By: Gordon Madgwick, Independent Cheque Industry Consultant and previously Operations Director, Cheque & Credit Clearing Company
Picture the scene. A payment needs making to a supplier. Mobile and internet banking is unavailable due to internet issues. Cash is not a secure option to send in the post. The local bank branch has reduced opening hours or is closed permanently. Step up the ‘good old dependable cheque’. Whilst the old adage, ‘the cheques in the post’ may conjure up intriguing cash flow manipulation techniques, it holds true that this payment method is a veritable treasure when it comes to financial control and business processes.
Whist the personal use of cheques has fallen in recent years as bank customers have opted to use other payment methods such as cards, online banking and mobile apps to make transactions, payments by cheque are still very important to many individuals, businesses of all sizes, charities and many other sectors. In 2020, at the height of the pandemic, 188 million cheques were processed with a value of over £230 billion. The cheque remains one of the most secure means of payment, and is certainly the only (non-cash) mechanism available where all that is known of the payee is their name, or their name and address.
Recent figures published by UK Finance; ‘Fraud the Facts -2021’ provide a definitive overview of payment industry fraud. According to the report, “Unauthorised financial fraud losses across payment cards, remote banking and cheques totalled £783.8 million in 2020, a decrease of five per cent compared to 2019.
Banks and card companies prevented £1.6 billion in unauthorised fraud in 2020. This represents incidents that were detected and prevented by firms and is equivalent to £6.73 in every £10 of attempted fraud being stopped.” (Note: Cheque fraud prevented, same period, was equivalent to £9.51 in every £10 attempted. See below).
Historically, in 2019, cheque fraud losses rose to £53.6 million, an increase of 161% compared to 2018. Fraud intelligence suggested this increase was largely driven by a number of high-value transactions targeting business accounts, with personal customers only accounting for a small fraction of total losses. However, this raised the question of whether large firms need to enhance the security features on cheques to deter fraudsters. In 2019, over £550.8 million of attempted unauthorised cheque fraud was prevented, an increase of 152 per cent compared to 2018. This is equivalent to £9.11 in every £10 of attempted cheque fraud being stopped before a loss occurs. In 2020 prevention increased to £9.51 in every £10 attempted. The cheque still remains a secure payment option when compared with other payment methods.
Total 2020 Fraud loss totalled £1.26 billion of which 45% came from Card Payments, 38% Authorised Push Payments, 16% Remote Banking and just 1% from Cheque payments. In 2020, 185 million cheque payments were made. This represents less than 1% of the 35.6bn total payment volumes in the UK.
The introduction of the Image Clearing System (ICS) in the UK, which replaced the paper-based cheque clearing system, allows bank customers to pay in cheques using an image rather than the paper document itself through Remote Deposit Capture (mobile and desktop/tablet cheque image scanning) or imaged at the branch. This use of the cheque image in the clearing system has provided customers with the benefit of reduced payment processing times from up to six days down to next working day receipt of funds.
Cheque security remains at the forefront of this innovation in cheque payment and clearing. Without the paper document to validate in the clearing system, fraudsters immediately recognised the potential to exploit a potential ‘weak link’ in transactions. The payment processing industry, banks and cheque producers fought back against such attacks with the implementation of Image Survivable Features (ISFs) printed on the face of the cheque to deter cheque fraud. These images, as the name implies, survive the cheque scanning process and remain on the cheque image into clearing where the cheque contents can be automatically verified against the data held in these encrypted features.
The introduction of ISFs, and work by law enforcement to target organised criminal gangs operating cheque fraud, has seen cheque fraud losses fall from the £53.6 million in 2019 to just £12.3 million in 2020 in value, (a 77% reduction) with a corresponding 56% reduction in the volume of fraudulent cheques.
This reduction in cheque fraud achieved with the introduction of ISFs, and the added security that these bring compared to other mechanisms, adds weight to the cheque’s position as the payment tool of choice for many. Charities, for instance, say that the cheque is vital to many of their customers, particularly the elderly, who feel uncomfortable using other payment methods. For many the idea of internet banking or mobile apps are anathema. Despite branch closures, the elderly often prefer the cheque as a payment method, feeling confident in the tangibility of the paper document in their finances. Indeed, the recent U-turn by National Savings & Investment (NS&I) over Premium Bond prizes paid by cheque shows the depth of feeling many have for the cheque.
