The government’s consultation on cheque imaging has just been launched.  The system, which enables banks and building societies to send digital images of cheques to each other for clearing in place of the paper originals, is already used in the US, France, India and China.  The imaging process offers significant potential for efficiencies and cost savings to the banking industry, with businesses and consumers standing to benefit from more convenient payment options and faster access to their money.

The UK’s current legislation does not contemplate cheque imaging so changes in the law will be required in addition to the development of an appropriate technological infrastructure and procedural framework.  Accordingly, the government is calling upon industry stakeholders to advise on the most effective means of delivery.

Current model

The present cheque clearing system is underpinned by a paying bank’s statutory right to demand the original paper cheque before it decides whether to honour the payment.  Paying banks tend to be liable for sums paid out as a result of cheque fraud and so they rightly analyse originals in order to detect forgeries and alterations.  Cheques are transported from the collecting bank’s branches to its clearing centre, where the essential details are read and sent by encrypted electronic transfer to the paying bank. The cheques then travel via an exchange centre to the paying bank’s clearing centre, where examinations are carried out.

The Office of Fair Trading’s “2-4-6” maximum time limits for cheque clearing reflect this slow process. Customers must wait up to two days post-deposit to start earning interest; four days post-deposit to withdraw the funds; and six days post-deposit until the money cannot be reclaimed, unless they knowingly participated in fraud.

Proposed changes

The government has proposed amending legislation to remove paying banks’ right to demand original paper cheques, opening the door to the digitisation of cheque clearing.  It proposes a corresponding shift in fraud liability from the paying bank to the collecting bank.  Carrying out fraud detection measures as soon as cheques enter the system will hopefully reduce certain types of cheque fraud that exploit the current delay between deposit and transfer of funds.

The consultation document puts forward two options for implementing cheque imaging.  First is the model similar to that deployed in the US, which allows receiving banks to send to paying banks a paper copy reconverted from a digital image of the original cheque, known as an Image Replacement Document. This would not involve a mandated time limit for migration, allowing those banks wishing to invest in technology to do so whilst allowing others to consider the benefits of adopting the new system before committing to it.  The second option involves all banks and building societies moving onto a single, central cheque imaging infrastructure (sometimes referred to as the “utility model”). The government considers that this would reduce customer uncertainty, encourage competition and create a more uniform and interoperable system.

Cheque imaging promises a noticeable reduction in cheque clearing time.  The government sees it as an opportunity to improve the current “2-4-6” timescale to a new maximum of “1-2-2”, meaning funds could be withdrawn two days post-deposit.  Further, banks could complement existing mobile banking offerings by allowing consumers to deposit cheques instantly using smartphones or other devices, increasing access to consumers in rural areas or with limited mobility.  The quality of these offerings is increasingly becoming a differentiation for the Bank, following the growth in smart devices and the recent changes in the account switching process.

Infrastructure

The industry will be left to agree on image quality standards and certification protocols, as well as the image recognition software to be used to detect fraudulent cheques and recognise any attempts to deposit cheques more than once.  Such systems will enable banks to collect, aggregate, analyse and share data, improving current fraud monitoring, prevention and customer notification.

Consultation

Responses to the governments questions and advice is sought from all parties with an interest in cheques and the operation of the cheque payment system, including banks, building societies, other payment service providers, businesses, trade bodies and consumer groups. Responses can be submitted by email, letter, or via HM Treasury’s Linkedin page before the consultation closes at 12:00am on 7 April 2014.