Jo Spencer
Jo Spencer June 11, 2020 SSI

Covid-19 isn’t the only thing New Zealand will eliminate…

Congratulations to our friends in New Zealand who have shown the way in tackling the Covid-19 challenge.  But some unexpected things have sprinted along in the wake of the Covid-19 epidemic in New Zealand. An example is the flurry of banks in New Zealand that have decided to stop supporting cheques.  And, now that the RBA data is again showing that the use of cheques is dying in Australia, as a result of the change in customer engagement during the Covid-19 lockdown, the push will certainly be on again to phase out cheques in Australia too.  

Those of us that operate in the world of payments might find ourselves oddly conflicted about the demise of the omnipresent cheque.  Especially those of us “over a certain age” that remember the thrill of being given a cheque book (and a paying-in book)  at the age of 14 when we opened our first bank account. But, talk to anyone under the age of 40 (outside of the US) and they’ll be puzzled by this conflict.  Cheques are inefficient and painful to use in this world of 24×7, real-time payments… aren’t they?  

If you talk to a banker, the cost of processing a domestic consumer cheque can be as high as $7.50 (the last time I was involved), and that’s before you start thinking about bank cheques and international drafts.  At least they can charge specifically for those.

We’ve been trying to make cheques more efficient for a long time.  Cheque truncation initiatives across the globe have allowed the clearing of cheques to occur as images (and the associated metadata).  Whilst this transfer between the banks has been largely digitised, and we no longer swap bundles of cheques in a car park, the end-game is to image the cheque “at source” meaning that the paper process is completely removed.  This has started to be addressed with lots of alternative imaging solutions.  But all of these could be a waste of effort if they have no cheques to image.

To be able to maximise cost efficiencies in Australia we’ll have to digitise other lock-box requirements and paper-based processes too (including product applications) as these all use the planes, trucks and trains currently used to efficiently process cheques today.

It may be a long time since you used a cheque. What are the key features of cheques that we need to remember?

  • They’re not as efficient as electronic payments.  True, but they were predictable;
  • You can pay a person or an organisation without knowing their bank account or other information.  You just need their name (or close to it);
  • You can send a cheque in the post or give it to someone in person. It was always “in the mail”;
  • A cheque you write has your account details on it.  True – typed and in MICR.  Is this a problem?  Cheques end up in a bank;  
  • You can give someone a cheque at all times of the day and week, though the money doesn’t move until a few days later;
  • Banks typically provide a view of cleared and uncleared funds in an account because a cheque isn’t “cleared” until 3 days after it is presented.  This was quite often confusing, but there are other transaction types that require this type of available funds feature;
  • Banker’s drafts provide a higher “certainty” than personal cheques and are typically demanded for higher values;
  • Losing your cheque book is a problem.  Yes, but you can always stop cheques singly or as a book;
  • The processing of cheques is typically done overnight right after all the ACH credits are applied by the bank to the account.  This maximises the chance of a cheque being honoured as it’s the first debit done after all the overnight credits.  In the world of real-time payments you always need to manage your account funding levels or they won’t be successful;
  • Your bank issues cheques to you and these are then checked off their list as they were presented.  Not always, duplicates are a well-known fraud scenario;
  • You can write a cheque with insufficient funds in your account (and a lot of us have intentionally or not);
  • You can write a cheque on toilet paper or “on the side of a fish”.  It’s a story, I’ve never tried it, but the issuing process might be tricky;
  • You typically don’t pay anything for cheques as a retail customer. True, but some countries and banks have tried to move us away from cheques using charges and you certainly don’t get a cheque book without asking for one;
  • The “bouncing” of cheques results in a horrendous process and embarrassment.  Sure, and you pay a fee, but this does mean that you can delay payment…; 
  • You can forward date a cheque or a series of cheques.  I remember doing this for insurance repayments in India, some years ago.  The 24 signed cheques were kept in a drawer and fished out on the due date every month. It worked;
  • A lot of cheques are never presented.  I was once told by someone who knew that the percentage was north of 20% – mostly very small values of dividend payouts;
  • Anyone can receive a cheque.  Cheques can be credited to a lot of account types.  Electronic payments may not have the same “reach”;
  • The signature on a cheque makes it trusted – not really. A signature is rarely validated unless it’s a very big value (and we’re talking 6-digits plus, typically).  A “friend of mine” tested this by signing a cheque as Mickey Mouse some years ago; 
  • Clever solutions have evolved to check the validity of a cheque.  My favourite is the “nose” of an cheque processing clerk who could tell by the smell of a cheque whether it was valid or not, but the feel is just as important;
  • Cheque fraud, as demonstrated by Leonardo diCaprio in “Catch me if you can”, is as old as cheques are.

