Why is the Check Still in the Mail?

It never ceases to amaze me how a nation with such an utterly archaic, technically obsolete banking system like America’s can assume such an inflated sense of its own importance in world affairs.

I was reminded of this once more while empathizing with those poor Wall Street executives who face drastic cutbacks on the annual compensation. „Banker’s bonuses likely to fall 20 to 30%“, the headline reads in today’s International Herald Tribune, which goes on to describe the desolation and panic of those second-tier traders and brokers for whom the year-end bonus usually represents the bulk of their take-home pay.

The sentence that really struck me, though, was this one: “”Employees are typically informed of their bonuses in January or February, with checks going out shortly afterward.”

Huh?

I am still trying to remember the last time I saw a check, much less wrote or received one. Checks are almost as archaic as wampum. Dog’s teeth or cowrie shells, anyone?

Just how far behind the rest of the world can the U.S. banking system be?  Just look at the numbers:

  •  86% of all business payments and 80% of all non-cash payment in the U.S. are by check, according to the website of printmycheck.com, which allows vendors and shop owners to accept checks by phone, fax, email or online website, instantly converting the information into “100% legal bank checks ready for deposit”.
  • Check fraud cost U.S. consumers and banks $20 billion in 2010, up from $10 billion in 1997, according to a study by Javelin Strategy & Research.
  • At least 17 million people in the U.S. living in 7.7% of all households do not have bank accounts at all, says the Federal Deposit Insurance Corporation (FDIC).

This is totally ridiculous, of course, and it shows once again that the U.S. is lagging behind not only the rest of the developed world, but many so-called third-world countries, too.

In Europe, direct bank or giro transfers and electronic payments have been around since the early 1950ies to send and receive regular payments like rent and wages and even mail-order invoices. By now have completely replaced checks in Germany, Austria, the Netherlands, Belgium, and Scandinavia, just to name a few. In Finland, banks stopped issuing personal checks in 1993. Even Poland abolished them back in 2006. In Asia, checks never really took off at all. A study in2009 showed that check usage in Japan, South Korea and Taiwan was negligible.

I hate to belabor the obvious, but checks are such a dumb idea that I wonder why Americans still put up with them. Consider the cost. DepositNow, a financial services company based in Las Vegas that enables customers to scan checks directly into their bank accounts, have an online tool to compute exactly how much gasoline customer can save in a year wby not driving to their bank to cash a check.

Besides, the checking system in America has given birth to a whole crime industry whose business model consists of exploiting the many weaknesses of the system, including first and foremost simply forging somebody’s signature. But there are more, most of them unique to America, and to us in more financially civilized countries they seem both weird and wacky. Here are a few of my favorites:

  • “Check Kiting”: the crook deposits a check in one bank account into a second bank account without the sufficient funds to cover it.
  • „Cheque washing“: a check is stolen in transit between the writer and recipient; the thief than uses chemicals to remove the ink on all parts of the check other than the signature. Then all he has to do is fill in the blanks.
  • The best way to commit check fraud, I think, is by writing and cashing a check, say, for $5100, only the “5” is written in disappearing ink, so by the time the check in processed, your account is only debited $100.

BTW: The most notorious „bad check artist“ of the 20th century, Frank Abagnale, devised a scheme to put incorrect MICR numbers at the bottom of the check he wrote, so that they would be routed to the incorrect Federal Reserve Bank for clearing. This allowed him to work longer in one area before his criminal activity was detected.

What worries me most is that checks is their potential for identity theft. Since checks include significant personal information (name, account number, signature and in some countries driver’s license number, the address and/or phone number of the account holder), they are an easy to get someone else’s personal data. In fact, until recently, you often had to include your social security number when cashing a check in the U.S. and Canada, until the authorities finally woke up to the fact that they were actively assisting criminals Identify. Today, identity theft is one of the fastest growing types of fraud in the US, effecting 11.1 million adults in 2010. In Europe, it is hardly known at all (although it is on the rise thanks to various online scams).

The big question on my mind is: Why do Americans persist in using a system that is grossly inefficient, immensely costly and amazingly insecure? I guess they just don’t know any better, and no one is telling them better. Never change a running system, bankers are telling themselves. After all, the onus would be on them to find a better way of doing payments (for instance by asking their European or Asian counterparts how they do it). Oh, yes, and then they would have to pay for implementing it. Much easier (and cheaper) to let people go on exchanging slips of paper and keeping their eyes tightly shut.

On second thought, maybe sending bonus checks to bankers is actually a good idea after all. There’s always the chance they may get stolen along the way…

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