Have you ever wondered why some ways of sending money feel stuck in the last century, even as we shop and work in a rapidly evolving digital world?
Us too. The days of writing and mailing checks, manually collecting and inputting someone else’s account and routing numbers (twice!), and sending multiple “please confirm wire receipt” emails should be remnants of the past, yet they persist in today's digital-first economy.
This is all set to change. The Uniform Commercial Code–the fundamental law governing all commercial transactions in the US–is being reformed. It’s a slow process in which each state has to ratify the changes, but 11 states have ratified the amendments and they are pending in another 20. The changes to the UCC open the door to the possibility of a new form of fully digital payments, and Fin3 is bringing this innovation to life in the form of digital drafts. One way to think of a digital draft is a digital version of a check. A digital draft is actually much more sophisticated than just a digital check, but this is a good starting place to understand the implications of the UCC amendments.
Why start with checks?
Checks are still a massive part of the payment landscape in the US. It might surprise you, but there were over 12 billion checks written in the US in 2021. While the number of checks written per year has been decreasing, the average value per check has almost doubled in the last decade. There has been an explosion of ways to make small payments–Venmo, CashApp, Zelle, etc.–but checks are still the preferred method of transferring large amounts of money, especially by businesses.
Paying with a check doesn’t require knowing any information about your counterparty. You don’t need the routing and account number of the person you are paying in order to send a check. You just need their name.
In many cases, the act of delivering a check constitutes payment and discharges an associated legal obligation (think insurance, settlements, etc.).
Checks can carry data that is helpful context for the person getting paid or that person’s bank. For example, you can include invoice information or comments in the memo field, which is essential for certain types of payments.
Despite these benefits, there are plenty of problems with checks. Check fraud costs businesses and financial institutions $24 billion or more every year. Plus, pulling out your checkbook to write a check, putting it in an envelope, and sending it in the mail is inefficient and costly, especially for someone who needs to send a check quickly or many checks at once. Digital drafts will solve these problems while delivering the benefits of check payments. There are a number of industry-specific problems DDs address, which we will discuss in the next few weeks, and we are very excited about the potential for solutions using the programmable nature of digital drafts.