Here's a surprise for those who assume that the use of handwritten checks to pay bills has gone the way of typewriters and telegrams: The use of paper checks is still on the rise, despite the rapid growth of credit and debit cards and electronic methods for bill payment.
“A lot of people simply feel much more comfortable with checks,” says MIT Sloan Co-Director of the PROductivity From Information Technology (PROFIT) Initiative, Amar Gupta, who is developing cutting-edge systems to replace this old paper trail with seamless, technology-based systems that are more efficient, more fraud resistant, and less costly. “People hear some horror stories about electronic checking and want to stay with paper checks that provide them with a physical receipt for their transaction.”
More than 50 billion checks are processed in the United States alone every year, according to the Federal Reserve Bank and other research. To Gupta, paper check writing isn't just an outdated way of conducting business: It adds significant costs across the economy, even if the individuals writing the checks aren't directly aware of those added costs to business, says Gupta.
“Various research has found that it costs from $1 to $5 to process a single check,” he says. “A Federal Reserve study found that the direct cost to society is $1.25 per check. People are surprised when I explain to them that there are on average five different transactions between the time I write a check and I get it back. If you and I had to pay $1-$5 per check, we'd have stopped using checks a long time ago.”
Consumers are also wrong if they think they avoid such economic costs to society by paying bills electronically. Though the federal government and some major companies do conduct a seamless electronic transfer of payment, many electronic check operators in fact actually write out paper checks and mail them to individuals or firms being paid.
Gupta, who has developed and executed several significant information technology projects in the United States and abroad since joining MIT in 1979, says the biggest challenge is to come up with comprehensive, system-wide solutions to the paper check problem.
“Most people who look at check writing usually take a piecemeal approach,” he says. “What's exciting about our work is that it envisions an integrated, end-to-end solution. We are getting all the right constituencies in line to analyze the problem and come up with solutions that make broad sense.”
In an important first phase that has already reaped real-world dividends, Gupta and his MIT Sloan team developed technology a few years ago to automatically read handwritten information on checks, including the amount of payment.
“The technology we developed has clearly influenced the development of new products that are able to read handwritten checks at high speed and with high levels of accuracy,” says Gupta.
The next stage of easing paper check costs and delays focuses on extending technology so that checks are cleared by fully electronic means.
“Our goal is to electronically take the check right from the source to its destination,” says Gupta.
Such technology will help eliminate several steps that now slow payment transfers. It will also help reduce errors and other problems common to the current process of clearing checks.
These efforts to apply new technology to old-fashioned check writing have already been noted with approval by key public and private players in this country, including the Federal Reserve Bank and the National Automated Clearing House Association.
“Other countries also want to get on the bandwagon,” says Gupta. “We have been talking to people abroad who want us to do studies, especially in India and Brazil.”
Indeed, the potential for fully electronic check transfer may be greater in other countries, where single, strong powerful banks are in a position to better control the overall check process.
In the United States, the number of interests involved in check writing ranges from large banks to small credit unions, from major corporate vendors to small businesses, all of them operating under varying regulatory and operational schemes.
“We are still quite some distance away from paperless transfer,” says Gupta. “We still don't have the drive for us to work collectively.”
But experience has left him hopeful.
“When we started working on this issue in the early 1990s, we were way ahead of everyone else,” Gupta says. “Now others are taking our original ideas and in some cases developing even better technology. I often say that we do things that are 10 years ahead of the time — and then it takes 20 years to bring them fully to the market.”
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