FIS Research - Accelerating Paper Check Migration

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Accelerating Paper Check MigrationResearch Brief July 2012

Accelerating Paper Check Migration

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© 2012 FIS and/or its subsidiaries. All Rights Reserved.

Sizing the Paper Check Market This research brief profiles a recent study by FIS™ on the use of paper checks by U.S. consumers. It explores why checks live on as a preferred payment method for some consumers and steps financial institutions can take to migrate paper check payments to debit card, credit card, automated clearing house (ACH) and other electronic payment services. Readers may question why we’ve focused on checks. Checks are slowly dying, aren’t they? While it’s clearly not a headline that check usage is in decline, they are not likely to die off in the near future as they remain as one of consumers’ most utilized payment instruments. According to the most recent data available from the triennial Federal Reserve Payments Study, U.S. consumers wrote 14.5 billion checks in 2009 representing $5.5 trillion in value (approximately 8 percent of the value of all non-cash payments in the economy). The average value of all checks written by consumers was $366. The Fed estimated that 83 percent of these checks were consumer-to-business (C2B) payments for retail point-of-sale (POS) transactions and bill payments, while 17 percent were consumer-to-consumer (C2C) payments. Interestingly, the Fed data revealed that the number of C2B checks written declined at a 10.4 percent compounded annual growth rate (CAGR), but C2C check volume actually increased at a 3.8 percent CAGR between 2006 and 2009. Payments made to individuals are often made by paper check because the payee dictates cash or check as the payment method. This obstacle is diminishing and the C2C check CAGR may have reversed course since 2009 as electronic person-to-person (P2P) payment methods such as Square™ and PayPal Here™ have entered and begun to penetrate the market. Regardless of the possible reversal of the C2C check volume increase, C2C payment remains ripe for migration away from paper. On an overall basis, the Fed estimated that the volume of checks written by consumers declined at an 8 percent CAGR between 2006 and 2009. If we project this historical CAGR forward three years, it’s reasonable to estimate there will be approximately 11.1 billion checks written by consumers in 2012 – amounting to about 95 checks per U.S. household annually with the total value exceeding $33,000. From sheer volume and value standpoints, checks obviously remain an essential element of the consumer payment mix. Another reason why we’ve focused on checks is their demise would represent a substantial expense reduction opportunity to financial institutions. According to IDC Financial Insights, U.S. depository institutions spend about $1.5 billion annually on item processing. While this expense will surely decline over time in conjunction with check volume, we believe financial institutions have an opportunity not only to accelerate check migration and its operational expenses, but also to drive additional revenue by encouraging consumers to shift their remaining check volume to card payments that generate interchange revenue. Both of these are important initiatives as bank and credit union operating margins are under pressure. FIS surveyed 3,205 U.S. consumers in February 2012 to better understand their preferences for in-person, retail POS and bill payments and, thus, help financial institutions chart a path toward accelerated check migration. We learned that while electronic payment methods will continue the gradual process of subsuming paper checks, there are elements of consumer preference and behavior that can be influenced to accelerate check migration. However, checks won’t disappear overnight and likely won’t decline much at all among some consumers without significant intervention.


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In 2012, the industry celebrates the 20th anniversary of the first debit card and the 30th anniversary of the creation of the ACH Network. Credit cards have been in existence for about 45 years. Yet 51 percent of consumers in our national research study reported writing at least one paper check within the past 30 days to make payments in person for goods and services (e.g., at the grocery store, shopping, dining out, gas station, entertainment, commuting, paying contractors/household help, etc.). Of course, this means that half (49 percent) of consumers have not used a check for in-person payments (see Figure 1).

Cash is still used most widely by nearly 90 percent of consumers for in-person purchases while debit and credit cards are used by more than 60 percent on a monthly basis. The typical consumer uses a debit card nearly 13 times per month while cash and credit cards are used about 11 times. On average, consumers write 4.5 checks per month for in-person purchases. But since nearly half of consumers are not writing any checks all, those who do use checks write nearly nine per month on average.


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The percentage of consumers writing checks is very similar for bill payment (see Figure 2). Fifty-two percent of consumers reported writing at least one paper check within the past 30 days to pay either a recurring or occasional bill; 48 percent did not write a single paper check for bill payment. All other methods of bill payment tracked in our survey were used by 30 percent of consumers or less. To be fair, the combined utilization of online bill payment through either financial institution or biller Web sites is 47 percent – nearly equivalent to paper checks – and in many instances the other electronic bill payment methods highlighted in Figure 2 are initially set up by consumers online. But it is telling that the ritual of writing paper checks still ranks so highly more than 15 years following the initial launches of Internet banking and bill payment. Consumer behavior in banking and payments tends to change gradually and barriers to making bill payments online still exist.


