By Evan Sparks
In 2019, Saturday Night Live aired a sketch called “Cheques,” a mock bank commercial that plays up the scandalous drama of check-writing — “because there’s nothing like furiously scribbling on a piece of paper, tearing it, flicking your wrist and saying ‘I trust this will suffice.’”
“Best of all, checks are easy,” vamps actress Sandra Oh, giving a check logistics lesson for unaware youngsters as she taps on a blank check. “Here: his name. Here: how much. Here: the same, but with letters.”
The humor in the sketch is driven by the checks’ status as an anachronism, much like the floppy disk icon that is still the universal computing hieroglyph for “save.” The Federal Reserve’s massive check clearing infrastructure was largely made obsolete by the 2003 Check 21 Act. For routine transactions, checks have become so marginal that the Federal Reserve’s Survey of Consumer Payment Choice relegates them to a category of “other,” which, along with prepaid cards and money orders accounted for less than 9 percent of all payments in 2022.
But contrary to a 2023 Washington Post report, checks aren’t entirely dead. While the volume of checks written each year has fallen from 50 billion in 1995, it was still at 11.2 billion in 2021. For high-value payments, checks are often a preferred choice. They are the second-most-common form of payments over $500, notes ABA EVP Paul Benda — accounting for 43 percent of payments to contractors, 35 percent of gifts to charity and 27 percent of payments to government entities.
Although checks have declined in use for payments, their use by criminals as a vector of fraud has shot up. In 2022, financial institutions filed 680,000 Suspicious Activity Reports related to check fraud with the Financial Crimes Enforcement Network — up more than 700 percent in less than a decade. Checks account for less than 9 percent of payments but 66 percent of payment fraud, according to the Association of Fraud Professionals. And if the criminals are able to get away with it, the fraud loss is usually eaten by the financial institutions — and ultimately by customers in the form of higher costs for credit and payment services.
Which raises the question: The paper check won’t die. Is it time to kill it?
The problem of checks
Checks are an “inherently insecure form of payment,” says Benda. “Who would ever give a random person their name, address, bank account number and routing number to someone on the street? But we still do it for some reason.”
“People always thought checks were safe, that putting them in the mail was safe,” notes Luanne Cundiff, president and CEO of First State Bank of St. Charles in St. Charles, Missouri. “That’s not true anymore. They’re not as safe and secure as average Americans once thought.” The presence of this and other data on a document that can be altered or “washed” is one reason check fraud continues to skyrocket, Benda notes.
Moreover, checks are expensive for both banks and business clients. The median costs to issue paper checks hovers around $2-$4 apiece, while the cost to receive them runs about $1-$2 per check, according to an Association of Financial Professionals survey. Costs to send and receive ACH transactions come in at less than fifty cents per transaction. It also requires expensive imaging and processing equipment on the bank side.
Cundiff notes that “today the check clearing process is a lot more efficient than it was before Check 21, and the cost has gone way down — but when you consider the fraud costs on top of it, particularly in the last year to year and a half, it’s not going to be a cost-effective alternative by any stretch.”
While the volume of checks written each year has fallen from 50 billion in 1995, it was still at 11.2 billion in 2021. For high-value payments, checks are often a preferred choice. They are the second-most-common form of payments over $500.
The persistence of checks
SNL joking aside, writing a check actually is easy. Regardless of the risk, a check is still the easiest way to transfer a large amount of money for no added fee. The recipient pays no interchange, as it would with a debit or credit card, and customers aren’t limited to transaction amount caps banks often have for card and other transactions. There’s no need to set up ACH — in fact, ACH is basically the inverse of checks’ convenience. A paper check is more cumbersome for payees, though it puts the payor’s data at risk, while ACH requires payees to do less to receive the payment, though they must disclose account information.
“There are inherent headwinds when it comes to how a business needs to make a payment,” says D.J. Seeterlin, chief innovation and strategy officer at Chesapeake Bank in Kilmarnock, Virginia. “A check offers the ability for me to send you a payment without knowing anything about you other than your name.”
Moreover, businesses and consumers alike benefit from the float between when a check is written and settled. Check 21 sped up that process, but “even today there’s still this concept of float,” Cundiff says. “When a business customer writes a check, it’s not going to clear immediately. They still have access to those funds, so that’s still a clear benefit in the eyes of both business and consumer customers.”
Seeterlin adds that “the biggest challenge is with commercial accounts. That’s where the real demand is. Although there’s a small subset of our consumers that are heavier check users, it’s a relatively light demand on the consumer side.”
To solve the problem at scale, “there’s a huge opportunity for some form of either a centralized directory or a federation of directories to make it accessible for businesses to make payments,” Seeterlin says. (While some existing large payments systems have this functionality, ABA SVP Steve Kenneally notes, they’re not universal — the largest payment network doesn’t represent even half of U.S. banks — and they are proprietary.)
