Why cheques have more bounce
“Dad? I’ve heard that they’re going to keep the cheque.”
“Yes, apparently they are.”
“What’s a cheque?”
“It’s a special piece of paper you can use to pay for things. You take a blank cheque and then you write out how much money you want it to be worth, and you give it to the person who wants the money.”
“So, if you wanted to be rich, you could just write a cheque for all the money in the world, like a million pounds?”
“It’s not that simple. You get the cheque from the bank. The bank has your money in what they call a ‘bank account’, and when you write a cheque, the bank takes the money from your account and puts it in the account of the person to whom you wrote the cheque.”
“That sounds like fun. Do the people with the money have big trolleys and bags with dollar bills in them?”
“No. Actually, the money doesn’t physically move. It’s just a computer somewhere keeping track of how much money is in your account. Then when you write the cheque, the computer talks to another computer and your bank account has a smaller number and the other person’s bank account has a bigger number.”
“Then why don’t people just send messages to the computer, like e-mail?”
“Well, lots of people had that idea, which is why there was this plan to get rid of cheques. But some people don’t like computers – usually older people.”
“Like grandpa?”
“No, not really. Grandpa takes computers apart and puts them back again for fun. But some really old people don’t like computers.”
“Like great-granny?”
“Yes. Great-granny didn’t like computers, but then great-granny would be 100 years old now, and she died a while ago. But there are still some people alive who don’t like computers and want to use cheques. A thousand of them wrote letters complaining that either they wanted to use cheques, or they wanted to get money from people who wanted to use cheques, and could we please keep cheques. So we’re keeping cheques. Remember, my love, that while Britain is obsessed with young people like you culturally, when it comes to politics, we’re obsessed with old people.”
“So will I get to write cheques when I am 100 years old?”
“I doubt it. All that happened this week was that banks agreed to keep open the system that allows cheques to be processed. But shops don’t have to accept cheques. So I expect they will die out as soon as most people don’t want to accept them as payment.”
“But wouldn’t shops want to accept cheques so they can sell things to people?”
“Not necessarily. If a shop is selling £10 of goods at a 5 per cent profit margin, then it is making less than 50 pence profit on the transaction. It might figure that it’s not worth the hassle of dealing with the cheque. A charity getting a cheque for £10 gets to keep the entire £10 – no wonder they are more willing to put up with the ridiculous concept. And charities don’t have large queues at the check-out.”
“That’s not fair. I wanted to write cheques like great-granny.”
“You can write all the cheques you want. Just don’t expect anybody to accept them as payment. That’s the thing about payment systems – it takes two sides to make them work. They’re not much use if other people don’t think they’re valuable. Governments can say it’s the law that you have to accept it, but that’s a minor factor. The world is full of alternative types of money. There are digital currencies such as Bitcoins and Linden dollars. Libertarians are trying to find ways to make it easy to carry gold and silver in a wallet-friendly format. There are air miles and loyalty cards and all kinds of alternatives. If people accept them as payment, they’ll work. If not, they won’t.”
“I heard at school that one time in Germany people used to swap coffee and cigarettes instead of using money.”
“Not quite true. In Weimar Germany, cigarettes and coffee weren’t being used instead of money. They were money. People weren’t swapping them. They were using them because they were convenient to carry around and, unlike the official money of the day, people knew what they were worth from one day to the next.”
“Was that when great-granny was a little girl?”
“Yes, it was. I don’t think she was ever fond of cigarettes, though. I think she preferred cheques.”
First published at FT.com
8 Comments
Alex Lennon says:
“puts it in the account of the person to whom you wrote the cheque”
Except that’s not really true is it? I feel sure your daughter would appreciate an explanation of the fractional reserve banking system…?
16th of July, 2011Ralph Corderoy says:
One institution that still accepts cheques is the bank. On opening an account they like a cheque drawn on one of your other accounts as it is a useful proof of identity for the anti-money laundering regulations. What’s the alternative? Driving licence or passport? Some people have neither, and if they have then when applying by post it’s not cheap to get your solicitor to authenticate a copy each time.
