[NORMAL] THE ROLE OF CHEQUES IN AN EVOLVING PAYMENTS SYSTEM HAVE YOUR SAY

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THE ROLE OF

CHEQUES IN

AN EVOLVING

PAYMENTS SYSTEM

HAVE

YOUR SAY

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INTRODUCTION

Dear payment system user,

In modern Australia, electronic payment methods are everywhere. At one time, the acquisition of a cheque account was a financial rite of passage for many young Australians. Now, a generation has reached financial independence with no need for a cheque book. As a method of payment, cheques are in long-term decline.

This evolution has understandably led to speculation about the future of cheques and other paper-based payments.

As the Australian payments industry body, APCA has been examining this social evolution and now seeks to sponsor a public debate about it. Understanding changing community needs and expectations helps the payments industry to ensure it can continue to provide the payment services people want, now and into the future.

To that end, we seek your views on the future of cheques. This consultation paper summarises what we have learned so far, and asks for specific feedback. We would value your insights.

Yours sincerely, Russ Rechner APCA Chairman

we seek your

views on the

future of cheques

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1.0 PURPOSE OF CONSULTATION

The paper covers the history and current usage of cheques, and then examines areas of continuing use and possible activities to assist the evolution to other methods of payment.

At the end of each section of this paper, there are some specific questions relating to cheque use and alternative methods of payment. APCA is undertaking this consultation as the Australian Payments industry body. APCA is a mutual self-regulatory organisation for banks, building societies, credit unions and other payments organisations. Its mandate is to improve the safety, reliability, equity, convenience and efficiency of the Australian payments system.

The purpose of this paper and the accompanying

consultation process is to seek community views

on the future of cheques in Australia having regard

to their long-term decline as a means of payment.

Amongst other responsibilities, APCA administers the Australian Paper Clearing System (APCS), through which cheque transactions are cleared amongst financial institutions. More information about APCA can be found at: www.apca.com.au.

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2.0 WHY CONSULT NOW?

This is a global phenomenon (see Appendix 1). As usage declines, the end-to-end unit cost of cheques will increase. In both consumer and business contexts, it will become harder for payers to find payees willing to accept cheques. Cheques run the risk of becoming an expensive and specialised or niche form of payment.

The payments industry, through APCA, has over the last 12 months studied the use and acceptance of cheques in Australia in order to understand why cheques are no longer being utilised, who still uses and accepts cheques and what their payment needs are.

The evidence suggests that although overall usage is in decline, cheques continue to be preferred by payers and payees in particular contexts.

Alternatives might not exist for specific circumstances, or the cheque user might not be aware of alternative and more efficient methods of payment. For some individuals, it may be the only non-cash way to make or receive a payment.

The aim of this consultation process is to ensure that as cheques become scarcer and inevitably more difficult to use, the industry can work to ensure that community payment needs are met by efficient, convenient alternatives.

Data from the Reserve Bank of Australia (RBA) is

clear. From being the dominant non-cash payment

method up to the mid-1990s, cheque use in Australia

is in steady long-term decline.

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3.0 CONSULTATION PROCESS

APCA invites interested parties to submit comments by Friday, 29 July 2011 and to take advantage of workshops and forums which will be organised during the consultation phase. All submissions will be treated as public documents and placed on APCA’s website unless you specifically request that the whole or part of your submission be kept confidential. Comments should be sent to:

Arun Kendall Industry Policy

Australian Payments Clearing Association Level 6, 14 Martin Place

Sydney, NSW, 2000.

e-mail: [email protected] Electronic submissions are preferred.

More information is available at: www.apca.com.au/consultation

APCA will organise a series of roundtable meetings with groups and organisations representing key users and acceptors. These roundtable sessions will be held across the country during the eight weeks before submissions are due. Participants will receive a briefing based upon the Consultation Paper and will be invited to make comments, raise issues and provide input.

Participants will be encouraged to make submissions after the meetings. The series of round table meetings will be supported by Peak Advisory Group meetings in the consultation period.

A proposal paper presenting recommendations for the future development of the payments system will be released for further comment in the last quarter of 2011.

The process for exploring how cheques are used is illustrated in Figure 1 on the following page.

A comprehensive consultation process

will ensure that the views of the community

are understood and reflected in future planning

for the payments system.

