Strategic Review of Innovation in the Payments System: Issues for Consultation – June 2011 4. The Decline of Traditional Payment Methods
The decline in the use of both cheques and cash in Australia provides a useful context for discussion of innovation. Each of these two instruments has its own distinct attributes that have contributed to its popularity as a payment method over many years, though the issues associated with declining usage differ between the two instruments.
4.1 The Decline of Cheques
The steady decline in cheque use over the past decade has made cheques the subject of an industry discussion of how their decline can be managed in an orderly manner.[7] Cheques are a relatively high-cost payment method, estimated in 2007 to cost financial institutions around $4 per unit, as well as imposing significant costs on users, particularly the payee.[8] As cheque use declines, many of the overheads remain, meaning that the unit costs are increasing over time. The Board is interested in approaches to manage the decline in cheques, first because it needs to be satisfied that the industry's approach is in the public interest, and second because some possible solutions may require the type of co-operative approach that is identified later in this paper as sometimes being difficult to achieve.
Despite having fallen from 40 per cent of the number of non-cash payments in 1995 to around 5 per cent currently, cheques are still in common use for one-off high-value payments, small- and medium-sized enterprise (SME) payments, superannuation payments, one-off government payments, dividends, donations and small personal payments. Among other things, this reflects the fact that cheques offer a number of attributes that are not readily replicated by electronic methods, including that they allow:
- physical, face-to-face, instant exchange, for example for a property settlement;
- unlimited additional data to accompany the payment, for instance by attaching the cheque to an invoice or other information;
- payment to be made when only limited information is known about the payee; and
- greater financial control where, for instance, the need for a specific signature (or multiple signatures) provides key account signatories oversight of all outward payments within a business.
The first three of these features have consistently been raised in consultations and are discussed further in Section 6. More generally though, it is likely that cheques will continue to be valued until viable electronic alternatives are widely available.
The Consumer Payments Use Study sought to identify the most important reasons why consumers use cheques. It found that around 40 per cent of those using cheques (which in turn account for 40 per cent of consumers surveyed) did so because they felt they had no alternative for the type of payment they were making. This most likely reflects the first three attributes identified above. This was followed by around 25 per cent who used cheques because of the record of payment they provided. That said, it is notable that there is a very marked difference in the use of cheques by age group. According to the Consumer Payments Use Study, only around 11 per cent of consumers in the 18 to 29 years age bracket had used a cheque in the past year, while 57 per cent of those 60 years and older had done so. This suggests that younger generations have a greater preference for, and/or less difficulty in finding, replacements for cheques.
As mentioned, the main policy question surrounding cheques is how their decline is managed in an orderly manner as unit costs rise. The Australian Payments Clearing Association's (APCA) consultation paper on the issue focuses on a range of possible industry approaches to this question. Part of the reason that cheque use remains relatively widespread is that cheques are inexpensive to those writing them, with most of the costs borne by the payees and the financial institutions that process them. This model is likely to become harder to sustain as unit costs continue to increase.
One possible response by market participants would be a change in pricing structures involving financial institutions and large recipients of cheques passing their costs on to the payers in a transparent way. Of course the decision to do so would be unpopular with segments of the community and may be difficult for institutions to make unilaterally. Equally, competition law concerns might make collective action difficult.
Other possible responses to declining cheque use might include:
- making further changes to cheque processing arrangements to reduce their cost so that the system can be more sustainable at lower volumes; or
- consider phasing out cheque clearing – the approach being considered in some other countries, including the United Kingdom and Ireland. This would be difficult without alternative instruments having been developed to fill the gap.
The Board welcomes APCA's consultation process in relation to the cheque system and the prospect of an industry-driven response to declining cheque use. Nonetheless, the Board would like to hear views of stakeholders on these issues in order to assist it in forming its own views, and to test the public benefit of any possible solutions.
Issues for discussion
- Are there aspects of cheque usage that are unlikely to be dealt with by industry initiatives currently underway or likely to be undertaken in the next five to ten years?
- Could the decline in cheques be managed by pricing cheque use in a way that provides better signals to users?
- Can a case be made for reforms to make cheque processing more efficient and therefore sustainable at lower cheque volumes?
- Could institutions unilaterally withdraw from the cheque system, leading to specialisation by a small number of institutions?
- Is there a case for phasing out cheque clearing over time? How could that be managed while ensuring that satisfactory alternatives are developed?
- Should government agencies' policies on payments be used to influence cheque usage?
- Should the approach to cheques be determined by individual institutions, determined collectively by the industry, or determined by the Payments System Board?
4.2 Cash Replacement
In some ways cash is displaying some broadly similar trends to cheques. The Consumer Payments Use Study identified a marked decline in cash usage relative to other payment methods since 2007, as it has been replaced by electronic payment methods, particularly payment cards. Nonetheless, cash remains the most commonly used payment method, particularly for low-value payments. The cost of cash use is also significantly lower than that for cheques, and indeed than for any other payment method for low-value transactions.[9] Nonetheless, the use of contactless and pre-authorised card transactions has the potential to reduce transaction times for card payments and may further reduce cash use over time.
The Board welcomes views on issues arising from declining cash usage.
Issues for discussion
- Are there any impediments to the development and adoption of products to replace cash?
- Is there any case for public intervention in cash replacement?