Checking system vs. SEPA and the like

Question

My first question here was inspired by the massive load of questions labeled scam here, especially the once involving checks. If this is too broad or off topic in some way please let me know so I can improve and/or narrow down the question a bit.

My assumptions:

Though checks still exist in some niches within the the EU, they are a very uncommon method to transfer money and as a apayment system in general. From an european perspective reading & looking at the possible pitfalls of the checking system here on Money SE made me wonder as of why US and Canada still use such an antiquated system that's widely used in scams (deposit scams via uncovered, bouncing checks)?

As I read more on them I found out that the first checks started cropping up in the United States toward the end of the 17th century, and the first printed versions were introduced in 1762 by British banker Lawrence Childs. Before that, checks were simply written out by hand, sort of like IOUs.

A brief summary of the origins:

The earliest usage of checks may have originated with ancient Roman praescriptiones, but checks resembling what we have today are more definitively traced to 9th-century Muslim traders. As international commerce grew—and required merchants to travel in person over multiple weeks or months—merchants were often burdened with bags of coins they needed to carry with them. That led traders to invent the sakk, which was a piece of paper with instructions to the merchant’s bank to make a payment from his account. A sakk could be cashed in another city or country, making travel easier and safer from theft.

The advent of printed checks made exchanging money safer and easier. The United States government did not print nationally redeemable paper money until the Civil War. (Individual banks or states could print their own money, but no one legally had to accept it.) Until the government started printing gold-backed banknotes, there often weren’t not enough coins in circulation to do business properly. Similarly in the United Kingdom, more than 75 percent of the population never handled paper money, which was available mainly in large denominations and used by the upper classes. It wasn’t until after World War I that British banknotes became fully backed by securities and thus more widespread.

source: https://fin.plaid.com/articles/checking-out-a-brief-history-of-checks/

While I'm aware that there are cashier's checks which are more secure in terms of available funds to cover the check, why the regular checks just weren't replaced by methods similar to SWIFT, SEPA, BACS or CHAPS by now as they are often the more attractive, faster, tranparent & secure payment method.

Am I missing some downsides of the modern systems and maybe disregarding some major advantages that regular checks have? Wouldn't the customers and banks benefit from abolishing the antiquated checking system and switching to more modern methods of electronical transfers?

EDIT (@jcaron thankfully pointed out France as an exception):

Total number of check payments in 27 countries in Europe from 2000 to 2020 in millions (note France as an exception - though declining over the years as well).

Here is the source

Answer 1

Am I missing some downsides of the modern systems and maybe disregarding some major advantages that regular checks have?

No.

Wouldn't the customers and banks benefit from abolishing the antiquated checking system and switching to more modern methods of electronical transfers?

Yes.

But...

In the US there's a strong push against regulation and government rule-setting. It's done in the name of "free market", but in reality is driven by large corporate monopolies or olygopolies that are trying to protect themselves and increase their profits.

The US banking system is one such olygopoly.

The ACH system is antiquated and prone to abuse, the paper checks are inherently insecure and prone to enormous amounts of fraud, but it is still much cheaper for the banks to absorb the fraud than to re-implement their whole infrastructure.

Instead, in the US you see solutions like "Zelle", where groups of banks organize together to build some kind of system that may or may not work for some users in some banks, and then continue to resist the change claiming "here, we have that in a different way".

It would be much better for transfers to work universally using IBANs, it would be great to not worry that anyone who sees my checks could easily withdraw money from my accounts, but in the US - customers are not the priority, they're the product.

Add on top of that the customers' own ignorance - and you'll see them actually supporting the system against their own interest. A lot of American voters actually are against regulation, against forcing companies to advance their services, there's a big part of the American public that never travels outside their own State, or even county, and they just don't know that things can be different and work differently, and for them the current thing works so why touch it?

This is true for the American banking system just as it is for any other part of the American economy. Similar things happen in healthcare, education, transportation, energy, financial oversight, you name it.

