Banking Over the Past Decade

Banking

Over the past decade there has been a significant increase in the automation of banking systems around the world. One of the impacts of automation is paperless transactions; this means that an increased number of consumers are choosing to make electronic payments rather than paying with a traditional check. The purpose of this discussion is to argue whether electronic payments are the best method of payment over the traditional check.

Electronic Payments vs. Traditional Checks

In working for a check printing company called Custom Direct for last eight years, I have been witness to a steady decline in order volume. This decline is due in part to the popularity of credit cards and electronic transfers. While there are some consumers who remain loyal to checks for security reasons and the comfort of seeing things in print, there are others who enjoy the convenience of electronic payment. However, electronic payments are going to continue to narrow the gap which could be an advantageous situation.

Indeed, our society is becoming a place in which electronic payments are quickly replacing traditional checks and even cash. According to a book entitled Cybercash: The Coming Era of Electronic Money the banking industry is being transformed by electronic transactions. Guttman (2002) explains

Having gradually replaced central bank notes and bank checks with plastic cards, electronic fund transfers and automated clearing-houses, the world is now readying itself for the next step in the automation of money. Electronic commerce conducted on the internet is bound to spur a variety of online-payment mechanisms, and such cyber cash may very well multiply the uses of the internet as marketplace, in production, and for financial transactions. We are at the threshold of a new industrial revolution, fuelled by the proliferation of digital-money forms (Guttman, 2002)."

An article entitled "We Don't Need No Stinkin Checks" asserts that the ability of banks to conduct transactions electronically has grown substantially over the past decade. The article asserts that this growth has been initiated and continued because of the demands of consumers. This demand became particularly apparent after the terrorist attacks of September, 11th and the anthrax attacks that followed ("We Don't Need No Stinkin Checks," 2002). The article points out that it was during this time period that consumers began to increase online purchases and the number of bills they paid online.

Indeed, there are many reasons way electronic transactions have become so popular in the last few years. One such reason is the issue of convenience as it relates to everyday purchases. According to an article found in the ABA Banking Journal, in 2004 a study conducted by the American Banking Association revealed that electronic payments surpassed cash and checks as the favored payment method of consumers for in-store purchases (Electronic Payments Trump Paper, 2004). The article explains that the study found that cash and checks compose 47% of in-store purchases, in 1999 this same figure was 57% and 51% in 2001(Electronic Payments Trump Paper, 2004).

The article further asserts that This evolution continues to be driven by the increasing popularity of debit cards. Four years ago, debit represented only 21% of in-store transactions; today consumers report that nearly one-third of in-store purchases are made with a debit card. This growth in debit card use has come at the expense of both cash and checks. While cash remains the single most frequently used payment method in stores, its share of the transaction mix has fallen from 39% in 1999 to 32% in 2003. Checks also play a diminishing rote at the point-of-sale, accounting for just 15% of purchases. Comparatively, consumer use of credit cards for in-store purchases has remained relatively constant at 21%. At 2%, the "other" payments category is made up of prepaid cards (Electronic Payments Trump Paper, 2004)."

In addition to electronic payments being convenient, they are also less expensive for the consumer particularly as it relates to online bill payment. This is the case because the post office has gradually increased the price of first class stamps over the last few years. An article entitled "Exploring Domestic Mail Rates" explains that it cost 39 cent to mail a business size envelope first class (Bowman). If the average consumer has 10 bills that they mail each month it cost them $3.90 a month which is equivalent to $46.80 per year spent on stamps. On the other hand, most banks offer free online bill pay when you have a checking account with the bank. Using online bill pay saves money and in addition it is usually more reliable than sending checks through the mail system where they can get lost, stolen or arrive to their destination late (Bowman).

