving 4.1 billion online payments totalled £479 million last year.

However, it appears that big business is bringing back cheque payments, maybe in response to the rise in “phishing” scams, in which criminals send fraudulent emails to victims to obtain personal information. Customers no longer believe emails or phone calls purporting to be from their bank or asking for information about bank accounts.

Between October 2020 and March 2021, HSBC’s customers—including those of subsidiaries First Direct, John Lewis Finance, and M&S Bank—received tens of thousands of cheques out of the blue for subpar service. Cheques were provided, according to HSBC, “to give the receivers full control over the account that they deposited it into.”

Lloyds Bank recently gave 350,000 insurance customers who were promised discounts when they renewed their contracts but didn’t get them a total of £13.5 million. Payments of £40 on average were made via check or bank transfer.

Because banks were closed less during the pandemic, checks have become more modern. Customers can pay them in through an imaging device on their mobile banking app. Thanks to its convenience and speed, the recipient can receive the funds in their account in about a day.

In the first half of 2021, clients of Lloyds Bank used the mobile app to deposit 3.8 million checks. The maximum amount that can be paid in via this technique is typical £1,000, with personal customers being able to write up to four checks totalling £2,000 every day.

Bank of Scotland, Barclays, First Direct, Halifax, HSBC, NatWest, RBS, Starling, and Virgin Money are among the banks offering this service. This revival came more than ten years after the UK Payments Council resolved to phase down checks in the UK by October 2018 in 2009.

But the House of Commons Treasury Committee started looking at the idea of doing away with checks in February 2010. The payments council announced that cheques would continue as long as customers need them, following concerns from charities and others.

Even though internet banking will undoubtedly continue to hold a sizable market share, cheques have a future and history. If the higher limits on transfer amounts were removed, it would be easier and more popular to use a check as payment through an app. If other banks join, the system might be expanded even further.

Many customers will believe they need checks if banks don’t develop more robust online systems. But don’t overlook the emotional benefit either; a cheque slipping out of a birthday card is much more pleasant than a cold online bank transfer.

What exactly does ‘Cash is King during a recession’ mean?

We live in unprecedented economic times, and there may be difficult days. As a result, people frequently resort to currency as a safe harbour in choppy circumstances. This has given rise to the common belief that during a recession, cash is king. That raises the following query: to what extent is that true?

The adage “Cash is king” frequently appears in business and finance talks. It broadly refers to the importance of sufficient cash flow and liquidity for the financial health of an organisation, home, or portfolio. Any wallet gains flexibility by having cash on hand, especially in an emergency.

The benefits of having liquid assets on hand when the economy falters are best summed up by the phrase “cash is king during a recession” for investors. Investors can use cash to leverage their financial positions in various ways, from navigating volatile markets to going all-in on discounted assets.

When the economy is uncertain, investors often add cash to their portfolios. But overdoing it can lead to unforeseen consequences.

Are image-based payment systems the future for safe transactions?

For instance, while not as old as currency, checks have been used for hundreds of years. But since a government-led initiative told the financial industry that consumers need alternatives, just like cash, cheques have gotten a second chance. As a result, cheques have been used less frequently as other forms of payment have become more common.

In 2017, our banking sector spent approximately £800 million on developing an image-based payment system (ICS) that can significantly improve the customer experience and provide those who still want to use them with payment options. In addition, due to new, improved security features, check fraud as a percentage is negligible (*£9.70 of fraud is averted for every £10 of fraud).

So why don’t banks tell us that we can deposit checks with our cell phones by taking a picture of them and scanning them and that the funds will be cleared by the next business day? Why don’t they inform corporations that they can take photos of scanned checks in one location and deposit them online as bank branches close? Cash and checks are still more expensive for the bank to manage. However, they continue to be among the safest payment methods in terms of security. Also, they could still use the current payment system as a backup in a power outage, network outage, disruption of a financial platform, hacking, or problems with legacy systems.

