God Save the Queen – But Not Paper Checks


The venerable paper-based check is on the way out in merry Olde England, after 300-years as the king of the banking hill. Here is how the U.K. is phasing checks out – and the chances of the U.S. going the same route.

How did the check phase-out deal go down? The U.K. Payments Council, the organization that sets strategy for all UK bank payments, led the charge, voting to eliminate paper checks by 2018. "There are many more efficient ways of making payments than by paper in the 21st century, and the time is ripe for the economy as a whole to reap the benefits of its replacement," Paul Smee, the Council’s chief executive, said in a statement.

The Council announced its decision on December 16, citing the long-term decline in check usage in the U.K. By allowing for a 10-year phase-out, the Council reasoned, consumers would have plenty of notice and ample opportunities to start using alternative payment vehicles, such as debit cards or online banking and payment services.

The Council estimates that check usage is down by 40% over the past five years. The organization also promised consumers that it would undertake a full review of the check phase-out program in 2016, before pulling the plug for good. England is not alone – both Sweden and Norway have already eliminated the use of paper checks.

American consumers may want to ask whether the idea of eliminating checks will make its way across the Atlantic to the U.S.

Actually, that process is well underway, even though it doesn’t have the formal blessing from the U.S. government, as the U.K. Payment Council had. According to data from the Federal Reserve – the central processing depot for most interbank checks – paper-based check usage in the U.S. is down significantly. In 2002, paper-based checks comprised about 4.2 billion checks and deposits at the Federal Reserve. Today, that number is down to under 1 billion, according to the Federal Reserve Retail Payments Office.

A big reason for that decline is because of federal law. The federal government’s “Check 21” rule, instituted back in 2003, allowed for the electronic images of checks. In essence, the rule enables banks to create a digital version of an account holder’s check, also known a “substitute check”, thus eliminating the need for physical, paper-based checks.

Federal Reserve data shows that while paper-checks usage is down, online-based check use is way up. In the second quarter of 2009, the Fed reports that paper-based check use in the U.S. was down to 4% of all checks processed by the Fed.

Banks have also developed novel ways to forego the use of paper checks. For example, U.S. Bank Corporate Payments Systems, based out of Minneapolis, recently released a new payment service called Online Payment Plus. It allows banks like U.S. Bank (Stock Quote: USB) to process checks via cardless bank purchasing accounts. In a 2008 trial period, U.S. Bank processed over $23 million in “checkless” transactions, mostly involving purchase orders and receipts and invoices.

Expect more of the same going forward. Because in this case at least, what happens in the U.K. won’t stay in the U.K.

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