Why are cheques free?

NFH

I know that cheques will become a thing of the past in a few years' time, but why do they remain free to issue and free to pay in? The cost to the banks of processing a cheque is around £1, yet this cost is not passed on to those who choose to use them. The result is that those who don't use cheques are subsidising those who do use cheques by receiving lower current account interest rates as well as paying higher incidental bank charges, for example for non-UK cash withdrawals and to receive electronic payments from outside the UK. It would make sense for the banks to impose a £1 fee per cheque issued, or 50p per cheque issued and 50p per cheque paid in, so that those who insist on using such an archaic and costly method of payment pay the true costs of doing so. What advantage is there to the banks of continuing to process cheques for free?

CLAPTON

why are electronic transfers free?

coolesticeking

On a personal level for example you don't pay but most businesses with a business bank account pay either a set fee or per item for writing/cashing cheques.

They try and claim the money back elsewhere most of the time in hope you will buy home insurance or another product such as an upgraded account that you pay for etc.

NFH

CLAPTON wrote: »

why are electronic transfers free?

Because the marginal cost of each transfer is close to zero.

opinions4u

What advantage is there to the banks of continuing to process cheques for free?

Personal bank accounts are full of cross-subsidisation when it comes to how they are paid for.

Being able to advertise "free banking when in credit" is much better than being able to advertise "free bank except for cheques when in credit".

Every banking service has a cost. Most of them are hidden and we take them for granted.

ATMs.
Cashcards.
Online services.
Standing orders and direct debits.
Call centres.
Branches.
Counter transactions.
Cheque books.
Processing cheques.
BACS and Faster Payments.

Do you want a clear charge allocated for all these things?

You could ask a different question: why should cheque users cross-subsidise the higher fraud risks that are associated with Faster Payments?

NFH wrote: »

Because the marginal cost of each transfer is close to zero.

A figure of 30p for a BACS transaction rings a bell. No idea about FP. "Close to zero" is not accurate in this context.

NFH

coolesticeking wrote: »

On a personal level for example you don't pay but most businesses with a business bank account pay either a set fee or per item for writing/cashing cheques.

Indeed, but it's odd that the same charges don't apply to personal accounts. In view of the higher charges for businesses of receiving cheques as opposed to electronic payments, it's also odd that very few UK small businesses print their sorting code and account number on invoices, which is common practice in other countries.

CLAPTON

NFH wrote: »

Because the marginal cost of each transfer is close to zero.

curiously the reference you kindly posted says they cost about a quarter of £1
cheaper yes but close to zero is a matter of opinion

NFH

opinions4u wrote: »

You could ask a different question: why should cheque users cross-subsidise the higher fraud risks that are associated with Faster Payments?

The fraud risks are considering higher for cheques. Why do you believe this to be the other way round?

PasturesNew

When I started work there was a 27p charge for writing cheques out.

NFH

CLAPTON wrote: »

curiously the reference you kindly posted says they cost about a quarter of £1
cheaper yes but close to zero is a matter of opinion

Yes, I noticed that too. My guess is that they were quoting the average cost as opposed to the marginal cost.

CLAPTON

NFH wrote: »

Yes, I noticed that too. My guess is that they were quoting the average cost as opposed to the marginal cost.

OK but lets compare like for like
is the £1 cost of a cheque the marginal cost or the average cost?