Nevertheless, the risk is a constant worry. We, therefore, look for means of reducing it. In case of any of those above, have cash in your pocket, a chequebook in your locker, additional cards, and mobile apps. But even the new payment options are under pressure as banks, fintech companies, and competitors are forced to close and stop their shiny new consumer-facing and business-to-business apps because of rising operating costs, shrinking market share, and falling demand.

Keep the cheques coming!

For different reasons, it seems like a large number of businesses still take checks as payment. Most small and medium-sized businesses that still use checks do so for various reasons, one of which is that it gives them more time to arrange their finances because it delays the time the money leaves their account.

Many SMEs also assert that they will continue to utilise checks as a form of payment since it is the procedure they are most accustomed to and because many payees still insist on it. Even though cash and electronic payments now predominate for lesser sums, many people and businesses are still willing to “cut a check” to pay higher costs.

Therefore, instead of taking away the option to order one when opening an account, removing the possibility to order one online without having to jump through hoops, or not informing their customers about the many simple ways that they can keep using them, why don’t banks urge people to accept tried and trusted payment options by keeping a backup checkbook just in case? The government was ready to give the customer what they wanted by reversing the cheque’s death. Why are the banks steadfastly trying to push them out when it is evident that their clients still value the “good old trustworthy” cheque?

However, one country thinks otherwise

The Reserve Bank of Fiji will remove cheques by 2024, as Governor Ariff Ali called the move a part of the banks’ plan to modernize the island country’s payment system.

Ariff Ali also said that RBF was not previously mandated to regulate the payment system until 2021, and its initial priority is the upgrade of its Real Time Gross Settlement System.

“By 2024, there’ll be no cheques. So hopefully once we launch the CSDs and the real gross settlement system, something we’re working on is by 2024 there’ll be no cheques so basically, no more paper cheques there’ll be more electronic payments,” the official remarked.

Cheque usage goes down in Australia as well

Monthly cheque usage has been steadily declining since 2002, with some of the biggest decreases being seen in recent years, show latest figures from the Reserve Bank of Australia, which states that cheque usage was down 17.8% for the year ended June 2022 and 18% down for the same period in 2021.

While cheques have not entirely disappeared, the decline in their usage is reflective of a societal shift towards technology.

“For some Australians, it’s hard to imagine a life without cheques. For others, they may have never used a cheque or owned a chequebook in their lifetime. In 1980, cheques accounted for 85% of the number of non-cash payments and almost all their value. Now, they account for just 0.2% of transactions, a number that continues to decline year on year,” a CommBank report stated.

An RFI Global Report in 2022 said that the likelihood of cheque usage regularly increases with age. Consumers above 65 years are significantly more likely to have written one to two cheques over a six-month period, than the younger user base. Also, the study saw one in four users report using cheques due to personal preference, with bill payments being cited as the top reason behind the move, followed by paying for items, services, or giving cheques as gifts. However, younger demographics were more likely to use mobile payments and buy now pay later services (BNPL) in a typical month rather than cheques.

CommBank commented in its report, “While cheques are still in use in Australia, usage has been declining at 20-25% yearly since 2016, while digital transactions increase. Looking to other nations around the world, including neighbouring New Zealand, who became cheque-free in 2021, we can expect to see the trend of embracing a cheque-free economy to continue.”

“After seeing huge growth in new payment platform transactions over recent years, digital payment technologies are showing no signs of slowing down. As consumers continue to adopt quick and easy digital payment methods, banks will continue to find ways to meet their needs through safe and secure digital platforms,” it concluded.

Conclusion

As we have mentioned in our article already, small and medium industries (SMEs) will continue to utilise checks as a form of payment since they are most accustomed to this particular practice and also many payees are still insisting on it. Even in the Australian case study, we have seen consumers above 65 years still writing one to two cheques over a six-month period.

Despite cash and electronic payments now becoming predominant mechanisms for lesser sum transfers, customers and businesses are still willing to ‘cut a check’ to pay higher costs. And the trend will continue in the coming years as well.

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