Animated discussion of ‘green payments’ at the annual meeting of US payments industry professionals, Payments 2010, hosted by the National Automated Clearing House Association (NACHA) last week may be a sign of real potential change in the still cheque-friendly US consumer payment culture.
Americans continue to be the world’s heaviest cheque users, with over 17% of US consumer payment transactions in 2009 being other paper-based according to Euromonitor data. While cheques are being officially phased out in the UK and continue to fall out of use by consumers in most other developed markets, concerted industry efforts to encourage a shift in consumer attitude are most likely to prove the key to true payment ‘electronification’ in the US. The shift also poses opportunity for operators, banks and other industry players as they continue to conquer transaction space in cheque-dominated payment channels.
US green payment movement gaining important followers
One significant development announced around Payments 2010 was the US Treasury Department’s decision to move all of its transactions to electronic format over the next five years. As a massive contributor to the payments system in the US, the Treasury’s move is expected to save over twelve million pounds of paper in the first five years. The plan is expected to shift the remaining 15% of still paper federal benefit payments to electronic format, in addition to requiring payment of more business taxes and federal employee-related expenses through electronic channels. While this really only affects consumer payments in that more federal benefit recipients will collect benefits via the Treasury’s “Direct Express” MasterCard prepaid card and will thus be more likely to pay with cards rather than cash, it sets a significant precedent for other large American organizations whose payment structures are still cheque-dependent.
Indeed, NACHA’s ‘Pay It Green’ initiative, launched in 2007 and aimed at educating US consumers and businesses about the positive environmental effects of converting to electronic payments, has gained several major participants since its founding, including three of the country’s largest card issuing banks by card numbers (JP Morgan Chase, Wells Fargo and US Bancorp) and a number of large utility companies that receive millions of cheque payments from consumers every month. According to Pay It Green, New York’s Con Edison electric power company, which serves over 3 million customers, saw over 42,000 electronic billing arrangements set up within the first seven months of launching a ‘green payment’ campaign several years ago. Campaigns like this have the ability to convert the around 48% of all cheques in the US that are written from consumers to businesses – as estimated by a 2007 Federal Reserve study – to more efficient, environmentally friendly payment channels.
Other large merchants are also aiming to further ‘electronify’ their payment structures, both cutting costs and improving their environmental footprint. T-Mobile USA, one of the market’s largest wireless providers, now receives around 37% of its bill payments through the ACH electronic payment network according to a T-Mobile presenter at Payments 2010. With almost 34 million T-Mobile USA customers at the end of 2009, further development of this trend is currently converting hundreds of millions of dollars worth of cheque mobile phone bill payments into electronic format.
Cheque-dominated channels may present ripe opportunity in the US, but global perspective limited in scope
While many US utility companies and other large merchants are championing the environmental cause behind green payments and gladly jumping on the broader ‘green marketing’ bandwagon present in today’s developed markets, cost savings have also played a fundamental role in the motivation of many of them to focus on ‘electronification’ of their payment systems. According to various studies, the average cheque can pose a cost to US merchants of anywhere from $0.60 to $3.00 depending on whether it is verified and the processing method used. In contrast to this, according to a NACHA source, electronic direct payments can “save companies and non-profits an average of 11.5 cents per payment (versus checks) in reduced processing costs.”
Card operators and issuers, who have clearly seen the opportunity that other paper payments represent in the US, are also fighting to enter this consumer payment space. Indeed, American Express Inc. even launched a card-based bill payment programme with rewards points for mortgages – typically considered a cheque-dominated bill payment category in the US – in 2007. However, depending on the card transaction interchange fee model, which still plays a significant role for most types of card payments in the US, card acceptance can also pose significant costs, even for large merchants such as utility companies; operators may encounter obstacles in advocating for their value proposition in contrast to often cheaper, arguably more efficient electronic direct systems.
In fact, while opportunity may still exist for card players in this space in the US, that proposition is effectively void in many markets around the globe. The electronic payment cultures in a number of other major markets have matured markedly over the past several decades – to the point of making entry of card payments into the consumer bill and other recurring payments channel extremely difficult, if not downright impossible. In Europe, the value of electronic direct payments in 2009 already represented 25% to 35% of the total value of consumer payments in Germany, Spain and Switzerland compared to 5% or less other paper value. Cheques have also rapidly fallen out of use in many Asian markets in recent years, with practically negligible consumer cheque usage in Japan, South Korea and Taiwan in 2009. And while these developed markets’ advanced financial services infrastructure has accelerated the trend, a number of developing markets are also seeing increasing electronic payment usage – in some cases driven by the ‘leapfrogging’ of electronic payment infrastructure over a less efficient chequing system.
Other Paper (Cheque) Payment Value as a % of Total Consumer Payments Value 2004-2009
% of total consumer payments value
Clearly, cheques are in decline as a consumer payment method in most markets around the world, as electronic direct payments have become a basic consumer medium. While UK banks, for example, have now even formally set a target date of 2018 for the phasing out of cheques in that market, it seems that it will be voluntary and industry-driven efforts – and neither top-down enforcement nor a grassroots change in consumer behaviour – that will eventually bring about the twilight of cheque payments in the US. In any case, the urgency of the environmental movement in the form of ‘Pay It Green’, the ambition of card operators to conquer paper-dominated channels and the basic cost savings to both merchants and banks, along with the exponential trend toward Internet banking, are all currently serving to cause visible changes in the US consumer payments landscape.