By Martin Ruda, Managing Director of the TALL Group of Companies
Few payments topics have left the FinTech sector more disinterested than cheques, but with the imminent introduction of cheque imaging and digitised, high speed clearing in the UK, the world is changing for banks, building societies, their customers and of course the service provider community.
The Future Clearing Model
By the end of July 2016, the cheque clearing industry is committed to exchanging some cheque images and data, in lieu of the actual paper cheque, as the first stage of changes enabled by the Small Business, Enterprise and Employment Bill, which received Royal Assent in March of this year. By the end of October 2017, all banks will be required to clear all cheques on the image and data files alone, and no further paper cheques will be exchanged between banks in achieving the clearing process.
As a result, the time taken to clear a cheque will be reduced from the current four to six day cycle, allowing transactions to be irrevocably completed within 48 (working) hours. Therefore, organisations receiving a significant volume or value of cheques will be able to benefit from greater payments processing efficiencies, faster access to cleared funds, and potentially fully automated back office reconciliation. In addition, the innovative payment system will eradicate the cost of having to send cheques to the bank via a courier, or make a daily trip to the branch.
Secure transmission of cheque images and data lies at the heart of the so-called Future Clearing Model and come October 2017 not a scrap of paper will be transferred from bank to bank. In fact the likelihood is that every cheque will be destroyed as soon as it has been imaged at the point of first deposit.
To maintain the security, integrity and reliability of the new system, a robust IT solution is required at the central switch. In addition, standardised platforms must be made available for those who wish to deposit images and take advantage of the reduced clearing cycle with remote deposit capture (RDC) from a smartphone or desktop scanner.
There is also an ongoing industry challenge to develop automated tools to further protect banks and businesses against fraudulent activity. In the UK, £34 million of cheque fraud was perpetrated in 2014, with the attempted amount a lot higher. With the clearing process reduced to under 48 hours within the Future Clearing Model, the system is exposed to a shorter window in which fraudulent activity could occur, however the same shorter window requires innovative solutions to identify, trap and reject fraudulent items.
Innovate UK and The TALL Group
The TALL Group of Companies has not only achieved a leading role through expertise in cheque scanning, image quality assurance and automated fraud prevention, but also as a key provider of secure cheques, drafts and warrants to the UK banking industry.
Following a rigorous application process last year, TALL Group subsidiary Checkprint Ltd was awarded funding from Innovate UK, the UK’s innovation agency, which offers funding to small and medium-sized enterprises to engage in R&D projects in the strategically important areas of science, engineering and technology.
The funds were awarded in order to develop an automated flagging system for cheques that alerts operators to any potentially suspicious activity at the point of scan and before the images and data are injected into the clearing system. This solution will also be able to highlight potentially counterfeit cheques that have been received, as well as items that may have been fraudulently altered after being issued by the account holder.
With the backing of Innovate UK, the project was launched in January with the aim of completing the solution by end of December this year. Using the invisible ultraviolet (UV) print content present in all UK cheques, the system will deliver a confidence level assessment of the validity of the item, removing any manual, subjective checking process at the very start of the reduced clearing time cycle. The project, which is being led by TALL Group IT Director Wayne Carlisle, is currently in the testing phase and will be finalised on time and to budget within the coming months, ready for implementation in 2016.
Under the operating rules to follow the new legislation, the responsibility for fraud detection and liability for fraud losses, which historically sat with the paying bank, may shift towards the collecting bank. Therefore, by providing the collecting bank, or its agent, with the opportunity to identify fraudulent activity at the very start of the time-reduced clearing process, and utilising a fully automated system, the solution will offer greater protection against cheque fraud to those financial organisations and their customers.
We are pleased the industry has committed to real progress in cheque clearing and image-based processing and believe it will be a huge success in the UK, much like it has been for many other countries across the world. However, the industry only has limited time before July 2016 to understand and prepare itself for the full implications of the new legislation.
The banking community has no real appetite for the cheque as a money transmission tool. However, with carefully focused investment the UK is poised to take a lead in fast cheque clearing, whilst at the same time maintaining the strong track record of security and fraud prevention that has characterised the cheque as a payment instrument for the past 356 years.