What might replace checks?
Given checks’ continuing ease of use, is there a single financial solution that can provide similar or greater convenience and protection? “Checkless” checking products have been around for a long time. In fact, the Bank On national account standards encompass checkless products as something that still meets basic financial inclusion needs. (In fact, use of paper checks is one of the biggest triggers of overdrafts, which can have a negative financial inclusion effect.)
But there’s a long way to go before checkless accounts are universal. “We do offer a checkless deposit account for our customers to use debit cards and offer bill pay services and the like,” says Seeterlin. “But those are definitely the outlier for customers.”
Are wire transfers a suitable substitute for checks for high-value payments? Some banks have removed fees for domestic wires, making them competitive in cost to checks — and a wire eliminates the risk of fraud from a check being stolen and altered. However, as ABA SVP Nessa Feddis notes, the consumer protection rules for electronic transactions like debit card and ACH transactions and those for wire transfers are different. Consumer electronic fund transfers like debit card and ACH transactions are covered under Regulation E. Regulation E exempts wire transfers (although a pending legal case challenges the application of that exemption), which are instead covered by state Uniform Commercial Code laws.
Thus, while there are protections against unauthorized transfer under both laws, they are different, and it can require a sophisticated consumer to understand the difference in the payment rails. “How does the consumer know the transaction is being processed using the wire system versus the ACH system?” Feddis asks. And wire transfers have the same problem as ACH payments — they require payees to provide their banking details to the payor.
Making the best of paper checks
In the absence of a killer app to replace paper checks, there are still several things that bankers can do to mitigate the risk of fraud. “More and more banks are realizing that implementing technology to uncover fraudulent transactions is a good use of dollars,” says Cundiff. “Another thing is encouraging their client base to take responsibility for reviewing their statement more often than once a month by the use of additional technologies, such as positive pay.” More familiar to business accounts, positive pay requires payers to verify online that a check being presented is valid before the check is cashed.
“They need to take some responsibility for that,” Cundiff notes. “It’s really a partnership sharing in the broad detection.”
Positive pay adds an extra step, and thus a little friction, in the payment process — but it provides a key safeguard against a fraudulent check being paid. For business clients that are reluctant to take that extra step, some banks are requiring that they sign an indemnification agreement if they waive the use of positive pay. Others may require business clients to use it should there be a fraudulent check drawn on the account.
Is positive pay a fit for consumer accounts? Unlikely, experts say. Benda notes that the consumers most likely to use paper checks — often senior clients — are least likely to be tech-savvy enough to approve checks digitally.
Ultimately, though, positive pay is another layer of security on what Benda has called an “inherently insecure” payment tool. “I would hate to do another thing to enable a bad product,” Kenneally adds.
Behind the scenes, ABA has developed the Check Fraud Directory, a free resource for all banks that provides access to the best contact information and the desired formats for submission when a bank needs to file a warranty breach claim. The directory — which can only be accessed by banks that provide information for their own institutions — can streamline the backend process that causes headaches for financial institutions.
Small steps
Bankers say that it may not be realistic to kill the paper check in the short term, in part because banks continue to invest a lot in helping the system work better for clients. These enhancements include so-called secure checks, which replace bank account and routing numbers with a QR code. “We’ve enabled it to be a lot easier just to enhance a customer experience,” Cundiff says, pointing to mobile check deposit and online ordering. To improve it further and reduce risk, banks can focus on two tactics: promoting the use of bill pay and minimizing the issuance of government checks. Even when bill pay results in a paper check being issued, it gets sent from a bank’s processing facility and “doesn’t go into the blue boxes” that have been compromised by mail thieves, Benda notes. “That is a generally more secure way to send checks.”
The second tactic involves cutting down on U.S. government checks in circulation. In advance of the 2024 tax filing season, ABA coordinated with the IRS on a webpage for banks to help consumers get their tax refunds by electronic funds transfer, Kenneally explains. “Twenty percent of refunds are still sent by check!”
While 96 percent of federal payments are now electronic, the Bureau of the Fiscal Service has its own tools to up that amount further, by assessing penalties against agencies with waivers from federal laws requiring more electronic payments.
New technology, systems and utilities like directories are likely to replace paper checks eventually. “The future of payments is clearly electronic,” says Cundiff. Until then, banks can push to use a mix of products — ACH, Zelle, RTP, wire transfers when suitable — to continue reducing check use without eliminating it.
“If we get check volume down from 10 billion to 3 billion, that will mitigate a lot of fraud risk,” Kenneally says. “We want to make it unusual to receive a check.”