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3.0 CONSULTATION PROCESS

Do you use cheques? Why use cheques? Choose

to use No otheroption mandatedCheque prefersUser must useUser

Enhanced payments options Educate about other options Lobby to remove barriers Why accept cheques? Barriers to other payment options No other payment option Do you accept cheques? YES NO YES NO Figure 1

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4.0 A SHORT HISTORY

OF CHEQUES

By the 9th century traders in some Middle Eastern countries were able to draw money from a counterpart in China, based on cash held in their home cities. The practice spread across Europe, with pilgrims travelling to the Holy Land in the 12th century carrying encoded documents issued by the Knights Templar, which could be redeemed for cash in Jerusalem and other cities. These documents contained much of the same information recognisable in modern cheques. Fragments of cheques found in Egypt from the period were small, made of paper, gave the name of the issuer and instructed the recipient to pay the bearer a stated sum of money.

It took another 500 years, however, for the cheque to be adopted in England. The first recorded

handwritten example was issued in London in 1659. Printed cheques were introduced about 1700 and personalised cheques a further century later. In a world of rudimentary communications and uncertain legal frameworks, cheques enabled relatively safe and reliable delivery of value. Their utility rested on relationships of trust amongst the three parties involved: drawer, drawee and banker.

Today, the advent of cards and electronic payment systems as well as sophisticated communications has removed much of the need for cheques.

The origin of cheques as a method of payment

is subject to debate, but they have been in common

use for over 1000 years.

Indeed, the use of cheques globally has begun to decline rapidly as consumers are provided with a greater range of more convenient payment options. The rise of electronic methods of payment can be seen in Figure 2, charting the rise and fall of various methods of non-cash payments:

The total number of cheques in use in Australia has dropped from 437 million in 2006 to 276 million in 2010, a drop of nearly 37 per cent in four years.1

The table on the following page summarises the widely-used electronic forms of non-cash payments that have provided more efficient payment alternatives.

1998 2001 2004 2007 2010 1995

Sources: RBA, ABS, APCA, BPAY 60 40 20 0 80 No. 80 60 40 20 No. 0 Debit cards Credit cards Direct credits Direct debits BPAY Cheques

Figure 2 – Australian Payments made per head of population per year

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4.0 A SHORT HISTORY

OF CHEQUES

In addition to the widely-used forms of electronic payments, a range of new forms and enhancements are emerging. These include specialist online payment services such as PayPal, new card products such as pre-paid cards and contactless cards and adaptations of all these products for use on mobile phones. By contrast, cheques have changed little over many years.

Form of Payment

Benefits

Debit Cards Immediate payment at point-of-sale, by phone or online, from a cheque or savings account.

Credit Cards Immediate payment at point-of-sale, by phone or online, from a credit account.

Direct Credit Account-to-account transfer of funds over the counter, by phone or online.

Direct Debit Scheduled drawing of funds from an account under an authority given to the payee.

BPAY Bill payment through a financial institution, by phone or online, using a unique identifier.

1. If you still use cheques, are you aware of alternative methods of payment? 2. How has your use of cheques changed?

Do you expect to change the way you use cheques in the future?

3. What benefits do cheques provide that are not satisfied by alternative payment methods?

4. If you currently accept cheques as a method of payment, do you have plans to change this in the future? For example, will you continue to accept cheques or will you shift towards electronic forms of payment?

5. Have your customers changed their use of cheques?

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5.0 THE CURRENT USE OF

CHEQUES IN AUSTRALIA

5.1 Usage of Cheque Accounts

APCA has collected data from financial institutions about the number of cheque accounts held by customers, both personal and commercial. APCA’s work has profiled users of these cheque accounts by age and, for business users, by the area of commercial operations, looking both at the number of cheques issued and deposited. Of personal customers who held a cheque account, only 30% had written a cheque in the past 12 months. 48% of those customers over 60 wrote a cheque and only 7% of those between 18 and 30.

The survey also found that most business cheque accounts were no longer used to write cheques,

APCA has been studying the current demographics

of cheque users and the degree of reliance on this

form of payment.

and that the commercial sector using the highest number of cheques was the property and business services sector.

Account data also suggests that relatively higher levels of business cheques are being used in dividend and share dealings, property settlement, insurance and by parts of the legal and accounting professions. The survey also looked at the use of other paper instruments, finding limited use across the industry of facilities such as warrants and travellers cheques. There was general agreement among financial institutions that these forms of paper payments were becoming redundant. 48% Over 60 36% 46-60 26% 31-45 100% 75% 50% 25% 0% 7% 18-30 Age bracket

10 THE ROLE OF CHEQUES IN AN EVOLVING PAYMENTS SYSTEM

Figure 3 – Active cheque account holders by age group

Active accounts were defined as those where at least one cheque was written in the last 12 months.

