Branch density, staff productivity, a nation’s stage of economic development, and the share of its financial assets controlled by banks have all been held responsible for variations in the cost of national banking systems. Of these factors, the first two have attracted the attention of individual banks searching for cost cuts, because they are matters that lie within their control.

But there is another factor that banks control, but to which they have paid scant attention: the pronounced link between the type of payment system used in a given country and the cost structure of its banking. Specifically, the more extensive the use of checks for non-cash payments, the higher the cost of the banking system. So while painful branch and staff cuts may, in some cases, have helped reduce costs, a more effective means to that end might have been to wean customers away from their checkbooks.

To take the aggregate evidence first: those OECD countries where checks are widely used for non-cash payments (the United States, Canada, Australia, and the United Kingdom) tend to have more costly banking systems than the European countries that rely to a greater extent on electronic transaction methods or non-bank giro systems...