Checking out: A brief history of checks
How the rise of more efficient—and secure—forms of payment has spelled checking’s decline, but not its total demise
Despite calls for checks to become extinct, they haven’t been eradicated yet.
Throughout civilization’s long history of paying for things, development of payment methods tends to be driven by a need for convenience. True to form, checks essentially came about as an alternative to traveling with sacks of coins. From there, payment methods have usually been replaced or phased out by approaches that were even more convenient or safer. But it turns out that the old methods are themselves still hard to shake. Despite the rise of more secure and efficient technologies like mobile payments and tokenized ACH, 15 percent of Americans still used checks regularly in 2015—a number that, despite many things working against it, isn’t expected to decline substantially within the next five years.
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.
Europeans came in contact with the Muslim world—and its payment methods—during the Crusades, it wasn’t until the 15th century that checks began to be used in Europe. They became especially popular in Amsterdam, a major trading hub. Because checks were written by hand, however, the incidence of fraud was extremely high. (Though just how high isn’t clear: Concrete numbers aren’t readily available.) Many cities in Europe actually banned their use or else required both parties to appear at the bank in person to validate them. Still, check usage persisted because of its convenience. The practice really made a breakthrough in the 16th century with the advent of negotiability, or the ability of a check to circulate among parties. This meant that someone could pass a check on to a creditor, say, who could then cash the check and withdraw the money himself. Before this, only the person who received the check could draw money, which made negotiating complex business agreements difficult. This allowed money to travel farther and made payment across long distances even more convenient and possible.
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. Childs’ printed checks included serial numbers on them for record-keeping purposes, which granted bankers the ability to “check” them—and possibly bestowing the payment method with a name.
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.
More banks began to accept and issue checks, and more and more people came on board with this new payment method. By the mid-19th century, the use of checks in the United States had grown rapidly and was the primary means of exchange. People in business and others who exchanged money often found it inconvenient to withdraw large amounts of cash from their banks, and they began making large transactions by check instead.
But for all the convenience of checks, the boom carried its own hassles: Banks couldn’t keep up with the volume of transactions being made. Banks would send porters out daily to clear checks and settle accounts with all the other banks; the porters carried bags of gold, the physical checks drawn on other banks, and a ledger book. It was wildly inefficient, with porters from different banks retracing each other’s steps. As the number of banks grew, this exchange could not be made within working hours on a daily basis.
As a result, the clearinghouse was established, which allowed banks to settle their accounts in a central location rather than going from bank to bank. By 1880, clearinghouses dotted the American landscape. Large numbers of checks were written between 1980 and 1930 for much the same reason Muslim traders had used sakks: With train and steamship travel becoming popular, no one wanted to travel with large amounts of money and gold.
And so the surge continued. By the early 1950s, Americans were writing more than 28 million checks a day—that means that nearly one in every six Americans was writing a check daily, or every American wrote one check weekly. But once again, processing checks quickly enough became an issue. Sorting and processing were done by hand, which took multiple people working more than two days to do. Because of the resulting backlog, 69 million checks were in process every day. In that decade, banks began introducing computers into their workflows. They also introduced Magnetic Ink Character Recognition, a system of magnetic characters printed across the bottom of checks. MICR is used for printing routing and account numbers and other identifying information, and can be read entirely mechanically.
This faster processing method meant people became even more inclined to write checks because they’d get cleared faster. In 1979, 86 percent of all payments were made by check—33 billion checks to be exact. The number of annual checks written peaked in 1995, with 49.5 billion.
In 2003, more transactions were paid for by check than by any other method. In fact, about 37 billion transactions were paid for by check, compared to about 15 billion by debit card. But payment cards and ACH were on the rise, and check usage had plummeted by 2012. That year, only 20 billion transactions were paid for with checks in the United States, compared to 45 billion by debit card. (By this point, credit card and ACH payments also exceeded check payments.)
Still, American businesses continue to insist on paying an astonishing 50 percent of their bills by check, largely driving the small percentage of transactions still being paid in this way. The 2004 passage of the Check 21 Act (which allows banks to take pictures of checks and move them electronically) and the convenience of mobile banking check deposit apps have probably contributed to keeping checks alive.
But just barely so: According to the Fed, only 3 percent of customers prefer to use checks than any other type of payment. (And even those people use cash more than checks.)
Even though so few people use checks regularly, getting rid of checks entirely poses challenges.
That’s not that getting rid of them wouldn’t be prudent. Writing a check costs businesses between $4 and $20 per check, amounting to a total of $54 billion a year, according to one study). What’s more, they’re much more vulnerable to fraud than any other means of payment. The United States has never actually tried to phase out checks entirely, but a plan to do the same in the United Kingdom by 2019 was quickly thwarted after a petition by more than 600 politicians, charities, and other stakeholders. They claimed that doing so shows a “blatant disregard” for those who use checks on a regular basis and aren’t willing to switch to electronic means. (Nevermind the blatant disregard sustained support of checks shows for fraud risks—but we’ll tackle that in another piece.) But behavior change is hard.
Still, the United States has made some strides in phasing checks out. In 2013, the U.S. Treasury stopped sending physical Social Security checks to millions of recipients each month, opting instead for electronic means or direct deposits via ACH. What’s more, the Fed is making a conscious effort to reduce checks and now primarily processes them electronically, clearing paper checks at only one location, down from 45 in 2003.
Though these moves might seem small, they are steps in the right direction. After all, though many payment methods have been improved upon in the last century, there isn’t much precedent for the elimination of any.