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5.0 THE CURRENT USE

OF CHEQUES IN AUSTRALIA

5.2 Views of Cheque Users

In 2010, APCA commissioned Edgar, Dunn & Company (EDC) to ask consumers, small to medium-sized enterprises (SMEs) and government departments about their cheque use and cheque reliance.

The survey sought to identify the degree of dependence on cheques by asking those who

used cheques how they would manage without this method of payment. The survey found that 25% of consumers still use cheques to some degree (matching the results from account data analysis) and approximately 5% of all those surveyed would have a major problem finding an alternative to using cheques as a method of payment. Figure 4 summarises the results.

25% Cheque Users 75% Do Not Use Cheques

30 % 70 % ( U se c he qu es a t l ea st o nc e p er q ua rte r)

Approximately 5% of all those surveyed

Use a cheque less than once every 3 months Not a problem removing cheques Minor problem removing cheques Major problem removing cheques

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5.0 THE CURRENT USE

OF CHEQUES IN AUSTRALIA

25% Cheque Users 75% Do Not Use Cheques

30 % 70 % ( U se c he qu es a t l ea st o nc e p er q ua rte r)

Approximately 5% of all those surveyed

Use a cheque less than once every 3 months Not a problem removing cheques Minor problem removing cheques Major problem removing cheques

The demographic profiles of this 5% were predominantly the elderly, rurally isolated and the unwaged.

The survey found that in general, SMEs and government departments that used cheques were keen to move to alternative electronic payment methods and commonly only used cheques where their customers demanded it. In a few cases, company and government payments infrastructures could not offer electronic alternatives due to aging technology. In summary, the survey found that:

• Government institutions are key issuers of cheques;

• The vast majority of businesses and consumers claim to receive funds from government by cheque;

• Cheques are seen as expensive, and government agencies are keen to reduce usage;

• Respondents need suitable alternatives for some welfare recipients; and

• There remain fund raising issues for schools, charities and other such bodies.

5.3 Economic Cost of Cheques

In 2007, the RBA found that the average cost of cheques for consumers, merchants and financial institutions was $7.69, as compared to $1.21 for credit cards, $0.67 for EFTPOS and $0.55 for cash.2

The RBA announced a review of innovation in the Australian payments system in July 2010. It has indicated from preliminary consultation that the declining use of cheques is an important issue for stakeholders.

Malcolm Edey, RBA Assistant Governor (Financial Systems) gave a speech to the Cards and Payments Australasia Conference in March 2011 and referred to the decline of cheques as an important element in the review.3_{Referring to the RBA’s Payments}

Use Study commissioned from Roy Morgan in late October/early November 2010, he noted that fewer than 40% of respondents reported using a cheque in the last 12 months. He also noted that cheques were declining by 9% every year and that:

“Over time, this is adding to unit costs. The result is that cheques, which were already an expensive form of payment, are becoming increasingly so.” In this speech, Dr Edey recommended that the Payments System Board should also be considering how the decline in cheques is addressed from a public interest perspective.

2_{RBA Payments Costs In Australia, at page 117.}

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5.0 THE CURRENT USE

OF CHEQUES IN AUSTRALIA

5.4 Cheque Processing

There are a number of stakeholders who have an interest in the future of cheques due to the nature of their business and operations.

APCA has been working with major cheque

processors Australia Post, VIPRO and UPSL, and these companies provided valuable input into the review of the future of cheques.

VIPRO and UPSL are engaged in cheque processing for financial institutions, either as an operator or a managing agent. Both recognised the long-term

decline in volumes and indicated support for the need for a clear industry policy on the future of cheques in order to allow them to make appropriate long term plans for the future.

Australia Post acts as an agent for a number of utilities and financial institutions and issues money orders which are then processed through a financial institution in the same way cheques are. Money orders have been declining at a greater rate than cheques, and Australia Post indicated an interest in getting clarity on the future of cheques.

6. Who do you believe will be most affected as cheques use declines? Why do you believe these groups use cheques?

7. Do you believe these groups have adequate access to other payments options?

8. Do you believe these groups are aware of existing alternatives to cheques?

HAVE YOUR SAY

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6.0 REGULAR CHEQUE USERS

6.1 Elderly, Isolated and Unwaged

APCA’s work so far indicates that the members of our community who have some dependence on cheques, and use them on a regular basis, are predominantly older Australians, those in isolated and rural communities and those on low incomes.

APCA’s survey work has identified a number of community

groups that still use cheques on a regular basis.

As a group, these Australians represent an estimated 5% of the population.

