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A Cheque Resurrection?

Blog: Kofax - Smart Process automation

Cheque Image Processing gives traditional payment methods a new lease on life.

“Cheques will be around when debit and credit cards are gone.”

This was a surprising prediction made during a recent meeting of senior bankers, held at The Gherkin, London, where the customer impact of cheque image processing and digital banking capabilities were discussed.

Representatives from all of the major high street banks listened to updates from the Cheque & Credit Clearing Company (C&CCC), and Royal Bank of Scotland (RBS).

Who Uses Cheques Any More?

You’re not alone if you thought that the use of cheques as a payment method was in terminal decline, especially with the many alternative ways of bill paying that are available today.

As far back as 2009, the UK Payments Council proposed that cheques should be phased out completely by 2018. The reversal came in 2011 due to loud complaints from a wide spectrum of groups including small businesses, charities, schools and individual users.

It’st’s true that UK cheques usage has been in steady decline (from 4b in 1990 to 644m in 2014) – with having the dual disadvantage of being costly for the banks to use as a settlement method, and too slow in getting payment to the customer.

So when you take a HSBC cheque that has been mailed to you, to your nearest Lloyds Bank branch to cash it, the paper cheque itself is the instrument of exchange and has to be physically sent through the central clearing system to HSBC before HSBC sends the funds to your Lloyd’s account.

This clearing process currently takes six working days. Add the time the cheque is spent in the mail, it is no wonder that other payment methods – Internet Banking, both PC and Mobile, Paym, PayPal, Direct Debit & Credit cards – have become so popular, and far cheaper for the bank or financial institution to process.

It’s All Change for Cheques

But this is all about to change. The payment regulations are in the process of being updated to allow an image of the cheque, rather than then cheque itself, to become the instrument of exchange. This will have a transformational impact on all aspects of cheque usage, payment times and transaction costs, and will open up creative opportunities for new services and solutions.

Fiona Gledhill, the Communications & Stakeholder Manager of the Cheque & Credit Clearing Company, provided an update on the current status of these regulatory changes: “As a consequence of new legislation in the Small Business, Enterprise and Employment Act, which received Royal Assent in March 2015, images of cheques will be able to be used as the instrument of exchange between banks, eliminating the need for the physical paper cheque to be transported around the country” said Fiona. “The impact on clearance times will be dramatic.

Today’s ‘six weekday’ clearance time will be reduced to the ‘next weekday’, at significantly reduced cost to financial institutions. This initiative will also expand customer choice and open up the payment system to new ideas and new players. Importantly, this new clearing system is an open platform which allows increased participation resulting in innovative services and reduced costs through competition.”

Check 21 and the US Experience

In the US, the use of a cheque (or check) images for settlement has been possible since 2003 with the passing of the “Check Clearing for the 21st Century Act” (commonly known as the Check 21 Act). Brian Hettinger, Lexmark’s US Director of Sales Engineering, has been involved in the majority of Check 21 systems deployments in the US since 2003, and he shared with the group his personal experiences in this field.

“Check 21 stopped the paper at the bank, reduced costs and enabled faster payment times. It also opened up the opportunity for innovative and pioneering services, including decentralising the image capture function out from the bank to the corporation and the individual” said Brian. “Check 21 introduced the concept of Remote Deposit Capture that allowed corporations and individuals to use a PC-attached scanner to capture the cheque image for transmission to the bank. With the advent of the smartphone this capability has been extended to support mRDC – mobile cheque capture – where the mobile’s camera functions are used to create the cheque image under the control of an App that is integrated with the bank’s mobile banking platform. This powerful combination ensures a compliant image and accurate meta data.”

Brian looked at other innovative uses of the image-capable smartphone that are still on the horizon in the UK but are already being implemented in the US.

“The smartphone camera, controlled via an App, can ensure that a crisp, in-focus, non-skewed document image, suitable for downstream OCR, can be taken by any casual user, allowing much more sophisticated customer-facing activities to be performed remotely. For example, opening a new customer account would normally require a trip to the branch, along with proof of identity – a passport or driving license, a utility bill, council tax details. But all of this customer “on-boarding” activity can be achieved with a combination of a mobile’s camera, screen and keyboard, controlled by the bank’s mobile platform that is connected to the bank’s back-office systems and processes.

This ability to directly interact with a prospective customer via a smartphone for the critical “First Mile™” of their engagement with the bank is no longer a nice-to-have feature but is becoming a demographic imperative. Most consumers choose their bank at an early age, then stay with them for a very long time. But to reach the millennials, who likely never visit a branch, banks will have to offer remote on-boarding – if they don’t, the next generation of customers will simply choose a bank that does, and the bank’s customer base will begin to wither on the vine.”

Brian concluded the UK is in a better position than the US was in 2003, in that 76% of UK customers already have a smartphone and so image-based cheque clearing can be designed with mobile devices in mind from the get-go.

A Payments Perspective

Eric Crabtree, Director of Omni-channel Banking at RBS, and previously Director of Strategic Transformation at Barclays UK, shared with the meeting an overview of the past, present and the future of payment systems to give the context within which image-based cheque payments will have to compete and survive.

“At the current time, circa 50% of all payments are non-cash, 24% of those use Direct Debit cards, with an increasing number of these payments via contactless technology. In the UK, Paym mobile payments services developed by the Payment Council, such as Barclay’s Pingit, are available to registered users. Third-party peer-to-peer (P2P) payments, like those available between PayPal customers, bypass the normal bank payment systems for individual funds transfers. Because we see an increasing number of “walled garden” payment technologies emerging, for example Apple Pay, at RBS we are looking to partner with these technology companies so we can accommodate their alternative payment platforms into a unified customer experience, while at the same time reducing costs for the retailer. Looking into the future, biometric authentication and wearable technology will also need to be incorporated into the customer experience – and so the open payment platform approach that Fiona at C&CCC is promoting will be essential in accommodating all of these future payment alternatives.”

Looking to the Future

Moving beyond cheque image capture to more sophisticated imaging applications, such as customer onboarding as outlined by Brian Hettinger, might be seen as another threat to the beleaguered branch network. The banking industry’s current strategy of turning their branches into advisory, rather than transactional centres. By enabling customers to perform many of the traditional branch activities on their mobiles, the advisory branch can now focus on higher-value advisory (and sales) roles. This will mean less service counter space and more face-time around the desk discussing the customer needs, aspirations and problems with an up-skilled branch adviser.

And the prediction that cheques will outlive credit and debit cards? Eric Crabtree says “All of the technology that today is embedded in credit and debit cards can be, and will be, incorporated into your smartphone and your other digital devices. So you will either pay digitally – or send a cheque”

So what keeps bankers awake at night regarding these impending changes to the payment system? Fiona Gledhill worries that if the new image-based clearing system is too difficult to work with then financial institutions will finally turn away from using cheques to other payment options. From a technology perspective, Brian Hettinger knows that the new clearing system will need to be robust enough to detect, in real-time, fraudulent dual deposits of the same cheque to separate bank accounts. And Eric Crabtree of RBS notes that the traditional role of the banks can be undermined by new technology players that RBS worked with in providing an integrated payment experience for their customers.

Peter Davies, Chief Operating Officer, HSBC Bank, summarised the evening’s discussion as follows:

“The introduction of image processing for cheques will be a game changer for our customers, whilst making the process of clearing cheques significantly more efficient for HSBC. We will be working closely with the regulatory authorities and the Credit & Cheque Clearing Company to be ready to support the use of cheque images for rapid cheque deposit clearing when this capability is introduced. It represents a classic “win-win” outcome for the customer and the Bank”.