As we look at the tsunami of change spurred by the coronavirus, one of those archaic items that seem to hang around despite a range of options is the paper check. While the adoption of electronic payments and IVR payments by phone is more and more widespread, many studies indicate that as many as 20% of people and more than 70% of businesses still write paper checks. Before we examine the potential death of paper checks, let’s review the origins.
Origins Of The Paper Check
In 1681, a strappy businessman who I can only imagine was in a pinstripe suit and suede shoes, first introduced the “check” in Boston. This “check” was simply written by hand, like an IOU on that napkin you found at the café last week. Just like today, people were able to hold liens against their properties in order to receive funds. Once the funds were received, people could then go about writing checks.
A British banker, Lawrence Childs, was coined the first businessman to bring printed checks into the picture in 1762, and this is also the birth of printing “serial numbers” on checks as a way to trace them back to the original owner or “check” on them. Hence, the origin of calling these slips of paper, “checks.”
Businessmen of the past, present, and maybe not the future are still facing the same problem: How do you move these pieces of paper that represent a payment, a.k.a. checks, to collect the money due from so many other banks? At first, it was really awkward.
Picture someone riding their bicycle in eighteenth-century London with a bag full of paper checks. It’s your money, it’s your neighbor’s money, it’s the governor’s money – but then, that poor messenger gets mugged, beaten up, and not only did he get his bike stolen but also the bag of checks. This is pretty much how banks started transferring checks between other banks; messengers dispatched off to the other banks on bicycles to present checks for collection; meaning a lot of traveling and a lot of payments being hauled around in unsecured conditions.
Necessity Is The Mother of Invention
Well, in this case, perhaps a combination of necessity and inspiration from Dutch Courage. According to a banking connoisseur, a London bank messenger stopped
for a drink or five mid-shift and ran into another bank messenger. Their drinking led to creativity, and that creativity led to a solution. The two messengers got to talking and realized that they both were in possession of checks that were drawn on the other’s bank. Instead of making their way over to each other’s bank, they exchanged the checks and saved each other a trip and a possible injury. Soon the word spread among other bank’s messengers, and this practice evolved into a system of check “clearing houses” – paper networks of banks that exchange checks with each other, and it’s still in use today!
The Rise of Paper Checks: 1950 – 1995
As you can imagine, the growth of checks sparked disorganization within banks, specifically when it came to processing checks; At this time, Americans were writing more than 28 million checks a day, so the tab key method of organizing checks was getting old, and clunky. This horrible method spawned the innovation of MICR.
MICR or Magnetic Ink Character Recognition was invented in the mid-1950s, by the Stanford Research Institute and General Electric Computer Laboratory. It was the first truly innovative technology that allowed for an automated system to process checks using MICR. MICR also incorporates the unique font used specifically for the routing number at the bottom of the check, or the account number and those weird symbols in the middle of those numbers that you never know if they a part of the account or routing number.
Today, MICR is still required on a check today. According to the Federal Reserve and the Accredited Standards Committee (for financial industry standards), it would be classified as a non-cash item and not as a check if it didn’t have MICR. So, skipping the MICR requirement and presenting a “check” printed with standard toner instead of MICR toner is actually illegal. The MICR process, in a nutshell, is as follows: Using a MICR Reader, (or a check sorting machine), the MICR code is read and, the machine based on MICR, is able to recognize the originating bank branch and location of the check. The payee bank is credited for the amount and the transfer of funds to the payee’s account. The check is then physically transported to the bank of the drawee by car, truck, or airplane and presented to the bank by the clearing institution where the payment amount is debited from the payor’s bank associated with the customer account number. The payor then receives the canceled physical check from the bank in the next statement.
Once the 1970s rolled around, almost 86 percent of all payments were made by check; 33 billion checks to be exact, and by 1995, the number of annual checks written peaked at around 49.5 billion.
2001: The Decline Of Paper Checks
Imagine billions of dollars literally in the air at one time. It’s crazy to think about, right? Almost a decade ago, having 6 billion dollars in checks flying to a destination on any given day was considered absolutely normal. On September 11th, 2001, the FAA grounded all flights, putting 47 billion dollars in checks in limbo for an uncertain amount of time.
The grounding spurred the passage of the Check 21 Act, officially put into place by the FDIC on October 28, 2004, allowing banks to use electronic images of checks instead of paper. Traditionally, banks were physically moving original paper checks from the bank where the checks are deposited to the bank that pays them. The process itself was inefficient and costly. Check 21 addressed this issue first hand and enabled banks to handle more checks electronically.
Check 21 deals directly with substitute checks. A substitute check is a high-quality paper reproduction of both sides of the original check and a legal equivalent of the original check. Banks use substitute checks religiously to collect funds from other banks. You can easily identify a substitute check because it says, “This is a legal copy of your check. You can use it the same way you would use the original check.”
The growth of substitute checks contributed to the development of mobile check deposits. A mobile check deposit is initiated through an app provided by a bank, that uses a smartphone’s camera to generate the substitute check. In the wake of COVID-19, nearly all banks are encouraging depositors to use mobile deposits.
2020: COVID-19 And The Fallout
While the coronavirus hasn’t directly caused a disruption in payments like 9/11/2001, it’s prompting a cultural awareness of what we touch, where we go, and who we see. Where once we might have visited a retailer or other company, we’re now speaking with a service representative or using their IVR system to take care of our business. When a minor ache or other ailment hits, we’re not visiting our primary care physician, we’re starting a TeleHealth session. My email inbox is hit with promotional messages, hints, tips, and generally “desperate pleas” from my bank to go 100% online and digital.
Paying without touching will soon be not just preferred, but potentially required. And this will likely mean that, in just about every case, your paper check is no longer welcome. Businesses will direct you to an automated solution such as our Compass Payments Suite, where you can use your phone to pay with your checking account.
Will this finally be the death of Lawrence Childs’ creation? Maybe not completely, but for most, this feels like the beginning of the end.