Regular readers of this blog won’t be surprised that as an accountant, I love efficient things, and when those efficient things relate to finances it’s even better. And because I consider myself to be a progressive accountant, I am amazed at some of the archaic financial “tools” that still exist and are somehow still used by a reasonable segment of the population. One such financial “tool” is the archaic concept of the cheque (or check as Americans call them).
Huh? What’s a cheque?
Those of you who are part of Generation Y (or millenials as some people would say) may barely even know what cheques are, so let me explain.
Shortly after man invented the concept of money, some bright spark decided that they needed a way to transfer large amounts of this money to pay their bills. So in the year 1472 someone’s great-great-great (x200) grandfather invented the concept of the “cheque”, where you effectively write a note of how much money you intend to pay to someone, and that someone presents it at their bank for payment. You then wait for a period of 3-5 days for no good reason, the cheque then “clears” and the money is transferred from your account to theirs.
Now while my story about the invention of the cheque is total crap (I have no idea when it was invented), the point is that it is a very archaic way of transferring money that should never have made it into the 21st century. But here we are, with people still using this incredibly inefficient means of transferring money, and on a scale that you wouldn’t believe.
Hang on, what’s your problem with cheques anyway?
There are lots of problems with cheques, but the main ones as I see them are as follows:
- You have to physically give the cheque to the recipient, either in person or sent via traditional mail. I have a strong dislike for traditional mail, as it is sending something in physical form at a cost (money, the environment, labour/effort) when it could be sent in electronic form at no cost, and more quickly.
- The recipient needs to take the cheque (along with any others they have) to a bank to deposit it, and probably fill out a deposit slip to say which account they want it to go into. This process takes time (you need to travel to the bank, wait in line for your transaction to be processed, and then travel back to wherever you came from) and comes at a cost (costs to travel to the bank, labour costs for time spent waiting in line, the bank needs to pay tellers to process your transactions, and there is the cost of the deposit slips/deposit books).
- You need to have a cheque book to write the cheques from, and when you run out of cheques you need to get a new cheque book. They send them out automatically, but you can possibly lose them.
- You have to wait for the funds to “clear”, which can take 3-5 days depending on the bank.
- To complete your accounting records correctly, you need to keep the cheque butts, otherwise you have no way of knowing what each cheque was for. The cheques just show up on your bank statements as the cheque number and the amount, and while you can get a trace from the bank for individual cheques (say if you lost the cheque butts), there are fees for doing this and then it takes more time to do the trace.
- If you are the writer of a cheque, it may not be presented for 6 months due to the poor financial habits of the recipient, and if you don’t make sure you have enough cash in that account at that time then you will overdraw. I’d rather make the payment and have the funds gone straight away!
- There are perfectly good alternatives to cheques that don’t have any of these drawbacks at all.
Now I know that there has been some innovation in relation to cheques in the last 20 years, with things like deposit envelopes that you can just throw in the slot so that they can be processed later, and even apps that allow you to take a picture of cheques and send them through to your bank, but it all seems like such a waste of time when there are alternatives that have none of the downsides of cheques and are available to every person with access to a smartphone.
What are the alternatives to cheques?
If you’ve been living under a rock for the last 20 years I can forgive you for being ignorant of the alternatives to cheques. If you haven’t been living under a rock and still don’t know the alternatives, the only reasonable explanation could be that you are now very old.
Everyone else that doesn’t know about these alternatives is in pretty serious trouble, but I’ll list them anyway:
- Electronic Funds Transfer: I don’t know if this is called the same thing in all countries but this is where you just get the account details of the recipient and make a transfer using internet banking. Most banks process these transactions for free, and while transfers between accountholders with the same bank will process immediately, transfers between different banks can take three business days.
- BPay: I don’t know if this exists in every country (it might be called something else though), but this is a system where a biller registers and gets a “Biller Code”. When you need to pay them money, you use this BPay Biller code and your reference number (which they detail on the bill) to make your payment, either via internet banking or even down at your bank branch (the teller can organise this for you). BPay payments process in 1-2 days and are free (the big banks pay for the system, not the end user).
- Credit Card: Most big companies allow you to pay via credit card on their website or over the telephone. This costs nothing for the sender and arrives in the recipient’s account (minus some merchant fees of between 1.1% and 3.3% depending on the card issuer) within three days.
Now all of these alternatives have existed for a very long time, so it’s not like they are cutting edge, but anyone using a cheque mustn’t know about them or is just too lazy to learn something new (even though this “something new” would then allow them to be even lazier by having to write out all of those cheques.
And who are all of these people still using cheques?
While I haven’t obtained statistics on the matter (I don’t even know where to get such statistics from anyway), from reading and general observation the people that still seem to be using cheques include:
- Old people: You know, the ones that wear pants up around their armpits? These are the same people that go into the bank every pension day to withdraw their pension in cash since they don’t trust ATMs/Cash Machines. I guess they are retired and see the regular excursion to the bank as a way of getting out of the house? How else could you explain it?
- Big companies, when they pay you refunds: Have you ever noticed that when you cancel an insurance policy and the insurer needs to pay you a partial refund, they send you a cheque in the mail? I have called up about this in the past and they say that they can’t make the payments via EFT (even if you give your account details) because their accounting system can’t process it. I find this explanation completely unbelievable – they can take your money electronically, but can’t give it back to you electronically? And they expect us to believe that even though they pay their suppliers electronically they can’t pay their customers electronically? I’m convinced that it’s just one small way of punishing you for cancelling your policy with them.
- Small businesses that have archaic accounting records: Anyone that has a modern cloud-based accounting system (e.g. Xero, Quickbooks Online, MYOB AccountRight Live, etc.) would know that writing cheques just takes longer. A key reason is that they only show up a cheque number on your bank statement, whereas if you use EFT or BPay the name of the recipient shows up on your bank statement. Your cloud accounting software can then recognise this name and automatically allocate the transaction to where it is supposed to go. If you know this then you know that cheques are just ridiculous.
- Americans: Not all Americans of course, but from reading a lot of personal finance blogs the use of cheques still seems to be very high in the US. Admittedly they have only recently switched to chip and pin credit cards and also only recently taken advantage of Near Field Communications (NFC) for mobile payments (in the form of Apple Pay) so these may be reasons why it has taken so long, but do you guys not have EFT or BPay (or their equivalents)?
- Ignorant people: The only other category of people that I can think of that would use cheques still are those that are just ignorant of the alternatives. Maybe there is no one else in their lives to tell them that no one uses cheques any more? How else would you explain it?
Is this really an important issue?
In case you think I’m mad or just ranting, you should know that even the Australian Payments Clearing Association is onto this issue, finding out the extent of the cheque decline and what they need to do to manage it (see here for more details). Their report, among other things, details some pretty significant statistics, including that cheque use has declined by 71% in the 12 years to 2014. If this decline continues, those that like cheques are in danger of not being able to function any more, because chances are that whoever you try to pay via cheque probably won’t accept the cheque pretty soon!
If you use cheques then you’d better start investigating the alternatives – even if you aren’t interested in changing, any future recipient of your cheque probably isn’t interested in taking your cheque!