Are electronic money transfers better than paper checks?

Yes

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by Kevin Apple

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Are electronic money transfer better than paper checks?

Well, let me ask a couple of other questions.

Is the Pope Catholic?
Do bears do their business in the woods?

The answer to all these questions, of course, is a resounding "Yes"!

To be perfectly honest, cheques (and please accept my apologies for the generally accepted British spelling of these instruments) are an antiquated system of payment that has been in widespread use since the 17th century and which has now been largely subsumed by alternative methods of payment. Electronic money transfers are just one of the replacements. The others include credit cards, third party online payment services (eg. Paypal), payments at postal and other agencies and paying in cash at the third party's own bank. The latter method has gone much the same way as humble cheque, both are financial dinosaurs.

In many western European countries, much of eastern Asia and the Pacific, cheque usage has been in a state of continual decline since at least the 1980s. In parts of northern Europe, cheques are almost non-existent, thanks mostly to interconnected international Giro system that has been in use since about the 1950s. The only large scale users in Europe are the United Kingdom, Ireland and France, where cheques are free to personal customers, however electronic transfers are becoming more common and processing volumes tipped in favour of the latter for the first time in 2006. Many organisations have now either refused to accept cheque payments or are charging for the privilege.

The only large scale users of cheques in the western world are the United States and Canada. It is not because Americans (and Canadians) are old fashioned and set in their ways, but rather because the United States lacks a system for clearing high volumes of low value electronic payments. Strange and something that I consider quite surprising. That this financial epicentre of the western world lacks something as basic as a system to effect these kinds of electronic payments. Why this is the case is probably beyond the scope of this topic however I understand that it has something to do with the regional structure of the US Federal Reserve and the legislation underpinning the banking system as a whole. What was also surprising was that in 2001, some 25 percent of Americans didn't even have a bank account ("The Future of Money" by Organisation of Economic Co-operation and Development, 2002). This means that a huge slice of the US economy is still cash based.

In Australia, having your wages paid by either cheque or cash was largely phased out during the 1980s. The same thing happened with social security payments, leading to a rise in the proportion of Australians with bank accounts. Financial deregulation at around the same time brought about a concerted effort by banks to reduce the costs associated with the processing of paper cheques. This led to financial incentives for customers to not issue cheques, namely a rise in the cost of cheque related transaction fees. With the advent of telephone and internet banking and electronic funds transfer at point of sale (EFTPOS), Australians embraced these new payment technologies, albeit helped by greedy banks continually pushing up the cost of having a chequebook.

PROS and CONS

We will have step by step comparison of these two forms of moving money and score them:

1. Cost - electronic money transfers are usually either free or at negligible cost, often a fee structure that enables you to have a certain number free each month after which a charge kicks in. In conjunction with user pays principles, you don't need to be a mathematician to work out that it is going to cost less to send an electronic blip around than manually handling a piece of paper, entering the data either manually or scanning into some kind of proof machine, then remitting the information electronically to the payee's bank. Then there is the checking mechanism to ensure that cheques have been made out correctly (they don't verify every cheque, usually only those above a certain monetary threshold, but that still involves someone physically examining the cheque). These additional costs are passed on to the cheque account holder, or attached as a higher transaction fee for payments made by cheque.

You obviously need to read the fine print on the terms and conditions brochure for your account, but in the vast majority of cases, electronic money transfers are much cheaper (or even free) than cheques. Score a point for electronic money transfers;

2. Speed - electronic money transfers within the same bank are instantaneous. Transfer money between your own bank accounts and the funds are available immediately. Between banks, processing times vary and there are usually cut off times. Generally, first tier banks, the major ones, transfer a payment before 6pm and the money is pretty much guaranteed to be there at some time the following day. At worst, the day after. Comparing electronic money transfers to cheque in terms of speed, is much the same as comparing e-mail to a posted letter. You are relying on the payee banking the cheque, this is then cleared through the bank's normal clearing system and usually only available a certain number of working days after the deposit has been made. So the difference can be days to a week or more. A big con for the payee, but a definite pro for the drawer, who will have the funds sitting around in his/her bank account for all that extra time.

Unless you are juggling funds and need the extra time in the hope that some deposit is going to make it to cover a cheque you have written (verboten in most circles), electronic money transfers are much faster than paying by cheque. Score another point for electronic money transfers;

3. Security - a lot of the hoo haa about internet banking revolves around concerns over security. The misguided belief that somehow someone is going to clean out your bank account if you do your banking on-line. All I can say is that internet banking has come a long way from its first tentative forays in the mid-late 1990s. Security has been beefed up, most banks now using 128 key encription to transfer data, and a lot of financial institutions have gone one step further and even guaranteed the safety of their internet banking systems. Do you dough by way of some boffin somehow cracking into the bank's electronic network, and the bank itself will reimburse you.

