The Death Of The Paper Check

This post is part of the "Future of Business" series, which examines how cutting-edge technologies are rapidly reshaping our world, from how businesses run to how we live. "The Future of Business" is sponsored by SAP.

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At the time, money moved around the United States in what now seems a laughably inefficient manner: Banks trucked paper checks to central processing centers, which sorted them and then bundled them onto airplanes.

On a normal day, about $6 billion was literally up in the air as checks flew to their destination. That amount grew to $47 billion after the FAA grounded planes in the wake of the 9/11 terrorist attacks.

That spurred passage of the Check 21 Act, which allowed banks to use electronic images of checks instead of paper.

It's been a runaway success: Almost no payments are settled between banks using paper checks anymore. Even substitute checks—paper checks from printed images, a workaround allowed by Check 21, were "practically zero" by 2011, according to a study published last year by the Federal Reserve Bank of Philadelphia (PDF).

That study, "Getting Rid of Paper: Savings from Check 21," estimates that going electronic is saving the banking system $1.2 billion a year, with consumers and businesses getting $2 billion in benefits from faster payment processing.

Yet all this change is invisible to ordinary banking customers and small businesses, who still write and deposit checks the way they always have—unaware that the paper check has a short lifespan after it leaves their hands.

The number of checks is dropping, but slowly. U.S. consumers and businesses wrote 28 billion checks in 2009, a figure that's been dropping about 1.8 billion a year. At that pace, according to the Philadelphia Fed study, paper checks will take until 2026 to go away entirely.

One big trend that could accelerate the paper check's death throes is the continuing shift to e-commerce.

Here's a sign of how far we come: Amazon, when it launched, let customers leery of using their credit cards pay by check. It discontinued that option in 2008.

Smartphone and tablet commerce and Internet-enabled in-store payment options like Square and LevelUp will move even more transactions off of checks.

Braintree, a payments company based in Chicago, recently acquired Venmo, a startup that does money transfers by text message, to build a digital wallet for mobile transactions that could make more payments all-electronic.

Intuit already has 29 million customers for its various payments service and is processing $38 billion a year in payments, but it thinks it could do more—it recently told investors (PDF) that it could increased its payments business by $4 billion by getting its QuickBooks software customers, primarily small businesses, to use its payments service. Intuit CEO Brad Smith recently highlighted the company's success at getting its customers to switch from PayPal.

eBay's PayPal, of course, is the Swiss Army knife of payments, handling online payments, in-person credit-card swipes, and person-to-person payments. Some object to its fees and its policies on holding funds; CEO David Marcus has made a public cause of improving PayPal's customer service—which is a must, if PayPal's going to compete with the familiarity and predictability of checks.

Banks are doing their part. Most offer features like mobile check deposit—which uses the provisions of Check 21 to route the image of a check capture by a smartphone right into the payments system. And Popmoney, a service offered by banking-software provider Fiserv, lets banks offer PayPal-like money-sending services for low fees.

Zipmark, a startup founded by a former Citi executive, likewise charges lower fees for accepting check payments. Zipmark routes payments by creating an image of a check—a purely electronic version that avoids the paper version altogether but rides on top of the existing banking system.

Dwolla, a payments startup, does bank-to-bank transfers for free when the amount is under $10, otherwise for a flat fee of 25 cents—less than a stamp and an envelope, a metric often used when comparing payments methods.

And Square, with its iconic credit-card swiper, is often thought of as a replacement for cash at coffee shops. But it actually serves a lot of artists, massage therapists, and other professionals who'd normally take checks.

In a fitting symbolism, Square is moving into a new San Francisco office this year that used to house a massive Bank of America facility. Across the street, the bank used to have row upon row of desks filled by workers sorting paper checks.

Update: We've clarified a description that Intuit CEO Brad Smith made of his company's online-payments service, based on new information we received from Intuit.