The following table outlines the reasons for this reliance on or preference for cheques, the relevant issues and possible responses.

Reasons for Use Issues Possible Responses Need for urgent access

to welfare payments

Lack of banking facilities. Unable to get emergency payments due to accounts being in overdraft. Inability to access other services such as merchants with BasicsCard authorisation.

Targeted payment arrangements for at risk communities. Greater financial literacy, education and support.

Opportunity for social interaction Paying “over the counter” is an opportunity for face-to-face interaction for older and isolated Australians.

Widespread shop front locations for access to banking services on, for example, an agency basis.

Computer illiteracy and lack of access

Lack of resources, access and/or familiarity leading to inability to use electronic fund transfer methods.

Education and awareness. Enhancement of community facilities for access to computers. Lack of mobility Those needing assistance from

others to move about find mailing a cheque easier.

Better awareness of online or mobile payment methods.

Habit No interest in changing current habits.

Community awareness and education programmes.

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6.0 REGULAR CHEQUE USERS

6.2 Business Users

Real Estate Transactions

Although there are major initiatives for automating property settlement underway, many payments associated with property transactions (rent,

disbursements, sale proceeds, agency commissions) are still paid by cheques.

Dividends Payments

Two corporate and managed fund registrars represent over 80% of the market. They undertake a range of payment activities including dividends distribution and employee share plan contributions. The registrars indicated that requests for direct credit of dividend payments was increasing, and that major clients are increasingly mandating this as a form of payment. For one registrar, cheques represent 10% of total payments, comprising 3% of total value. The managed funds areas of that business do not use cheques at all. Cheques are more costly to process, and involve more administrative effort, including the costs and resources required to deal with replacement and dishonoured cheques. Varying practices relating to stale cheques mean that the life of a cheque in Australia (anything from 15 to 18 months), adds a degree of uncertainty and the risk of duplication.

Payments to overseas shareholders are done mostly by cheque, often in foreign currency accounts. These are claimed to be cheaper than making international currency transfers through SWIFT.

Insurance

Insurance companies prefer to make and receive payments electronically and the demographics of cheque users match APCA’s usage data. However, there are a number of areas where cheques are the only form of payment used, namely Compulsory Third Party Insurance (CTP) refunds and payments to brokers and legal firms for settlements.

Legal and Accounting Professions

Cheques are still needed for many routine processes such as court filing fees, property settlement and for payments to a small number of barristers. Cheques represented a minimal proportion of fee payments, but are still demanded by some clients.

CPA Australia indicated that the ability to make a payment into and out of trust accounts was an important benefit of cheques.

Superannuation

According to the Cooper Review of Superannuation, 38% of businesses use only cheques and 22% use a combination of cheques and electronic payments in relation to superannuation payments.

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6.0 REGULAR CHEQUE USERS

Reasons for Use Issues Possible Responses Property Settlement/Trust

accounts/Third party payments

Allows for disbursement of payments to a range of different payees or to a third party in trust.

E-conveyancing initiatives. Enhanced trust accounting processes to allow electronic payments.

Share Dividend and Other Registry Payments

Customer preference and barriers to using electronic payment methods.

Likely to follow consumer demand: see Possible Responses at 6.1.

Overseas Payments Cost and convenience of alternatives.

Likely to depend on evolution of cross-border methods.

Court Fees Only form of payment accepted. Change to government policy and infrastructure upgrades.

Insurance Refunds and Payments Some insurance accounting systems do not support electronic payments. Brokers and lawyers request cheques for disbursements.

Review of statutory Insurance requirements. Enhancements to accounting systems.

4_{See page 282 in Chapter 9, Super System Review}

Sole use of cheques is generally higher among businesses with fewer staff and lower turnover. Of the 60% of businesses that do not exclusively use electronic payment methods, 65% can see that it would increase efficiency. Despite this, 45% of those who do not exclusively use electronic payment methods prefer to use cheques.4

The report recommended that there should be active encouragement for employers to use electronic means of payments by implementing fines for those using other payment methods, but this recommendation was not accepted by the Government. The following table summarises findings to date.

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6.0 REGULAR CHEQUE USERS

6.3 Government Payments

The ATO and the Department of Human Services (DHS), including Centrelink and Medicare Australia account for a large proportion of payments between citizens and the Commonwealth Government. Centrelink reports that a very small number of payments are now made by cheque. Approximately 15,000 cheques a month are issued to a total value of 5 million dollars a month compared to 18 million direct credits a month valued at 7 billion dollars. Centrelink’s policy is to encourage payments by electronic means. Recipients of payments need to provide a bank account number, irrespective of the method of payment made. However, there is a very small group who need to be paid by cheque due to being unbanked or having other issues with

overdrawn accounts, ad hoc emergencies, and inability to access ATMs or stores with authorised facilities for DHS payments.

