Checks - a Bizarre Anachronism

When I closed escrow on the house in Hawaii, the escrow service asked me to send the difference between the escrow amount and the bank loan by way of electronic transfer. It was several thousand dollars, so I walked down to the Wells Fargo branch, filled out a form, and declared myself done with it.

The odd thing was that I wasn’t allowed to do the transaction using a personal check. I guess that had to do with the amount of time it takes to process a personal check, and the escrow service was not willing to perform their function until the money was in (understandably). What was puzzling was that it cost $30 to perform the transfer.

Why is that surprising? Well, consider how a check is processed:

• you send the check to the recipient,
• the recipient deposits it at their bank
• the bank has the check scanned or read
• an electronic transfer is requested from the recipient’s bank to your bank
• if the transfer is completed, the money is taken out of your account and deposited on the recipient’s account

How is electronic fund transfer different?

• you go to your bank and request a transfer
• an electronic transfer is requested by your bank to the recipient’s bank

End of story. The only difference is that there are lots more steps involved in sending a check, it is much more risky and error-prone for the recipient, it is much more costly (because of the transfer of paper that is required, which includes requirements for storage), and the fact that the transfer is initiated by opposite banks.

Of course, the electronic fund transfer is much more logically initiated by the bank that has the funds, the sender’s. If it’s the recipient’s bank that initiates the process, it is unclear as to whether there are funds available at the time.

So, all in all, checks are supremely inferior to EFT: they are much more expensive, take a lot longer, and they come with risks.

So, someone explain to me why checks are free, while EFT is very expensive?

Well, the reason is, of course, pressure. People are used not to pay for checks, and they’d start a revolution if a bank started charging. The revolution is called “changing banks” and is quite a terrifying threat.

EFT, on the other hand, are extra services that most people don’t use frequently. There is no revolution if you overcharge (and any charge at all on EFT is an overcharge, since the much more expensive-to-deliver checks are free), and not enough customers switch banks because of charges.

The situation is similar to other service providers. I recall that United wanted to charge me $150 to get my bicycle to Maui – which is the reason the picture of me on top of Haleakala has a cheap rental bike instead of my faithful Lemond. Considering that my cycle weighs 17 pounds (24 with crate), that’s absurd – but how many people actually load a bike on a plane?

Wireless phone carriers do the same thing: they charge absurd amounts of money on SMS, all the while we know that SMS is much cheaper for them to transfer than voice. You have no guaranteed quality requirements, the amounts of data are well-known, and there is no issue if the signal drops.

The question is: why is it that the law of supply and demand so spectacularly fails in these cases? Supply of a cheaper good should be larger than that of a more expensive good that is built using the same pieces, so the price should be lower on parity.

Somehow, the market here is not working.