Craig Smith, managing director of finance and administration at Parseq, explores the new cheque processing and clearing rules coming into effect in 2017 and what they will mean for businesses.
Next year the process of handling, processing and clearing payments by cheque will begin a radical transformation towards the new clearing model enabled by recent legislation.
The changes will mean from March 2017 all UK banks must be in a position to accept scanned images of cheques into the clearing process. Then by October 31st, when the full impact of the new rules are implemented , financial institutions must also be able to generate digital images and data files of cheques received and have processes in place to clear a cheque within a maximum of two working days.
These changes may not be felt by some businesses, but for others this will be hugely beneficial.
Until the new legislation comes into play the law dictates that banks physically need to transport cheques to central clearing centres where the details on the cheques are then read and confirmed. Cheque code-line data is sent across a secure network to other banks and the actual cheques are exchanged as well. It is a slow and labour intensive process, but until the changes next year it’s necessary as it’s a banks right to ‘see’ the cheque before they decide whether to pay it or not.
Cheque imaging will reduce the level of labour required markedly. Banks or business partner organisations such as Parseq will be able to scan the cheque directly to the payee’s bank along with code-line data across a secure network.
The news of new legislation to improve cheque payment processes may come as a surprise to many, especially as it seems the humble cheque had been written off.
Martin Ruda, group managing director of The TALL Group of Companies who work in partnership with Parseq says: “Every now and then a news story appears which claims that the demise of the cheque is only a hair’s breadth away from happening. Yet, here we are in 2016 and not only are cheques still being used in their millions – 450 million[i] – to be precise, but technology and Government legislation is also evolving to make their use as efficient and cost effective as possible.
“These changes demonstrate the relevance cheques have to a market that perhaps doesn’t feel as comfortable or confident with some of the more modern methods of payment available. What’s more, for businesses cheques have always given them cash flow flexibility – something few other payment models can offer.”
And Martin is right. It may seem an outdated method of payment to many who have fully embraced the world of contactless payment and online banking, but the reality is cheques still account for a significant number of transaction in the UK. According to recent figures 38 per cent of consumers use cheque payment and so do more than half (55 per cent) of businesses.[ii]
We conservatively estimate that Parseq handles more than 25,000 cheques a day on behalf of our clients in utilities and financial services and these changes will without question transform and improve how they process these payments. The new legislation will enable us to scan the cheque on our clients’ behalf and get the payment process underway which in real terms could mean the money will be available in as little as 48 hours.
Processing times for cheque payments have always been a benefit on the one hand and a criticism on the other. For the person or organisation paying with a cheque the five working day clearing process was a blessing to help manage cash flow, but for the payee it has been a frustration. Both positions have been considered in the new legislation.
Banks will initially have a two (working) day timeframe for clearing cheques. But, rumours have already begun to surface that the aim is to process the payments in near real time.
Ruda adds: “The changes state that clearing must take no longer than two working days, but I suspect once the process is up and running, it will be next to real time in many instances.”
For customer service driven sectors, such as those operating with utilities and financial services, it’s vital that they offer their customers payment choice and flexibility, but they like any other commercial operation need to have payments processed as quickly as possible to pump back into the business.
However, a question which has been raised is, if the cheque can be processed – in theory – under these new changes in near real time, won’t people just pay by online transfer or direct debit? What’s in it for the payee?
“By introducing image-based processing models the industry is actually protecting the future use of cheques so that customers can carry on using cheques for as long as they want. Customers need do nothing differently to what they do at present, they can walk to the bank and deposit the paper cheque over the counter if they wish. Most changes would take place ‘behind the scenes’. If however a bank decides to offer its customers cheque imaging tools on mobile banking apps and scanning products which an image model enables, then it will be a customer’s choice if they decide to use these. It’s win / win for customers.” Explains Ruda.
Banks are already gearing up for the expected changes. Last summer Lloyds launched a four week trial amongst 1,700 staff to try out its mobile cheque imaging technology and 30,000 of Barclays’ customers are already using similar apps from their smart phones.
It’s also understood that conversations have already begun between banks and certain commercial customers about what clearing options they want.
Convenience of payment and management of cash flow isn’t the only reason some customers choose to pay by cheque. Others use it because it’s widely regarded as one of the safest payment transactions.
Ruda states: “There are many physical security measures in place to detect cheque payment fraud. In its physical form a cheque has a Ultra Violet layer of ink which can only been seen under a special light which can help to indicate if the cheque has been tampered with – for example, changing a £50 payment to £500.
“In the five working days it currently takes to clear a cheque several physical checks are made and there is time to decline a payment if any of these checks aren’t satisfied.
“These checks won’t necessarily be replicated into the introduction of image processing. That said, commitments have been made to safeguard the safety credentials of the cheque, it’s just not fully understood how at this stage.”
The issue of security and item validation is something we’ve been discussing at length with our customers and partners such as The TALL Group with the latter soon to launch an innovative new solution to the market to address these concerns.
In my view the people who say the death of the cheque is imminent are acting on the false assumption that everyone is using online banking, happy to pay via Direct Debit or even by telephone banking. The reality is, as the figures suggest, this isn’t the case.
There continues to be many people who find cheque payment the most convenient method and will not be swayed by the introduction of an app for their smart phone as a means to make their cheque book redundant. What’s more the new legislation reflects this.