The ATO reports that although all its systems support electronic payments, 30% of payments made and 40% of payments received are by cheque and the ATO encourages customers to pay or receive payment by electronic means.

The rate of payments by cheque is declining ATO data indicates that an increasing number of customers now prefer to be paid or make payments electronically.

The issues facing Government clients mirror the APCA survey findings that consumers who are dependant on cheques include the elderly, the rurally isolated and the unwaged.

Reasons for Use Issues Possible Responses Unbanked or

inadequately banked

Welfare recipients without access to banking facilities access payments by cheques cashed at local stores.

Financial literacy, education and support.

Income Managed Accounts

Some stores are not equipped or authorised to accept the BasicsCard and clients can only be issued with cheques.

Expand specialist welfare programmes.

Miscellaneous Emergency Payments

Used especially where clients have overdrafts and frozen accounts and need access to funds for food.

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State and local government presents a more complex picture. Many different agencies and authorities receive and pay cheques. It appears that nearly all of them now support electronic alternatives such as cards or online payments, but usage of cheques is still high.

It has been reported that the NSW State Government is reviewing the issuing of cheques and moving recipients onto electronic means of payment. Reportedly, the NSW State Government issues 2.6 million cheques a year at a cost of tens of millions of dollars.5

6.4 The Not-for-profit sector

Experience in the United Kingdom has suggested that the charities sector is vulnerable to losing access to

Reasons for Use Issues Possible Responses Spontaneous payments Ability to donate without prior

arrangement.

Enhanced facilities for charities. Lack of resources to upgrade

processes

Safe way of receiving funds. Banking facilities that support electronic payments.

Support for low-cost process improvements.

cheques as a payment method. An important factor may be reliance on spontaneous donations in a face-to-face context – doorknock appeals, fundraiser events, public collections and so on. Many Australian charities now accept donations electronically – by card or online payment. The payment of school costs is often done by cheque, allowing parents to provide children with a safe means of payment for school fees and other payments. Similarly, there are a number of clubs and not-for-profit organisations that only accept cash or cheque payments.

One challenge may be the large number of not-for-profit organisations without any resources for process enhancements, due to low administrative budgets.

6.0 REGULAR CHEQUE USERS

9. Can you think of any other payment methods that provide a viable alternative to payments by cheque?

10. Can you identify any other sectors,

organisations or payment opportunities that may be dependent on cheques?

11. What are your views on the viability of alternative payment methods identified above?

12. If you still pay by cheque, thinking about situations where you have recently written a cheque, could you have paid another way? If not, what would have prevented you from doing so?

13. How important are safety, efficiency and cost in choosing which payment option to use? 14. If you still accept cheques for payments,

what is the benefit? Why are other payment options not used?

HAVE YOUR SAY

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7.0 POSSIBLE NEXT STEPS

APCA’s work so far suggests three areas of activity that

would reduce dislocation and inconvenience as cheques

decline: education; enhancing payments options; and

removing barriers to use of alternatives.

The following table provides more detail, based on Section 6.

Possible Responses Type of Activity Comments

Targeted payment arrangements for at risk communities.

Enhanced payment options The BasicsCard is an example. Likely to require Government/ industry partnership.

Greater financial literacy education and support.

Education Would need to be a part of an integrated approach – not just about payments.

Widespread shop front locations for access to banking services on, for example, an agency basis.

Remove barriers Requires a large network of community points of presence. May also need to be integrated with other financial services. Enhancement of community

facilities for access to computers.

Remove barriers Would need to be part of a larger programme of enhancing community access to the online world.

Better awareness of online or mobile payment methods.

Education Focus should be on elderly, isolated and unwaged Australians. Community awareness and

education programmes.

Education As above.

E-conveyancing initiatives. Enhanced payment options National E-conveyancing Development Limited has been created and charged with responsibility to deliver a national system.

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7.0 POSSIBLE NEXT STEPS

15. Are you prevented from using or accepting other payments options? Can you provide details of what prevents other options being used? 16. Are you aware of any other

existing alternatives that would provide an efficient alternative to payments by cheque?

HAVE YOUR SAY

Possible Responses Type of Activity Comments

Enhanced trust accounting processes to allow electronic payments.

Remove barriers Likely to be legal, practice and technology issues.

