Picturing faster payments: Cheque imaging
The Government recently unveiled draft legislation to modernise the payments system by introducing cheque imaging in the UK:
- An electronic image is created of both faces of the cheque.
- There will be no need to deliver the cheque itself to the payer's bank.
- The change will also apply to bills of exchange, promissory notes and similar paper instruments, such as travellers' cheques.
- HM Treasury will be able to make regulations deeming the collecting bank (i.e. the payee's bank) liable to pay compensation for particular losses arising from the electronic presentment of cheques. It currently favours strict liability, but could allow lower compensation where the victim's behaviour has contributed to the loss.
Why does this matter?
Cheques remain an important (sometimes the primary) means of paying individuals, small businesses and charities: 718 million cheques were written in 2013 and 10% of payments by individuals, and 20% of payments by small businesses and charities, were made by cheque in 2012.
The proposals aim to ensure the continued relevance and survival of cheques in the 21st century.
What does this mean for customers?
- Cheques will be cleared quicker and funds available earlier. At present, 5 physical journeys and 3 code transfers occur before money is paid out (or a cheque is returned). With cheque imaging, the cheque enters the system as a digital image created either by the payee or (if he presents the paper copy at his branch) by the collecting bank; that image is then transmitted through the system. Greater automation and removing 4 courier journeys behind-the-scenes will reduce the clearing process (even for those customers who use in-branch banking) from the current 6 days to just 2 days.
- More choice:
- Whether to pay in cheques digitally (which can be done 24/7) or in person at a branch (business hours only) – banks must allow choice and cannot force cheque imaging on customers;
- As regards the bank they use – in other countries there has been an increase in account switching as customers no longer need to remain with a bank that has a local branch. A cheque redirection service can be accommodated within the new cheque imaging system to further assist those switching accounts.
- Cheques could be paid into UK accounts from anywhere in world. This could help international businesses, but should also assist the technologically- enabled housebound.
- Payments can be made quickly without the payee having to divulge any account details (an advantage enjoyed by systems such as PayPal).
- New automation and technology is expected to allow easier reconciliation of cheques, faster cross-checking of queries and swifter notification of dishonoured cheques.
What does this mean for banks?
- Terms and conditions with customers will need to evolve to permit cheque imaging and reflect security concerns. For example:
- Which customers will they deem to be a risk and not permit to pay in cheques via digital imaging, and what type of transactions/ payment amounts are of concern? This will need careful and sensitive handling by collecting banks.
- Will banks insist on some level of assurance as to the trustworthiness of the original image? For example, will the payee be required to warrant:
- the quality of the original cheque from which the image was created; and/ or
- that he (or, for business customers, a trusted individual) has personally created the image which is being submitted?
We suspect that collecting banks will not be comfortable with accepting images which have been created by an unknown source (such as by the payer himself) as this leaves them open to fraud and the liabilities which follow.
- There is nothing in the Bill to prevent a collecting bank from reattributing liability behind the scenes, so supplier contracts may need revisiting.
- Cheque imaging raises the possibility of image theft and manipulation. Banks should consider the security of their internal networks and of the interfaces through which customers will be required to submit their images to collecting banks.
- The central infrastructure improvements required to launch cheque imaging will involve a one-off cost across the industry estimated as tens of millions of pounds. However, significant cost-savings are also anticipated: per item cheque processing costs fell by 70% when a less efficient system was introduced in the USA.
- In-branch banking practice is likely to be impacted:
- Later in-branch deposit deadlines should be possible once cheques no longer need to be couriered to clearing centres.
- Government hopes that challenger banks (who lack large branch networks) will find it easier to gain a foothold in the UK banking market, thereby aiding competition.
- A further decrease in footfall might give incumbent banks evidence to justify further branch closures.
How can Fieldfisher help?
Cheque imaging is likely to begin in 3-5 years' time. In the meantime, we can:
- identify the changes required to customer terms and conditions
- advise on necessary changes to supplier/outsourcing contracts
- advise on infrastructure and technology procurement
- consider security and data protection issues and
- negotiate changes requested by banks.
For further information, please contact John Worthy or Clare Burman in our Payments & Cards team, or your usual contact at Fieldfisher.