Could paper checks be on the way out, like the penny?
The Federal Reserve says it is considering "winding down" its processing of paper checks for banks and their customers.
By Chris Isidore, CNN
(CNN) — First the penny. Next, paper checks?
When the US Mint stopped making pennies last month for the first time in 238 years, it drew a lot of attention. But there have been quiet moves to stop using paper checks as well.
The government stopped sending out most paper checks to recipients as of the end of September, part of an effort to fully modernize federal benefits payments. And on Thursday the Federal Reserve put out a notice that suggested it is considering – but only considering – the “winding down” of checking services it now provides for banks.
The central bank’s statement said that as an alternative to winding down those services, it is mulling more investment in its check processing services, but noted that would come at a higher cost. But it is also considering not making any such investments, in order to keep costs roughly unchanged. That would lead to reduced reliability of those services going forward.
“Over time, check use has steadily declined, digital payment methods have grown in availability and use, and check fraud has risen,” said the notice from the Fed. “Also, the Reserve Banks will need to make substantial investments in their check infrastructure to continue providing the same level of check services going forward.”
But even if it’s true that options such as direct deposit, automatic bill paying and electronic payment systems such as Venmo, PayPal and Zelle have all reduced the need for traditional checks, paper checks are still an important part of the payment system. They make up about 5% of transactions and represent 21% of the value of all those payments, according to a statement from Michelle Bowman, the Fed’s vice chair for supervision, who dissented from the Fed’s Thursday statement.
“Checks remain important payment mechanisms for consumers and businesses,” she said. “Discontinuing Federal Reserve check services is not an efficient solution to the growing problem of payments fraud, particularly in light of the ongoing role of checks in the payments system.”
The history of checks is a little uncertain, but they are thought to date back nearly 2,400 years. The first modern checks gained popularity more than 500 years ago.
“(In) the early 1500s, in Amsterdam, Holland, …. people who had accumulated cash began depositing it with Dutch “cashiers,” for a fee, as a safer alternative to keeping the money at home, then the cashiers agreed to pay the debts out of the money in each account, based on the depositor’s written order or “note” to do so,” said a post on the history of checking on the site of Checkeeper, an online check printing service.
The end of paper checks could cause problems for consumers who don’t have access to a traditional bank account and still depend on the small slips of paper to receive some of their funds, including their paycheck. About 6% of adults were “unbanked” in 2024, according to the Federal Reserve, meaning neither they nor their spouse or partner had a checking, savings, or money market account. That unbanked percentage rises to 22% for those with an income below $25,000.
Older consumers who might not be as comfortable with new technologies, or the estimated 10% of Americans who don’t even have smartphones, could also be greatly disadvantage by a further move towards electronic payment systems.
And checks can still be an important way for some merchants to be paid, or to save costs, rather than paying high transaction fees associated with accepting credit card payments.
“Checks are obviously not used nearly as much as they used to be, but they’re still an important part of the financial system, especially for low-income people,” said Doug Kantor, general counsel for the National Association of Convenience Stores, whose members often provide cash checking services for customers as well as accepting checks for some payments, such as auto repairs. He said it would cause untold and difficult-to-foresee problems to wind down the checking system.
He also points out that many people still use checks to pay their monthly bills – in some cases without even realizing it – if they have directed their bank to make various payments on their behalf. He said he couldn’t imagine winding down the checking system any time soon.
“At some point, they may well be eliminated entirely. It’s really hard to know how long a tail there is there,” he said. “I would think they’re not ready to wind it down yet, and I would hope they’re not ready to wind it down yet because there are significant numbers of people – a minority, no doubt – but still significant numbers who rely on the system.”
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CNN’s Bryan Mena contributed to this report.
