What explains the origins of giro and cheque countries?
One of the basic facts in retail payments is that there is a structural difference between so-called giro-countries (Austria, Switzerland, Japan, Germany, Netherlands, Belgium etc) and cheque-countries (France, US, Canada, Australia).
In his excellent dissertation on payments and network effects, Gottfried Leibbrandt sets out to answer this question. After a thorough investigation of literature, he concludes that network effects are an important factor that helps explain the typical development path per country. At the same time, he finds it hard to trace the origin of the difference between cheque- and giro-countries
1. There is no satisfying explanation for the country differences. Empirical studies find that country idiosyncrasies rather than variables like GDP and crime explain the differences in instrument usage.
In a similar vein, the first BIS working group on Retail Payments observes:
Use of different retail payment instruments in the so-called cheque countries and giro countries can be explained by the differences in:
• concentration of market supply among traditional providers of retail payment services;
• financial incentives for providers with respect to debit and credit transfers;
• nature of the risks in the value transfer processes for the two types of payments; and
• legal framework and regulatory environment.
Of course the above list is long enough to be right and the report also mentions numerous French regulations that influenced its use, in particular also the rule that payment with cheques should be free to the people. And indeed this legal factor must not be forgotten.
Where is the cheque in the Netherlands?
In the Netherlands, a well functioning system of so-called cashiers notes existed, alongside regular cash for quite some time. Then in 1814, the establishment of the central bank and the introduction of bank notes introduced competition for the cashiers. In the early 1830s one of the cashiers fought a heavy legal battle to preserve the use of its cashiers notes, but eventually gave in to the reality that the bank notes were becoming the standard.
Ever since, the central bank was careful not to obstruct the cashiers and bankers too much in their business operations. So as a practical measure, the central bank took care to set its fees for deposits and discounted bills of exchange at a less competitive rate than the market. But fact of the matter remains that a possible candidate for a privately issued Dutch payment cheque, was no longer available.
Some parliamentary proceedings suggest that the legal rules with respect to bills of exchange 'wissels' were insufficient to really create a sound basis for the use of cheques as a payment instrument. As a result the market used bank notes in combination with clearing arrangements.
This intrigued me so when looking for more information on the topic I encountered a college book (by Mr. W. Molengraaf) that suddenly shed more light on the situation in other countries.
What Molengraaff states is that cheques came into existence in the United Kingdom as 'sight-bills' on a banker. They were brought into circulation as an alternative payment instrument to circumvent the stamp duty that would apply to a regular bill of exchange. He continues to state that also in France the cheques owe their existence solely to tax considerations.
Up next I figured I would take a look at a US stamp duty register from 1866. And we can indeed see the difference there. A bank check would cost 2 cents, regardless of the sum involved, while a bill of exchange would cost 5 cents and possibly more when higher amounts were involved.
The particular Dutch situation....
In the Dutch situation we will see that the discussion on setting up postal giro services started around 1902, already with references to the situation in other countries. It took us more than 10 years to decide on the establishment of the postal giro services and indeed market structure and some regulatory capture may have influenced the discussion. Also it became pretty clear that the incumbent bankers and cashiers did not want to move forward with their own version of bankers giro. But that's stuff for a next blog.
In the mean time, if you enjoyed this blog, you may want to let me know that you're interested to be informed when my book on hundred years of Dutch giro payments will be published. This will help you understand more of the intertwined dynamics that are at work when retail payment systems and instruments are developed.
Just send an e-mail here and I will notify you when the book is coming up.