The death of the cheque
In just eight years' time, a 300-year-old slice of British heritage, still widely used today, is set for the chopping block – the cheque.
On the face of it, the controversial decision by the Payments Council (the organisation funded by banks and other payment service providers to set up the strategy for payments in the UK) to replace cheques with a 'viable alternative' by October 2018 appears easy to justify.
Data recently published by the organisation found that cheque usage fell 10% over the second quarter of 2010 compared with the same period of 2009, as consumers and businesses continued to switch to credit and debit card payments and electronic transfers.
A number of major retailers, including Sainsbury's, Asda, Morrisons, WH Smiths and Shell, no longer accept cheques, while utility and energy suppliers give discounts for payment by direct debit rather than cheque and cash.
"We know that cheques are naturally falling out of use," says Sandra Quinn, spokesperson for the Payments Council.
However, critics point out that the Payments Council Board is made up mainly of bank representatives, and that the real reason for scrapping cheques, which currently cost the banks around £1 each to process, is that UK banks will save an estimated £200 million a year in processing fees.
Reliance on cheques
But while banks may prefer customers to use cards or online banking, many consumers aren't comfortable with new technologies. One of the groups most reliant on cheques is the elderly, many of whom have no computer and little inclination to learn about technology.
"As far as online payments go, I don't think a lot of people my age will be bothered to learn the intricacies of the internet, and besides, I don't have a computer," says 81-year-old Jeanne Rendall from Ampthill in Bedfordshire.
Jeanne uses cheques almost every day and says she'd be lost without them. "I am partially disabled, so the hairdresser, milkman and greengrocer all come to me, and as I don't drive, I use the local taxi firm a lot too.
"I pay them all by cheque as none of them carry a card machine. Without cheques or a computer I would need to resort to cash. For me, cheques are essential."
The Payments Council claims that it recognises older people would struggle with an internet-led replacement to cheques.
"That's why we are looking at a range of options, including an electronically processed, paper-based alternative," says Quinn. "The banks know there needs to be something equivalent to cheques – they just don't know yet what it will be."
But as Jeanne points out: "Cheques do the job, and I don't see why we need to get rid of something that works perfectly well already."
Chris Gray, the 49-year-old owner of nearby business Ampthill Fireplaces, agrees. For more than 19 years he has taken 50% of his £500,000 annual turnover by cheque payment – and not one has bounced.
"We go to customers' houses when selling our products and take a third of the payment upfront as a deposit," says Chris.
"With an average order of around £2,300, that's a considerable sum to have sitting in a current account, so customers give us a cheque but ask us to cash it a few days later when they have transferred money in. It's a form of contract."
Chris's Co-operative Bank business account doesn't charge him to pay in these cheques, but he would be charged for payment by card.
"I have a card machine but use it reluctantly: although debit cards only cost around 55p per transaction, credit cards cost up to 2% of the value of the transaction. That really hurts small businesses like ours."
Chris did some number-crunching to show just how much it would hurt the firm if cheques were not used. Ampthill Fireplaces took £250,000 by cheque in 2008, £312,000 in 2009 and £306,000 to date this year.
"If this income over three years had all been taken by credit card, incurring average fees of 1.5% per transaction, it would have cost me £13,000, which is unsustainable," he says. "Even with an equal mix of debit and credit card payments, the cost would still be £2,000 a year."
Chris says he would have to pass on some of the cost to customers, reducing his competitiveness. "It's small businesses that will be hit in the pocket," he adds.
Local organisations dealing in much smaller sums would also suffer, according to Karen Lowe, 32, from Billericay in Essex. She uses cheques regularly to pay for the various clubs attended by her two children, two-year-old Amelie, and Oliver, who is almost five.
"Amelie has just started pre-school twice a week, which costs £10 a session. They don't have any other means of taking payment, and I don't tend to carry much cash. The same applies to Oliver's football and tennis clubs, which take cheques at the start of term."
Karen pays her household bills online and believes consumers and businesses must move with the times. However, she points out: "It would be farcical if these small clubs had to find more money just to switch to another payment process."
Even people who have never written a cheque would still prefer not to see the back of them. One such person is Joshua Hyland, an 18-year-old contact centre agent from Wells in Somerset.
"I don't have a chequebook but I can see their purpose," he says. "For example, every year, my aunt who lives in America sends a cheque for my birthday. I like receiving a cheque because I know she's taken the time and effort to post it. Also, I can choose when to cash it."
The Payments Council says 'nothing is set in stone' on the fate of the cheque. The final outcome will be announced in 2016 for implementation in 2018, so they need to get their thinking caps on.
Issued by a bank as part of a current account and, in a nutshell, serves as electronic cash. Unlike a credit or charge card, where you get an interest-free period before you have to settle the bill, the funds spent on a debit card are withdrawn immediately from your current account. Unless you’ve arranged an overdraft, if you don’t have the cash in the account, you can’t spend it.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.