Review of statutory Insurance requirements. Enhancements to accounting systems.

Remove barriers Will require review of applicable legislation.

Enhanced processing facilities and low cost process

improvements for not-for-profit organisations.

Education; Remove barriers Widespread awareness of the issue will help solutions emerge. Government sponsorship may be valuable.

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APCA would welcome any general feedback and

comments on the views expressed in this paper as

well as answers to the specific questions listed below.

A Short History of Cheques

1. If you still use cheques, are you aware of alternative methods of payment? 2. How has your use of cheques changed?

Do you expect to change the way you use cheques in the future?

3. What benefits do cheques provide that are not satisfied by alternative payment methods? 4. If you currently accept cheques as a method

of payment, do you have plans to change this in the future? For example, will you continue to accept cheques or will you shift towards electronic forms of payment?

5. Have your customers changed their use of cheques?

The Current Use of Cheques in Australia

6. Who do you believe will be most affected as cheques use declines? Why do you believe these groups use cheques?

7. Do you believe these groups have adequate access to other payments options?

8. Do you believe these groups are aware of existing alternatives to cheques?

Regular Cheque Users

9. Can you think of any other payment methods that provide a viable alternative to payments by cheque?

10. Can you identify any other sectors, organisations or payment opportunities that may be dependent on cheques?

11. What are your views on the viability of alternative payment methods identified above (in Section 6)?

12. If you still pay by cheque, thinking about situations where you have recently written a cheque, could you have paid another way? If not, what would have prevented you from doing so?

13. How important are safety, efficiency and cost in choosing which payment option to use? 14. If you still accept cheques for payments, what

is the benefit? Why are other payment options not used?

Identifying Payment Alternatives

15. Are you prevented from using or accepting other payments options? Can you provide details of what prevents other options being used?

16. Are you aware of any other existing alternatives that would provide an efficient alternative to payments by cheque?

8.0

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9.0 APPENDIX 1:

GLOBAL DEVELOPMENTS

9.1 United Kingdom

On 17 December 2009, the UK Payments Council agreed to phase cheque clearing out completely by 2018. The Payments Council was established to develop strategic direction for the UK payments system, and the decision was the culmination of nearly two years of preparatory work involving extensive independent market surveys on cheque use and consumer attitudes to cheques and wide consultation with the community.

The independent research showed that the key drivers behind the continued use of cheques were habit, tradition and inertia, combined with a lack of awareness and confidence in other payment methods. In the lead up to the 2018 deadline, the Payments Council has undertaken to continue to monitor cheque usage and to enhance the provision of alternative payment methods in the lead up to the deadline. A final decision would take place in 2016. However, in February 2010, the UK’s Treasury Select Committee announced an inquiry into the Payments Council decision. The Committee advised that it would be seeking submissions and evidence on:

• trends over time in the use of cheques as a payment mechanism, including estimates of likely usage over the next five to ten years;

• the advantages and disadvantages of abolition, including the impact of abolition on particular groups in society; and

• the development of alternative payment mechanisms.

The UK Payments Council says it is working with banks to develop an alternative paper-based payment method as part of a commitment not to leave customer “high and dry” when the cheque clearing scheme is finally abolished.

9.2 Ireland

Cheque use in Ireland is one of the highest in Europe, representing 75% of all non-cash payments as compared to less than the European average of 4%. The short term strategy of the Irish Payments Services Organisation (IPSO) is to reduce cheque use to bring it in line with the European average, but one of the clear goals of IPSO’s National

Payments Strategy is to eliminate cheques completely, with no date identified as yet.

As part of its National Payments Implementation Plan, Ireland increased stamp duty on cheques to meet its short term aims (reducing a similar tax on payment cards).

Cheque Guarantee facilities will end by 31 December 2011.

9.3 The Netherlands

The Dutch financial institutions began discouraging the use of personal cheques through rationing and charging policies more than ten years ago, finally abolishing them, with very little consumer resistance, when the country adopted the euro in 2001.

The decline in cheque use was hastened by banks independently increasing processing charges and reducing the availability of free cheques supplied to accounts.

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9.4 Sweden

When, at the beginning of the 1990s, one of the Swedish banks decided unilaterally to charge a fee of SEK 15 (AUD 2.30) per cheque (and the others banks followed suit) the majority of cheque payments disappeared over just a few years and moreover without any public protestations. The reason for this was surmised to be that there were excellent substitutes that were free of charge and which were marketed by the banks, primarily cards and credit transfers. Note that cheques have not been eliminated completely in Sweden: they have just been priced out of the market.