Anything we do in this space is going to have some interesting impacts.  Some of us older customers are comfortable with cheques (but we are also likely to use account books).  We need to be helped if this extinction is going to be achieved. The implications are often hidden until the service is removed.

When you can shift over from cheques, it makes good  sense to do so.  But be aware of what that means…  

  • You will have to provide your bank details (or something that points to the account) to the payer.  It may not seem important but our electronic data needs to be protected and there could be legal implications;
  • Direct debits may be an option.  Certainly but, again, the mandate process is different in different countries (and doesn’t exist on the payer side in Australia).  New initiatives are planned, but these arrangements need to be managed by the customer and typically bind a customer to the bank (complicating customer portability);
  • To allow higher value transactions using cheques to be replaced, online payment processes will need pre-authorisation or higher levels of customer authentication;
  • You actually need to have more money in your account to cover the necessary payments (“credit push”or “debit pulls”) at different times of the day;

So, what will replace cheques?  Real-time or batch processed online payments would be a good guess. But wouldn’t it be a good idea if we had an equivalent product?  The next products in the NPP stable in Australia are the “request-to-pay” and the “mandated payment service”.  It’ll be a missed opportunity if these don’t provide smarts to help in the replacement of cheques and enable digital payment solutions (card or account based) that help us to interact physically or remotely in the world of trusted digital commerce. 

Recently, direct debits, the natural successors to cheques, are coming under pressure due to the change in gig-economy earning and account funding patterns.  The number of returns/failures is increasing because direct debits rely on available funds and they can’t be sure of this as part of their process.  Some banks in New Zealand address this by trying to process the same direct debit several times during the day, but it’s in no way ideal.  

Cheques have been discontinued in Scandinavia and other countries, but it’s a challenging position to take as there is no single, direct, equivalent solution in the digital world.  Any alternative solution must  be simple, resilient and ubiquitous, otherwise the poor customer gets very confused. We need to map each use of the lovely old cheque to their digital equivalent and intentionally make the ecosystem better, easier and safer for all, going forward.  Then we need products branded and supported in exactly the same way by all the banks, whilst supporting innovation on top.  Easier said than done.

The critical components of any payment solutions will be the digital consents, mandates and the underlying identities of those involved.  Only then will we be able to establish trust in the digital interactions and payment types supporting them.  If we silo these to be accessible only inside the banks and don’t design customer-centric portability across banks, it’ll be yet another pair of “concrete overshoes” for customers.  Luckily, global standards, definitions in verifiable credentials, and standard digital interaction patterns are evolving to make life simpler.  The world of Self-Sovereign Identity (SSI) makes all this possible.

Don’t get me wrong. I’m not advocating the retention of cheques. It’s just that the customer impact needs careful consideration and the e-commerce ecosystem needs to be designed and prepared to make replacement solutions acceptable.

I haven’t written a cheque in years, but I think I’ll miss them once they’re gone… unlike Covid-19.

About the Author
Jo Spencer
Jo Spencer Jo has more than 30 years’ experience in financial services covering software design, bank architecture and strategy, consulting and solution-delivery across the globe. He’s delivered mission critical solutions for both sovereign nations and large financial institutions. He has led large, multi-located teams and has developed an extensive and active network.

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