A new payment instrument for Britain

Cash lost the top spot as the consumer’s payment method of choice in 2010 for the first time… The latest figures for the first quarter show the gap continuing to widen as we choose to use our debit cards. We spent £39bn on the high street with our debit cards in the first three months of the year – more than twice the amount spent on credit cards (£17bn). By the end of 2011, total debit card spending for the year could reach £320bn. In the first quarter of this year, cash machine withdrawals, which account for a significant part of the cash we spend, plateaued at £44bn – down 0.3% from the same period last year. Spending on credit cards in January to March 2011 was just 1.5% higher than in the same period last year, a decline in real terms. By contrast, debit card spending was up 10.1%…

Meanwhile cheque usage fell dramatically as consumers and business sought quicker, more convenient ways to pay. In the last three years, cheque usage has fallen just over 30%… Faster Payments grew 47% in the first quarter year-on-year. A total of £48bn of cleared funds was moved instantly by UK account holders, meaning their payees had immediate access to that money, rather than having to wait for a cheque to clear.

[From Payments Council – Debit cards on top with continued spending surge]

Oddly, the continued fall in cheque usage did not, as you might imagine, serve to reinforce the goal of the national payment strategy set back in 2008 to end cheque clearing in 2018. Instead, under pressure from nutty newspaper columnists, egregious elderly whingers and complaining charities, the Payments Council abandoned that goal and determined to keep cheques for as along as people want them (and can force other people continue to pay for them). I thought that in the light of this decision, the Payments Council and the Treasury Select Committee might be interested in an alternative paper-based cheque replacement scheme: the deposit-cheque.

The deposit-cheque scheme works in this way. Customers are given books of cheques that are preprinted with a maximum amount and protected with a simple anti-rewriting mechanism such as perforations with the same amount on them. To avoid the problem of cheques bouncing and the uncertainties related to clearing (and to obviate the need for any form of replacement cheque guarantee card) the value of the cheques given to any customer is against money that is held in an interest-bearing account for them. So, for example, my Dad would ask Lloyds for £100 in deposit-cheques. Lloyds give him a book of ten £10 cheques. The £100 is moved from my dad’s current account to an interest-bearing deposit account solely for the purpose of backing the cheques. The cheques would be valid for, say, two years. When my dad wants to pay the window cleaner, he writes out a cheque for £7.50 and gives it to the window cleaner. Once it has been signed by my dad, the window cleaner can use it in lieu of cash, up until the expiry date – no need to pay it into a bank account, which is the time-consuming and expensive part.

I thought this scheme might go down especially well with the Treasury Select Committee and the Old Person’s Czar, Joan Bakewell, because it was invented in the 1873 by a Mr. James Hertz, who set up a “Check Bank” on these principles in London, saying that he intended it to become the medium for the “accomplishment of an immense mass of small payments”. They had quite a good “ignition strategy” too, because they were targetting business, for whom the payment of wages in cash was an onerous and expensive task. According to the Handbook of London Bankers for 1876, there were 984 banks who honoured the Check Bank’s cheques, so they clearly had something going for them, although I have not as yet discovered what happened to the enterprise. All in all, though, I think it fits the bill for 21st-century Britain.

Having said that, though, perhaps this brilliant and innovative paper-based alternative to our current cheque system needs more support. I wonder if the Treasury Select Committee have looked at neighbouring countries to not merely keep cheques in existence, but to drive up their use? Ireland, for example. Ireland has been very successful in resisting modern contrivances such as payment cards.

Ireland is still extremely reliant on paper payments, particularly cash and cheques… Ireland has historically had a policy of such usage, and the government has actively discouraged electronic payment until recently by taxing citizens for using debit and credit cards.

[From The Financial Services Club’s Blog: In Ireland, it’s cash or cheques only]

Russell Burke, Head of Payments Strategy at the Irish Payment Services Organisation (IPSO wrote an article on this in Electronic Payments Law & Policy (EPLP) in which he said that a consequence of SEPA and PSD will be more competition in the Irish payments market and this should mean eliminating the distorting “stamp duty”, the tax on credit and debit card ownership—R. Burke. From cash to card: the need for a national payments plan in E-Finance & Payments Law & Policy (Jun. 2010)—although it has to be said that that hasn’t happened so far.. Perhaps we can learn from our neighbours and modernise further by persuading the UK regulators, commentators, lawmakers and pressure groups to put a tax on the use of electronic instruments to incentivise the use of cheques still further.