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Five Payment Type Segments Of course, there’s a significant amount of variation in numbers that combine to create averages, and there isn’t really an “average” consumer. Some consumers adopt new financial services technologies very quickly while some wait it out. To help us study the spectrum of payment adoption, we segmented our consumer sample into five groups based on usages of various payment methods for in-person purchases (Figure 3): Cash Users Debit Carders Innovators Paper Check Writers Credit carders

The Paper Check Writers segment makes fewer in-person payments per month than other segments (23 versus an average of 30 for the other segments). Paper checks and cash combined account for two-thirds and paper checks alone represent 41 percent of their in-person payments. Writing more than nine checks per month, they are the last of the truly committed check writers. In contrast, paper checks only account for about 5 percent of the other four segments’ payments (they write fewer than two checks per month).


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The Paper Check Writers segment generates 45 percent of all of the checks used for in-person payments. Changing this segment’s behaviors will not be easy but will pay dividends because it will greatly accelerate the decline in paper check payments. But the other four segments should be targeted for migration as well. Already they have largely transitioned away from checks, but on a combined basis, they write 55 percent of the checks in the market. It should be much easier to convince or incent these customers to completely eliminate the one or two checks they write per month for in-person payments. The sizes and demographics of the five segments vary widely (see Figure 4). Paper Check Writers represent 11 percent of the consumer market. On average, they are older and their

incomes are most concentrated in the lower-middle part of the income spectrum. They also are more likely to be retired and have lower-than-average educations. Their demographics contribute to less spending and, thus, fewer payments.

Cash Users look very much like Debit Carders from a demographic perspective – down market and concentrated in Gen X and Boomer segments, although Debit Carders are slightly younger than Cash Users. Both segments represent a significant size of the population, at 27 percent and 34 percent, respectively. (Note: We grouped heavy users of gift and/or prepaid cards into the Cash Users segment because the data revealed that gift and/or prepaid card users are also heavy users of cash payments.)

Credit Carders are the most affluent and second oldest segment and make up 26 percent of U.S. adults. Innovators (high usage of mobile and contactless payments), at only 2 percent of the population, are

younger and have the second-highest average incomes. Eighty-one percent of them are members of Gen Y or Gen X.


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Obstacles to Driving Decline in In-person Paper Check Payments In our survey, in-person payments were defined as P2P payments made to individuals and in-person payments made at the point of sale. Representing 11 percent of paper check payments in our survey, P2P payments by paper check will decline at a slower pace than POS payments made by paper check. The main reason is a majority of P2P payees prefer to accept cash or checks. A minority of P2P payees accept credit card (24 percent) or debit card (15 percent) payments. Even lower portions of P2P payees accept online or mobile forms of payment. Only 6 percent accept an online P2P payments service (e.g., PayPal), and less than 1 percent accept mobile payments. With the exception of Credit Carders, consumers prefer to make P2P payments in cash (49 percent) or by check (48 percent) rather than by credit (22 percent) or debit card (14 percent). Only 5 percent of consumers expressed interest in using an online P2P payments service to make a P2P payment while only 1 percent expressed interest in mobile payments. The diffusion of online and mobile P2P payment methods will eventually hasten the decline of paper checks, but without substantially more demand than both payers and payees expressed in this study, the paper check decline associated with P2P payments will be gradual. Paper Check Writers are, no doubt, the bane of grocery and superstore retailers because they hold up the line – irritating both shoppers behind them and retailers who are paying for cashiers’ time. Among different lines of retail trade, one-third (32 percent) of Paper Check Writers used paper checks as their payment method the last time they visited a grocery store and one-quarter (24 percent) used paper checks at discount stores/supercenters (e.g., Walmart, Target, Kmart). For the other four segments, the portion of consumers who used a check at these retailers was minuscule (only 1 – 2 percent). When asked how disruptive it would be if retailers were to prohibit the use of paper checks at POS locations, one-third (34 percent) of Paper Check Writers felt it would be very disruptive. This figure nearly doubles to 60 percent for Paper Check Writers whose last payment to a grocery store was made via paper check. Whole Foods’ policies notwithstanding, it’s doubtful that mainstream food retailers will risk losing these customers by refusing to accept check payments. But our research data suggests that non-food retailers have a strong case for no longer accepting check payments (and many of them already have). The obstacle to migrating Paper Check Writers to credit card usage at POS terminals has more to do with the perception of credit cards than not having access to them. Only 12 percent of Paper Check Writers do not have access to credit cards. Two-thirds (67 percent) have a Visa® and more than half (51 percent) have a MasterCard®. Credit card penetration among Paper Check Writers is higher than it is among Cash Users or Debit Carders – both groups with potential challenges obtaining credit due to the high proportions of their members with low incomes.