The article further asserts that as consumers stop using traditional checks as a form of payment, banks and other types of payment organizations will have the capacity to influence what payment methods are used in place of checks (Electronic Payments Trump Paper, 2004). The article also asserts that the decline in check volume has been caused in some ways by the increased use of automatic payment and online bill payment. For instance, nearly 60% of consumers use automatic payment and only 30% of consumers having never attempted the use of automatic payment (Electronic Payments Trump Paper, 2004). In addition, the adoption of online bill payment has contributed to the decline in the use of traditional checks. The article reports that is 41% of consumers use online bill payment and it is one of the fastest growing payment methods (Electronic Payments Trump Paper, 2004).

Indeed one of the reasons why consumers are more apt to use electronic forms of payments such as debit cards is the rewards that customers get for using their Debit cards. According to Feig (2005) for many years credit card companies have used reward programs and recently banks that issue debit cards have also began to offer consumers rewards. The author asserts that many of these reward systems are actually modeled after the reward systems of credit card companies (Feig 2005). This means that some debit cards offer cash rebates, point systems for free or discounted air travel. Although this is the case with some debit cards the article points out that reward systems are only available for about 10% of debit cards that are issued (Feig 2005). In fact only about a third of debit card issuer, usually the large banks, offer consumers a reward program. The vice president of Certegy Card services Dennis Driscoll asserts that many consumers have demanded rewards tied to the use of their debit cards. However, Driscoll explains that these reward systems are only likely to occur when they are beneficial to the customer and the company (Feig 2005).

The article also explains that when banks want to advertise checking accounts they are apt to attach reward programs to their debit cards (Feig 2005). The author explains that when a checking account not the main checking account of a household that checking account isn't profitable (Feig 2005). However if a reward yielding debit card is linked to the checking account the account is more likely to be the primary account for the household. The author explains further that Debit and credit card rewards programs, or loyalty programs, are powerful tools for retention for financial institutions. The STAR Consumer Payments Usage Study found that just 17% of respondents knew of a POS-based rewards program offered by their financial institution. However, once they find out about the program, 46% enroll, indicating that financial institutions may realize significant benefits by better educating their customers about their loyalty offerings, the study found (Feig 2005, pg 62)."

Reward systems are a powerful tool that is often used to convince consumers that electronic payment systems are more convenient and safer to use. The research indicates that companies have benefited greatly from the use of these reward systems as an increased number of consumers begin to abandon the use of traditional checks. In fact an article entitled "When it comes to payments, debit cards reign supreme" the increased use of the debit card has contributed significantly to the decreased use of the traditional check. The author explains that eighty-four percent of consumers said they have been writing fewer checks since they began using the Visa check card...and 97% said that using the card at the point of sale was faster and more convenient than writing a check. Customers also touted the safety of the card, with 88% saying they felt safer carrying the check card rather than cash ("When it comes to payments, debit cards reign supreme").

The advantages of electronic transactions for Banks

It is evident that banks can benefit a great deal from the use of electronic transactions. An article entitled "Banks Bent on Plastic over Paper" explains that Banks are making a concerted effort to get consumers away form payment through traditional checks. The author contends that one of the strategies that is being used involves check conversion at the point of sale (Bruno, 2002). This is the process by which consumers receive their voided checks handed back them at the point of sale as opposed to the checks actually being taken to the bank and processed in the traditional fashion. Such a strategy allows banks to reduce the cost associated with paper check conversion (Bruno, 2002). In addition this strategy reduces the number of fraudulent checks that are written (Bruno, 2002). The author also insist that this strategy may lull some customers into actually using debit cards or check cards at the point of sale, as opposed to using traditional checks (Bruno, 2002).

Indeed automation will be an important part of banking well into the future. An article found in Community Banker asserts that automation is key because it allows for the electronic transmission of checks. In addition, many banks are using automation for electronic signatures which will allow for loans and other financial services to be implemented over the internet. According to the author this automation also improves workflow and performance because it is more streamline and therefore less confusing.

The article contends that the aim of this automation is to make the banks transactions as paperless as possible ("Automation is the Answer at T. Bank," 2005).