On the downside, way too many people have fallen for the old Nigerian scam or fake bank e-mails looking to check your account information, giving away their confidential account information and passwords in the process, only to see all their funds disappear. These kinds of transactions are not covered under any guarantee and nor should they be. This is the same as signing all the blank cheques in your cheque book and then giving this to a complete stranger for safekeeping. You need to take a bit of personal responsibility to safeguard your personal information. If you use lengthy passwords, change them regularly and a meaningless combination of alpha-numeric characters, you should not have any problems.

Unless your bank has a guarantee in place for internet or on-line banking, this one isn't as clear cut. It is largely a matter of common sense and they can be as safe as each other. I would score this one again in favour of electronic money transfer, albeit in a close one; and

4. Delivery - this criterion means getting the money where it is intended and getting your funds back if things go wrong. Assuming that the account information you have been given is correct, there is next to no chance of the funds going astray through electronic money transfers. In Australia, large organisation utilise a payment system called B-pay, which incorporates the account and billing information to make it easier for you to pay a bill (which is what the B stands for). It identifies you as the person sending the funds and serves to automate the biller's processing.

With a cheque, if you use the payment slip provided by the payee or biller, you generally can't go wrong either. It is a bit iffier should you decide to rely on the vagaries of the post. The posties are generally honest and reliable types however, when the fickle and shifting mores of humanity are involved, particularly when money is involved, there are no guarantees. If the 'or bearer' designation on the payee line isn't crossed out, the cheque is a negotiable instrument payable to whoever presents it at the bank. You can safeguard against this by putting a crossing on the cheque. "Not Negotiable - Account Payee Only" works a treat. If the bank ignores this and pays the bearer, you will be entitled to compensation (the bank generally gives you back the money and gives the offending bank teller a swift kick up the backside).

Getting your money back is a little trickier and the same problem arises whichever payment method you use. If you are depositing directly into a bank account, the onus is on you to make sure that account number is correct. If the payee is the one giving you the account information and they've mucked up their own details, then it is generally tough bickies. It would be up to them to chase the money from whoever it has gone to (if anyone) and all you should have to do is provide the bank with copies of the transaction details. You've paid the amount requested into the payee's bank account as advised by them and that is really the end of your obligation. I've had this happen a few times and most banks don't tend to use consecutive numbering, meaning that for any block of numbers, only a small percentage are valid account numbers. When you include an invalid account, the bank will return the funds to your account, less an appropriate administration fee of course (as your bank is not a charity). You can then confirm the bank account and forward the difference to the payee, as you shouldn't have to wear the cost of their mistake.

On the basis that most people tend to post cheques to bill payees, which reduces the level of certainty that they will actually get the money, I'll score this one to electronic money transfers as well. This is also from the point of view of the payee, who doesn't have to worry about there being sufficient funds in the account to cover the amount of the cheque (and this is a whole separate topic - see my article on "How not to overdraw (overdraft) your checking account").

As we have seen from the above, it is a clean sweep for electronic money transfers. The only possible advantage I can see to issuing cheques to pay bills is that you can float payments. This means that you have use of the funds for a few extra days before the amount of the cheque is actually debited from your account balance. Given that most people wouldn't use a transaction type account as an investment vehicle, the interest earned is likely to be somewhere between nothing and minuscule. If you are paying a substantial amount to someone, there is a fair chance they are going to insist on a bank cheque or draft for payment (meaning that the funds are drawn from your account at the time of purchase) as the funds are as good as cash for them and generally available immediately.

In all the discussion, I have focused on the view from the drawer's perspective. As with everything in life, there are two sides to every story. The payee just wants to get their money when it is due and be confident that the payment is going to be honoured. This is not an issue if the payment is received as an electronic money transfer as the paying bank will only allow you to access cleared funds. It is a different story where cheques are involved. The payee needs to bank the cheque and wait for it to be cleared before they can access the money. Given that this can be anywhere from a couple of days to a week or more, why would they want to accept cheques for payment? In addition to the uncertainty of payment, most banks charge inward dishonour fees to rub salt in the wound and base part of their account keeping or transaction fees on the number of cheques deposited.

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