Premium Bonds are the most popular savings product in the UK, having been launched by Prime Minister Harold Macmillan in April 1956 and popular with older investors. In September, NS&I announced plans to phase out paper warrants – like a cheque – which are sent in the post to some Premium Bonds winners. It encouraged people to receive pay-outs directly into bank accounts, claiming that system was more efficient and that fewer prizes would go unclaimed. However, complaints from regular savers who were worried about the changes flooded in. NS&I chief executive Ian Ackerley admitted to MPs that the timing of the proposed change had been an error, so that in December 2020, the plan had been put on hold. Now, in June 2021, it has been scrapped entirely.
It was this type of groundswell and reaction that also drove the Payments Council back in 2011 to announce that “cheques will continue for as long as customers need them”. The Payments Council had previously set a target for closing the cheque clearing system by 2018. However, they bowed to public pressure and listened to both the Government and many sectors in society as to the future of the cheque, with the members of the Payments Council committing to continue to provide customers with cheques ‘for as long as they are needed’. In 2015, this commitment resulted in the legislation, “The Small Business, Enterprise and Employment Act”, that created the Image Clearing System (ICS), an innovation promised as part of the move to bring the cheque into the 21st century. An innovation that has been seen to provide a new lease of life for the cheque.
As society in general relies more heavily on digital processes and applications, it is heartening to many that the introduction of the ICS has reinvigorated the cheque as a payment method. The digitisation of the ‘back-end’ cheque clearing process, allowing customers more choice in how they pay in cheque payments, either by remote deposit or in branch, has the added benefits of reduced payment processing times and greater security that will appeal to many as businesses open up following the COVID-19 pandemic.
This reduced clearing time has obvious advantages for the payee as funds are available sooner than the previous 6 days within the paper clearing system. However, an unseen advantage for the payer in using cheques comes when making large numbers of, say, relatively low value payments for items such as bonus payments, tax, insurance or utility refunds. According to The Times, “More than one in ten cheques sent to taxpayers by HM Revenue & Customs (HMRC) have not been cashed.”
“Responding to a freedom of information request, HMRC said that according to its most recent figures, it issued about 31.83 million cheques from 2015-20, 28.05 million of which have been cashed. This leaves 3.78 million cheques, almost all of which were for tax refunds, that have not been deposited in accounts.”
Even for an organisation like the HMRC, in the first instance bank charges mean that making a cheque payment may cost far less than those charged for making faster payments. But secondly, as many of these cheques are simply not presented, or are deposited many months later, this self-evidently improves their cash flow. However, it should be remembered that, despite the convenient 6-month cut-off date for cheque deposits made by banks, according to the Cheque & Credit Clearing Company, part of Pay.UK, who run the clearing system in the UK, “A cheque is valid for as long as the debt between the two parties (i.e., the person writing the cheque and the person they give it to) exists. In other words, cheques do not have an expiry date. However, it is common banking practice to reject cheques that are over six months old to protect the person who has written the cheque, in case the payment has been made another way or the cheque has been lost or stolen. This six-month timeframe is at the discretion of individual banks. It should not be assumed that cheques older than six months would automatically be rejected as the only definite way to cancel a cheque is for the person who wrote it to request that a stop be placed on it. If you have a cheque that you want to pay in that is more than six months old, your best course of action is to not pay it in and instead obtain a replacement from the person who gave it to you. Where there is a dispute, a cheque remains legally valid in order to provide proof of the existence of a debt for a period of six years, which is the Statute of Limitations.” The cheque remains a powerful payment method. The ability for a payee to make remote deposits digitally (should their bank allow it and provide the necessary apps) through the ICS can make it far easier for customers to deposit received cheques, even from the comfort of their own home.
Digitisation is not restricted to the back end of the process though. Accredited security cheque printers, such as the TALL Group of Companies, whose members include TALL Security Print, Checkprint and DLRT, provide bona fide bank customers with the option of issuing cheque payments on their behalf. Using the TALL Send-A-Cheque™ service, customers supply, via secure data links, cheque data from which the TALL Group then print cheques, including the latest bank-recommended ISFs and either return to the customer, or post on their behalf. This type of service provides a digital option to hand-writing, or printing cheques in-house through proprietary software packages requiring pre-printed cheque stock, saving both time and resource for customers, many of whose finance departments have been remote working or furloughed as a result of COVID-19.
Once again, the cheque proves its value and flexibility in the modern business setting, and those detractors who seek to undermine its worth should do well to remember that any organisation, no matter what their size, typically relies on a steady cash flow to maintain its existence. Having a reliable, secure and efficient method of payment is essential. Whilst many organisations are set up and organised to embrace electronic payments and online transactions, there are many who prefer to use cheques for some or all of their business banking. The ability to make and receive cheque payments can still be the perfect payments solution, offering organisations a differentiator in their particular marketplace.
Long live the cheque….