9.5 United States

In January 2010, the US Federal Reserve announced a 2010 Federal Reserve Payments Study that consists of three research efforts commissioned to estimate the annual number, dollar value and composition of retail noncash payments in the United States. Together, the studies will provide aggregate estimates and current trends in the use of noncash payment instruments by US consumers and businesses.

Previous studies have revealed significant changes in the US payments system over time, including a continuing decline in the use of cheques and growing use of electronic payments, such as automated clearinghouse, electronic banking transactions, credit cards, debit cards and stored value cards.

The US Treasury announced in December 2010 that it plans to switch off cheque payments to all citizens currently receiving federal benefit and non-tax payments by the end of the first quarter 2013, with new benefit recipients receiving electronic direct deposits from May 2011.

9.6 Canada

In Canada, some 70-80% of all commercial payments are initiated as cheques, a practice predominantly supported by mid-sized businesses. This makes cheque use one of the highest rates in the world. Large corporations already see the advantages of automation and are increasingly adopting electronic payments.

However, the need for integrated remittance and payment data is still strong and an essential element in providing a tighter and more cost effective method of payment reconciliation.

The Canadian Payments Association (CPA) plans to promote the migration of paper payments to electronic payments by researching viable alternatives to cheques, enhancing the existing electronic payments framework, and facilitating new and emerging electronic payment instruments in its framework as part of its Payments Strategy Vision 2020 paper.

9.0 APPENDIX 1:

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10.0 APPENDIX 2: ALL ABOUT CHEQUES

How are cheques processed?

Most people who receive cheques (payees) deposit them with their own financial institution. Usually their account will be credited overnight and an electronic payment record containing details from the cheque is created and sent to the cheque writer’s (payer’s) financial institution. The payer’s account is then debited if the cheque is to be paid by the payer’s financial institution.

Can I draw funds against a cheque

immediately?

When you deposit a cheque into your account, your account is credited with the amount of the cheque on the same day. If the account is interest bearing, interest begins to accrue immediately.

However, you may not necessarily have access to the proceeds of the cheque from day one. Often customers must wait for a few days so that financial institutions

can “clear” cheques.

Why do cheques need to be cleared?

When you issue a cheque, you are giving your financial institution written instructions to pay a specific amount from your account. The cheque clearance cycle makes it possible for financial institutions to complete the necessary checks to make sure payment is made in accordance with your instructions.

As cheques are a paper based payment instrument, they need to be physically presented to the financial institution they are drawn on for payment decisions. The payment record that is electronically transmitted to the payer’s financial institution speeds up the process of checking that there are sufficient funds available in the account to make payment. However, the cheque can be still dishonoured for other reasons if for example, it is not signed in accordance with the authority held at the financial institution.

As part of the clearance cycle, the cheque you deposit is physically transported from your financial institution to the financial institution where the payer’s account is held and the payer’s instructions are verified.

How long does it take for a cheque

to be cleared?

Typically, the cheque clearance cycle takes three business days. This covers the time it takes to clear funds. Staff at your financial

institution can confirm the normal clearance period at the time of depositing the cheque.

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10.0 APPENDIX 2: ALL ABOUT CHEQUES

Customer (Payer) Merchant/ Service Provider (Payee) Merchant’s Service Provider’s Financial Institution Customer Financial Institution Your Financial Institution Payer’s Financial Institution Your Financial Institution Cheque Cheque Cheque Advise (If dishonoured) Clear Cheque Funds Transfer

Business Day 1 Business Day 2

Cheque Paid?

Funds are reversed out of your account Funds paid

into your account

Funds out of

payer’s account Funds are paid back into the payer’s account YES NO Business Day 3 You can withdraw the funds

1

2

3

4

Customer (Payer) Merchant/ Service Provider (Payee) Merchant’s Service Provider’s Financial Institution Customer Financial Institution Your Financial Institution Payer’s Financial Institution Your Financial Institution Cheque Cheque Cheque Advise (If dishonoured) Clear Cheque Funds Transfer

Business Day 1 Business Day 2

Cheque Paid?

Funds are reversed out of your account Funds paid

into your account

Funds out of

payer’s account Funds are paid back into the payer’s account YES NO Business Day 3 You can withdraw the funds

1

2

3

4

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11.0 APPENDIX 3: GLOSSARY

Term Explanation

ATO Australian Taxation Office. Australian Paper

Clearing System (APCS)

The set of rules, procedures and message definitions associated with cheque clearing.

