Wednesday, October 14, 2009

Why do we use checks?

Think about this scenario. I hand you a piece of paper. This piece of paper has all of the information you need to take any amount of money directly from my bank account. It has written on it the amount I wish to give you. You assume that I can indeed give you that amount, and I assume that you will not steal from me.

Does this seem like a sane thing to do? Just think of all that can go wrong here. You could steal from me. You might be honest, but someone else could take the information from you and steal from me. (This happened to Donald Knuth - people would get a check from him, scan them and post the proof, then scammers looking for pictures of checks online found them and forged checks. Knuth's reward checks are now no longer valid because of this.) I may not have money in my bank account. Perhaps I don't now, but I hope to. Banks actually give a little leeway called "float" to as a convenience to their customers. But this can backfire. If someone arranges things carefully they can bounce a series of payments between accounts, get the bank ready to say that all of the accounts have money, withdraw the money, and leave the bank holding the bag!

Obviously I've just describe a check. But, you ask, what is the alternative? Funny you should ask. Several months ago I went to the Netherlands. They don't have checks there. What do they do instead?

Well if you're my utility company and you want me to pay you, you send me the information I will need to deposit money in your bank account. I go to my bank and transfer money there. You get notified when it arrives. The technical name for this in English is giro transfer.

Now stop and think about how many problems this solves. I never hand out my bank details to anyone. You never have to deal with a bounced check. There is no possibility of anything like a kiting scheme. And the only practical change is that instead of my giving you information that can be used to draw from my account, you give me enough information to put money into your account.

The moral is that checking systems are fundamentally flawed. The design of a giro transfer system is fundamentally sound. Unfortunately tradition is set so that checks are here for a while to come. And people are honest enough that the problems don't generally rise to the point that would make people object. Sure, the security problems are obvious when you think about it. But as always when people aren't being bitten by the problems, people forget about the security implications.

Of course checks are losing popularity between credit cards, easy cash withdrawals, and automated payments. So there is hope that some day they will be seen to be superfluous and will eventually be abandoned. In the meantime checks serve as yet another example showing how little we care about security, even when it comes to our money.


zby said...

I see you are writing for american audience.

Ben Tilly said...

Actually world-wide checks seem to be the norm, and giro systems an exception.

In particular a little Googling around confirms that checks (with all their problems) are widely used in countries as far flung as England, Turkey, Singapore, Brazil and Australia. Not to mention, of course, USA and Canada.

jarkko said...

Checks certainly are a rare exception in Europe these days.

It's interesting though how polar opposites the US and Europe are in this case (and yes, the Brits tend to be at least as much behind the curve as their US counterparts), something I learned after writing a rant about the subject in 2007.

At the end of next year, the bulk of Europe will belong to SEPA, The Single Euro Payments Area. This will mean all wire transfers intra-SEPA will be as fast (<1 day) and cheap (currently a couple € cents per transfer) as local wire transfers.

That, together with IBAN numbers and online banks make wire transfers so painless I wince every time I hear someone mentioning a check these days.

Michael Wales said...

Checks are pretty rare in the states as well, these days. Your older generations still use them and a lot of people will still use them if they mail a payment in to a utility company, bank, etc (their bills).

In my experience though, especially at stores, Debit Cards are the way to go. I don't even carry cash anymore to be honest - if you don't take my debit card, I'll go somewhere that will (very rare).

When it comes to bills, more and more people are opting for their bank's online billpay (that's what I do) or automatic withdrawals from their checking account.

Hell, come to think of it, I don't even have a checkbook.

Unknown said...

Hey, I posted this as a comment over at HN, but I'll leave it here as well.

I moved to NL a while ago, and have only used GIRO a few times since there's an even better method everybody uses: bank-to-bank online transfer.

They're free, and instant. All you need to know is the recipient's account number. There are other fields for specifying what the payment is for (order number, PO, "Rent - October", etc). You can make them recurring, if you like, and add people to your address book for easy reference later.

Banks are responsible for the security, and take it seriously. My bank gives me a thing they call an "e.dentifier" which is a calculator-thing that I drop my ATM card into (my card has a smart-chip). I unlock my card with my PIN number, and enter in the code presented to me by my bank's website. The device displays my card's response, which I then give back to the website to log in or send payments. With this scheme, the bank knows I physically have the card, and that I know the PIN number (better than a signature). This is the most common way, but I once saw another system which confirmed by sending a code via SMS to the sender's cell, to be entered on the web site. That's also pretty fail-safe.

Unlike checks, I can't make the transfer unless that money is actually my account (and the recipient can't spend part of that money thinking it will clear to find out later it didn't). Thus there can be no NSF/overdraft fees. Also unlike checks, it's instantaneous, so the money is never on hold by banks in a limbo state, unavailable to both parties. Nobody has to buy any checks, nobody can be ripped off by check advance fees, and there can be no check processing fees.

For all of those reasons, you'll never see this in America. :)

Ben Tilly said...

While that may be a different system, the principles of the system are the same as the traditional giro system. If someone wishes to receive money from you, they tell you how to send it to them, and you instruct your bank to do so. At no point do you hand someone else enough information for them to wipe out your bank account.

BTW the HN discussion you refer to may be found here.

CRConrad said...

From the HN thread: "I'm in Europe (Sweden), at age 34 I think I've handled exactly one check."

Heh. At 46, I've seen exactly one check: A friend of mine used them back in the mid-to-late eighties, and he showed me what his checkbook looked like once, when I asked out of curiosity about this archaic -- yes, even then! -- method of payment. (Yup, one: I only looked at the top one.) Never heard of anyone I know, nor even anyone of them knows, using checks since then.

sam said...

And its 2012 now, and I am still being bitten by check maniacs!

Julio César said...

Checks are just a way to show off class and elegant penmanship. Not everyone knows how to write a check.

Julio César said...

Checks are just a way to show off class and elegant penmanship. Not everyone knows how to write a check.

Julio César said...

Checks are just a way to show off class and elegant penmanship. Not everyone knows how to write a check.

Julio César said...

Checks are just a way to show off class and elegant penmanship. Not everyone knows how to write a check.

Julio César said...

Checks are just a way to show off class and elegant penmanship. Not everyone knows how to write a check.

Unknown said...

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