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Key reasons why Paper Check Writers as well as other segments are resistant to credit cards as a payment method are apparent when we look at how the segments rate the importance of various factors when making in-person payments (see Figure 5). With the exception of Credit Carders, the majority of all segments, including Paper Check Writers, rate

control over the timing of when funds are taken out of accounts as highly important. All consumer segments, with the exception of Credit Carders, view having a payment method that helps

them to not spend beyond their means as highly important. Only Credit Carders and Innovators, to a lesser extent, place a high level of importance on points or rewards

when choosing a payment method. Paper Check Writers have more in common attitudinally with Debit Carders, which suggests that debit cards would be a more acceptable migration path than credit cards for Paper Check Writers.

Paper Check Writers also think that the cost of credit cards is high – much higher than the cost of debit cards. One-third (32 percent) rate the cost of credit cards as high or very high. In contrast, only 6 percent of Paper Check Writers rate the cost of paper checks and only 7 percent rate the cost of debit cards as high or very high.


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If forced to give up writing checks at POS locations, Paper Check Writers would more likely migrate to debit cards (41 percent) rather than credit cards (30 percent). Cash Users, Debit Carders and Credit Carders would migrate to their preferred payment methods, although Innovators would more likely use debit cards than any other payment method including mobile or contactless payment. Paper Check Writers do not expect to abandon paper checks in the near term. Only 7 percent expect their paper check usage for in-person payments to diminish in the next year compared to 18 percent of consumers within the other four segments. FIS estimates a year-to-year decline for in-person paper checks of 5 – 7 percent based on the results of our survey, but most Paper Check Writers are likely to cling to their checkbooks indefinitely without some intervention. Intervention with the Carrot and the Stick So what will motivate Paper Check Writers and other consumers to reduce their paper check usage and opt for in-person payments? The good news is there are elements of consumer behavior that can be influenced to accelerate check migration. Only 18 percent of Paper Check Writers and only 6 percent of all consumers within the survey population stated that nothing would persuade them to use fewer paper checks for in-person payments. Thus, the portion of consumers who appear to be intractable is quite small. Figure 6 and the bullets below highlight factors that could motivate Paper Check Writers to reduce their paper check usage. To a significant degree, these factors also resonate with members of the other four segments. Thirty percent of Paper Check Writers would use fewer paper checks if they could keep track of spending as

well as they can with paper checks. It’s the check register and carbons that keep them committed rather than the paper checks themselves. Recordkeeping is paramount.

Thirty percent also would use fewer paper checks if they were assessed a 10-cent charge for each check to cover processing costs, thereby tipping the perceived cost differential between paper checks and debit in favor of debit cards. While this particular survey question does not represent a highly sophisticated pricing analysis, it is interesting as it implies that a substantial portion (70 percent) of Paper Check Writers may be relatively price insensitive and continue to write checks even if charged a modest per-item fee. At an average of nine checks written per month for in-person payments, this level of fee may not be viewed as onerous. (Our survey question did not specify whether the charge would be assessed by the financial institution or the merchant.)

Twenty-four percent of Paper Check Writers would use fewer paper checks if they received rewards for using a credit or debit card instead of a check.

One-fifth (19 percent) would reduce paper check usage if they felt that other payment methods were just as secure as paper checks. This is not an irrational concern given the widespread incidence of credit card compromises and constant mainstream news headlines regarding data breaches and identity theft.


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Paper Check Usage for Bills The Paper Check Writers segment represents 11 percent of the consumer market but generates 47 percent of all the checks used for bill payments. They exhibit low usage of online banking, which not only contributes to their high usage of paper checks for bill paying but also affects their abilities to monitor their spending (a key reason why they maintain a reliance on the check register and carbons). Their usage of online banking vies for last position with Cash Users, of whom 14 percent are unbanked.


