Cheque payments: the shape of things to come

Even though cheque payments remain the most popular form of non-cash retail payment, they make up only 60 percent of all non-cash retail payments today compared to 85 percent in 1979.

Recent Federal Reserve studies suggest that roughly 40 milliard cheques were written in the United States in 2002. The number was about 50 milliard in 1995.

The Reserve Banks handle about 17 millard of these cheques annually, a volume that is expected to fall as well.

The move to other forms of non-cash payment, including electronic payments, has been supported by the Reserve Banks. But in doing so it has created an alternative to a significant part of their revenue raising programmes.

The Reserve Banks are not allowed to cross-subsidise their cheque clearing activities and must operate in a quasi commercial environment: under The Monetary Control Act of 1980 the Reserve Banks must set prices to recover, over the long run, their total costs of providing payment services to depository institutions, including the imputed costs they would have incurred and imputed profits they would have expected to earn had the services been provided by a private business firm.

Changes planned by the Reserve Banks include new cheque-imaging and check-adjustments (that is resolving check errors in cheques) technology.

The changes will see the closure of five offices and the reduction in services at a number more. But the number of offices affected is considerably greater - the number of processing centres will be reduced from 45 to 32, for example. The Reserve Banks say that they aim to maintain services levels to as close to present levels as possible - paving the way for slower cheque clearances. The slow pace of cheque clearing in the USA surprises many that deal with it: even in the UK, amongst developed countries generally regarded as tardy, cheque payments usually take three working days to clear, significantly faster than in the USA, particularly in the case of inter-state cheques.

But there are hazards says The Anti Money Laundering Network's Nigel Morris-Cotterill. He warns that delays in, particularly, commercial payments may mean a further reduction on the number of cheques - and this may mean an increase in funds transfers, bankers' drafts or even cash. Any of these may result in a changing transaction pattern that might create exception reports under automated monitoring systems.

Some centres will gain staff but there will be an overall reduction in headcount of some 400 - although this means 1300 will be redundant from their present positions and 900 will come to the enlarged centres. Morris-Cotterill warns that disaffected staff are a potential source of risk and the danger of diverted payments where staff are under threat should not be overlooked.

The move to alternative payment methods may been seen as providing improved security, particularly with real-time clearing. However, this is not necessarily as clear cut as it seems with the risk of fraud seemingly growing with the increase in the use of alternative payment systems, says Morris-Cotterill.