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Just to address the concern raised in the comments - sure, the US banking system works. It's just not working well. Most Americans have no other point of reference so that's the only system they know and have experience with. As I said, being the US a very conservative country, convincing someone that things could be better without them having any opportunity to experience the difference causes a very reactionary response such as what has been exhibited in the comments.

Answer 2

• Not everyone has a bank account. Sometimes that is because of distrust of the banking system. Sometimes that is because they don't have the documents to open a bank account. Sometimes that is because they don't want to pay fees for having a bank account. There are a host of check cashing businesses that will cash checks written to people without bank accounts.
• Checks are a good least common denominator. If you hire a new dishwasher but he hasn't turned in direct deposit paperwork yet, you can just cut him a check. If you hire a neighbor to watch your dog while you're on vacation, you can write him a check rather than figuring out which P2P app you both use ("I use Venmo. I don't have that, do you have CashApp? No. Do you have PayPal? Hmm, I think I set up a PayPal account a while ago. Hold on, let me see if I can reset my password").
• People are set in their ways. Plenty of people get physical bills in the mail, write physical checks to pay those bills, and send those physical checks back to the biller. That's how they've handled personal finance since they became an adult and they have no desire to change. It would be politically very difficult to tell 80 year old grandmother that she has to buy a device that can go online and buy internet service in order to log in to her bank's web site for the first time in order to set up bill pay just to pay the electric bill that she's been paying via check for the last 62 years without missing a month. And then to use Zelle or some other P2P service to pay the neighbor that walks her dog.
• It isn't obvious that completely eliminating checks would actually put a dent in scams. There will always be a need for payment services that are cancellable and non-cancellable. Scammers will find ways to exploit that by sending a cancellable transaction and receiving non-cancellable transactions. And any new system will introduce new types of vulnerabilities. The 80 year old that was just forced to start using online bill pay, for example, will be pretty vulnerable to phishing scams. Scammers might send out more phishing emails and fewer fake checks but the total amount of fraud probably won't change much.

Of course, none of these problems are unsolvable. Just reasons that the current system endures. Checks are vastly less common today than they were, say, 20 years ago as electronic transfers have become more convenient. Checks will undoubtedly get less common in the future as people get more comfortable banking digitally. But they still exist.

It is certainly conceivable, for example, that the US would overcome its long-standing opposition to a national ID that everyone (including undocumented immigrants) would be able to obtain, require all banks to offer checking accounts with no fees that are open to everyone regardless of their prior banking history, etc. and then completely eliminate the problem of the unbanked. But there are a non-trivial number of political problems between where we are and where we'd need to be. Some of these problems are at least potentially purely regulatory in nature but plenty of the problems depend on resolving politically hot questions that would face opposition from both sides of the political aisle.

Answer 3

The other answers aren't exactly wrong, but the real problem is that there are 4800 banks in the US. Not 4800 branches, 4800 separate banks, with a very long tail of small local banks that are technically unsophisticated. It took a great deal of effort to get them all connected to the existing clunky ACH system that the US uses for electronic payments. ACH can take two or three days because some of the smallest banks only poll for ACH transactions once a day.

The Federal Reserve is has been working for years on an instant payment system called FedNow that does what people in other countries have taken for granted for a decade, electronic payments that clear immediately. It's supposed to start working this summer. See https://www.federalreserve.gov/paymentsystems/fednow_about.htm

While a lot of ACH transactions use the Fed, there is also a private clearing house grandly named The Clearing House (TCH) which has its own realtime payments system called RealTime Payments (RTP). TCH RTP connects a lot of medium and large banks, and is what Zelle uses. Zelle actually works pretty well except that in some cases banks have refused to reverse fraudulent payments, which is silly, since they can claw them back from the recipient bank. After some pressure from the government Zelle is supposed to fix that so by the end of the year with any luck, US bank customers should be able to use FedNow or Zelle for most payments.

As others have noted, we are still very accustomed to checks, and I expect it will take another decade for paper checks to die out.