P.S. Why is this box 2.7 lines high?
16th of July, 2011AMK says:
I don’t use chqs in shops – haven’t for ages – but I do still get use out of them for transactions between private individuals. For example, to send birthday/xmas money to the teenage relations I rarely see. Simplicity itself to stick a chq in with the birthday card. They also come in very handy when I have done some shopping on behalf of someone else, primarily my Mum. I shop on her behalf fairly often, both online & in real shops, and chqs are by far the easiest way for her to pay me back, meaning she does not need to keep a lot of cash in the house which would be insecure & inconvenient – you have to go out to get the cash. I can also have something delivered to her address, and she can send me a chq to pay for it (I might like to pay for all this for her, but simply can’t afford to do so) without having to wait to see me.
16th of July, 2011Chqs probably will die out, but they should not be axed by people who really haven’t thought through some of the small scale, interpersonal uses for them which are still incredibly valuable.
Alice Bondi says:
This article completely fails to acknowledge the hundreds of single person self-employed businesses. I do have some people paying me by bank transfer, but often after delivery of the service – so I have no certainty I will be paid. Cheques provide immediate evidence of intention to pay, so even if the cheque bounces (it’s happened to me just once in nearly 20 years), no-one can challenge the intention to pay. Cheques work.
And my elderly mother with macular degeneration simply can’t any longer do a bank transfer. She did, five years ago, frequently – but now her sight won’t let her read the inevitable card reader. She relies on cheques. Any solutions to that one for payments not made on the spot (when cash can be used)?
18th of July, 2011Frances Coppola says:
I am a sole trader whose business depends on fairly large numbers of fairly small payments from private individuals. I have tried, with limited success, to persuade these individuals to make payments by bank transfer, but so far less than a third do so. The remainder pay in cash or by cheque. Because my business is very small it would cost me a considerable amount in processing costs to accept credit or debit cards – far more, actually, than the cost of processing a cheque: this is not because they cost the banks more to process but because banks don’t like small businesses so charge us lots of money for things like card processing. The prospect of withdrawing cheques was therefore horrifying. Either far more of my customers would have to pay by bank transfer (which of course means my bank details are on public display), or I have to process much larger amounts of cash, or introduce card processing with a surcharge to customers for using it to cover my costs. Until someone comes up with a means for private individuals to pay for private music lessons without using cheques or costing a lot of money, cheques need to stay.
18th of July, 2011Matt says:
Frances: PayPal.
21st of July, 2011Age UK says:
There’s a good reason why cheques are still needed. As some of your readers have pointed out people use them when there’s no alternative that readily meets their needs. For the 60 percent of older people who have not, or cannot, access the internet, they remain a lifeline.
21st of July, 2011But Mr Harford is right to point out that cheques are not safe yet. The abolition of the guarantee card has already undermined cheques. They must not be undermined further.
Nick says:
There is an additional problem with bank transfers relating to multiple payments from different clients. As a freelancer, I have multiple clients paying similar if not the same amounts for work on different dates. Most of these clients, when transferring money, do not put a reference clarifying which piece of work the transfer is for. In fact there seems to be no standardised way to include invoice information etc in the transfer – each bank implements a different policy in this regard. This means tracking who has paid what for which date particularly onerous, especially if you have a large amount of other freelancers as clients, each with their own accounting system. Cheque payments are a lot easier to track – even if with the irritation making time to go to the bank in person to pay it in…
Also, there are times when one may want to refuse or delay accepting payment – for example because of some ongoing negotiation. Anyone with your bank details (eg an old client) can transfer money into your bank without permission, presenting a fait accompli that may not be desirable. Admittedly, this is likely to be a fairly rare occurrence, but one can imagine scenarios where this can cause all sorts of legal complications… With a cheque, one has the ultimate sanction of whether to pay it in or not.
3rd of August, 2011