Australian Payments Clearing Association (APCA)

APCA is the primary vehicle for payments industry collaboration with

a mandate to improve the safety, reliability, equity, convenience and efficiency of the Australian payments system. More information about APCA can be found at www.apca.com.au.

BPAY A single electronic bill payment service adopted across the banking sector. Cheques A paper-based payment methodology.

Clear funds Ensuring that there are sufficient funds in a payer’s account to cover a cheque payment.

Direct Debits Direct debits are an electronic payment system typically used by businesses to collect regular payments from large numbers of customers’ banking accounts. Direct Credits Direct credits are widely used by businesses to credit their employees’ accounts

with salary payments and by government departments for regular payments such as Centrelink allowances. Other common examples are dividend and interest payments. In recent years, direct credit is also being used to provide widespread access to internet-based (sometimes called “Pay Anyone”) and phone-based banking services.

E-conveyancing A system that would allow the transference of property and funds through settlement processes by electronic means.

EFTPOS Electronic Funds Transfer Point of Sale operated by EFTPOS Payments Australia Limited.

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11.0 APPENDIX 3: GLOSSARY

Term Explanation

Mobile Payments Using mobile phones to authorise and transfer payments.

Payments system The ‘payments system’ refers to arrangements which allow consumers,

businesses and other organisations to transfer funds usually held in an account at a financial institution to one another. It includes the payment instruments – cash, cheques and electronic funds transfers which customers use to make payments – and the usually unseen arrangements that ensure that funds move from accounts at one financial institution to another.

Reserve Bank of Australia (RBA)

The Reserve Bank of Australia is Australia’s central bank. It conducts monetary policy, works to maintain a strong financial system and issues the nation’s currency. As well as being a policy-making body, the Reserve Bank provides selected banking and registry services to a range of Australian government agencies and to a number of overseas central banks and official institutions. It also manages Australia’s gold and foreign exchange reserves.

Self-regulatory organisation

A body which directs, develops, administrates and regulates any industry with the involvement of industry participants.

SMEs Small to Medium Sized Enterprises (businesses).

SWIFT Society for Worldwide Interbank Financial Telecommunication, a member- owned cooperative which facilitates the transfer of funds between financial institutions globally.

Travellers’ Cheques A paper-based payment instrument that allows encashment in foreign currency. UPSL Unysis Payment Services Limited.

VIPRO Owned jointly by Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation.

[NORMAL] THE ROLE OF CHEQUES IN AN EVOLVING PAYMENTS SYSTEM HAVE YOUR SAY

THE ROLE OF

CHEQUES IN

AN EVOLVING

PAYMENTS SYSTEM

HAVE

YOUR SAY

CONTENTS

INTRODUCTION

we seek your

views on the

future of cheques

1.0

PURPOSE OF CONSULTATION

The purpose of this paper and the accompanying

consultation process is to seek community views

on the future of cheques in Australia having regard

to their long-term decline as a means of payment.

2.0

WHY CONSULT NOW?

Data from the Reserve Bank of Australia (RBA) is

clear. From being the dominant non-cash payment

method up to the mid-1990s, cheque use in Australia

is in steady long-term decline.

3.0

CONSULTATION PROCESS

A comprehensive consultation process

will ensure that the views of the community

are understood and reflected in future planning

for the payments system.

3.0

CONSULTATION PROCESS

4.0

A SHORT HISTORY

OF CHEQUES

The origin of cheques as a method of payment

is subject to debate, but they have been in common

use for over 1000 years.

4.0

A SHORT HISTORY

OF CHEQUES

Form of Payment

Benefits

5.0

THE CURRENT USE OF

CHEQUES IN AUSTRALIA

5.1 Usage of Cheque Accounts

APCA has been studying the current demographics

of cheque users and the degree of reliance on this

form of payment.

5.0

THE CURRENT USE

OF CHEQUES IN AUSTRALIA

5.2 Views of Cheque Users

Approximately 5% of all those surveyed

5.0

THE CURRENT USE

OF CHEQUES IN AUSTRALIA

Approximately 5% of all those surveyed

5.3 Economic Cost of Cheques

5.0

THE CURRENT USE

OF CHEQUES IN AUSTRALIA

5.4 Cheque Processing

HAVE YOUR SAY

6.0

REGULAR CHEQUE USERS

6.1 Elderly, Isolated and Unwaged

APCA’s survey work has identified a number of community

groups that still use cheques on a regular basis.

6.0

REGULAR CHEQUE USERS

6.2 Business Users

Real Estate Transactions

Dividends Payments

Insurance

Legal and Accounting Professions

Superannuation

6.0

REGULAR CHEQUE USERS