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Although their in-person payments are fewer than other segments, Paper Check Writers’ number of bill payments is higher than average (see Figure 7). On average, two-thirds (65 percent) of their bill payments are made with paper checks compared with 12 − 28 percent of other segments. Utility bills, followed by mortgage or rent, insurance and credit card bills are the most common types of bills paid with paper checks.

Checks are much more entrenched in bill payment than in POS payments. The vast majority of consumers believe their paper check usage for bill payment will remain the same. Only five 5 percent of consumers predict a meaningful decline in their check writing for bill payment within the next year compared to 15 percent that predict a decline in check usage for in-person payments. Without some kind of intervention, paper check usage for bill payment is likely to decline at a slower pace than usage at POS terminals. We estimate the decline will be about 2 percent per year. When asked why they pay bills with paper checks, relatively few consumers cited not paying bills online as the reason for continuing to make some bill payments with paper checks. More often, consumers reported not wanting to spend time setting up online payment for occasional bills and/or lack of a biller site to accept online bill payments.


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The key reason why Paper Check Writers still use paper checks to pay bills is ease of keeping track of spending – the same reason why they use paper checks for in-person payments. And, they don’t like to charge bills to debit or credit cards. Many Paper Check Writers, as well as members of other segments, also admitted that habits are hard to break. Float, often cited by financial services executives as a rationale for continued check usage, was a reason mentioned by a modest number of Paper Check Writers. Only 18 percent of them cited “allowing for more time to clear through my account” as a key reason for continued use of checks for bill payment. Summary As depicted in Figure 8, some obstacles to paper check migration persist, such as: In-person payments to small businesses and individuals are often constrained by payee acceptance

methods. Broader acceptance of card-based and electronic P2P payment methods among small businesses will mitigate these constraints over time. However, our research points out that 35 percent of consumers try to avoid using card payments at small, local merchants because of the swipe fees that merchants pay for card acceptance. Small merchants will need to take a lead in encouraging customers to pay via cards instead of paper checks.

Bill payment is often constrained by biller acceptance of cards and by payee reluctance to pay bills online.


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Speeding up migration of paper checks will require “carrot and stick” intervention to overcome consumer inertia. Optimally, these incentives and disincentives would be implemented on a targeted basis. • “Carrots” include incentives such as:

− Offering credit/debit/prepaid card rewards − Providing tools to track spending that are better than the check register − Ensuring security of payment methods and privacy of personal information − Promoting online banking, especially with older customers, and providing them with assistance in

setting up online payment for recurring bills

• “Sticks” include deterrents such as:

− Instituting surcharges on paper check usage (retailer or financial institution) − Placing limits on the number of checks written per month (financial institution) − Refusing to accept checks (retailers) − Implementing “card-only lines” at food retailers

Regardless of incentives or deterrents, only a very small portion of consumers (we estimate 6 percent) will continue to strongly resist paper check migration. Our research suggests that most consumers could be motivated to migrate away from paper checks more rapidly.


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About the Research “Accelerating Paper Check Migration” is part of a series of research briefs based on primary research conducted by FIS Strategic Thought Leadership. The research findings herein are based on a 75-question online survey completed by a representative sample of 3,205 adults in February 2012. The survey was fielded by FIS to a consumer panel maintained by Toluna. The study’s primary objective was to determine strategies and tactics to migrate paper to electronic payments. Supporting study objectives included: 1) segmenting consumers based on payment method preferences, 2) determining how payment methods differ by payment contexts and 3) identifying obstacles to and incentives for migration away from paper. About FIS FIS delivers banking and payments technologies to more than 14,000 financial institutions and businesses in over 100 countries worldwide. FIS provides financial institution core processing and card issuer and transaction processing services, including the NYCE® Payments Network. FIS maintains processing and technology relationships with 40 of the top 50 global banks, including nine of the top 10. FIS is a member of Standard & Poor's (S&P) 500® Index and is currently ranked No. 1 in the annual FinTech 100 rankings. Headquartered in Jacksonville, Fla., FIS employs more than 32,000 on a global basis. FIS is listed on the New York Stock Exchange under the “FIS” ticker symbol. For more information about FIS, see www.fisglobal.com. “Accelerating Paper Check Migration” was authored by Paul McAdam, SVP of Research and Thought Leadership at FIS, and Mandy Putnam, director of Research and Thought Leadership at FIS. Please contact the authors if you have questions about the research or how the results apply to your organization. Paul McAdam 708.449.7743 [email protected] Mandy Putnam 614.414.4207 [email protected]

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FIS Research - Accelerating Paper Check Migration

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