In January 2015 the UK government is expected to make the digital image of a cheque legal tender, paving the way to end paper cheque processing.
Following the change in legislation in the first six months of 2015, HM Treasury will set out rules and timeframes.
Banks will then be able to implement digital cheque processing.
The change will mean that institutions will be able to process a picture or scan of a signed physical cheque.
Customers will no longer need to go to a branch to deposit cheques. As well as benefiting the consumer, it could improve cashflow in small businesses, since company owners would be able to scan in paper cheques themselves, rather than have to take them to the bank.
It is highly likely banks will offer cheque scanning functionality in their mobile banking apps; commercial banking customers will be able to process cheques using bulk scanning machines, with prices starting between £400-500 for a low-volume scanner.
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The history of digital cheques
Digital cheque processing has been technically possible since the 1990s. In fact, NCR developed the cheque-reading machine in 1998, based on artificial intelligence research from Yann LeCun, who is now the director of artificial intelligence (AI) research at Facebook.
The technology was first implemented in the US 10 years ago, but adoption took a long time due to volume.
A case study published last year by analyst Forrester estimated that US bank Redstone Credit Union saved $3.60 – or 90% – of the cost of processing each cheque, by enabling mobile deposit transactions.
In other words, while a branch transaction costs around $4.00, the equivalent digital cheque-style of transaction would only cost Redstone Credit Union $0.40 to process.
The UK processes 750 million cheques a year and, while in decline, the humble cheque will play a part of the UK economy for many years. The costs of processing paper-based cheques makes a clear case for digitising the process, but legislation has held back the implementation of digital cheques in the UK so far.
In Canada, the legislation to process digital cheques went through in September 2013. What can the UK learn from Canada’s experience?
Lessons from Canada
Annually, Canada processes about 25% more cheques (1 billion per year) than the UK. Canadian Imperial Bank Commerce (CIBC) is one of the banks that has now implemented digital cheque processing.
Speaking about the bank’s implementation, Fraser Mackay, vice-president of self-service operations & support at CIBC, said: "There's the technical side and there is a cultural challenge. To get a holistic implementation for a bank, you have to go for all the front-end channels, through to the image exchange at the back end, which is a massive amount of work and a massive amount of expense."
This is Canada’s second attempt at digital cheques.
In 2008, following a government mandate, Canadian financial institutes attempted to roll out cheque imaging. According to reports at the time, the initiative failed because the banks could not get their IT systems to talk together, to enable end-to-end cheque clearing across the banking network.
The initiative was rebooted, allowing banks to go at their own pace. CIBC processes about a quarter of a billion cheques a year, almost a quarter of the country’s cheques.
This time round, Mackay said, the bank wanted to gain a first-mover advantage in digital cheque processing, which it launched as part of its mobile banking platform in early 2013. A few months later it launched a version for commercial banking. "We focused on doing cheque imaging in our own organisation, and it was still an awful lot of work," he said.
We try to implement this in a way that if there is doubt, rather than get the customer to try again and again, the cheque raises an exception at the back end
Fraser Mackay, vice-president of self-service operations & support, CIBC
These were the easier parts, from a banking infrastructure perspective. He admitted changing cheque processing at branch-level would involve a lot of work. "You can automate the teller, so bank clerks use a similar scanner to commercial customers. But we also have a lot of customers who deposits cheques by putting them in an envelope and dropping them into the ATM. So, to digitise cheques, we would need to enable digital scanning at the ATM. We have 1,100 branches and 4,000 ATMs, so this represents a significant amount of work."
The challenge in digitising the whole process is that not only do the cash machines need to have a built-in cheque scanner, optical character recognition (OCR) software is required at the back end to validate the value of the cheque and the signature.
Digital cheques also change people’s relationship with the bank. Mackay said: "The challenge is that people are used to going into a branch, lining up for a bank teller and depositing a cheque." This is the customer education element, where the bank explains to customers they no longer need to queue and can instead take a photograph of a cheque with a mobile phone, or scan it in using a PC at home.
The bank used NCR APTRA passport software for digital cheque processing at ATMs. The software reads the handwritten text for the amount, compares this to the amount entered in the amount box, and checks this against the figure the customer enters at the ATM terminal.
"We try to implement this in a way that, if there is doubt, rather than get the customer to try again and again, the cheque raises an exception at the back end, where it is routed for manual review," Mackay said.
The future of digital cheques
The UK processes 750 million cheques a year. Processing paper cheques, along with using the armoured vehicle to deliver them as part of the clearing process, means that cheque handling is expensive. A fully digitised cheque clearing system would allow businesses and individuals to receive payments quicker.
UK legislative approval is expected soon after Christmas 2014. This legislation will mean that a cheque image is a legal replacement for a physical cheque. Following the legislation, HM Treasury will give dates for implementation.
Unless it is mandated like Canada’s first attempt, individual banks will need to decide when to deploy digital cheque technology.
Giovanni Bandi, director business development at NCR, said: "In terms of hardware, the UK is behind Canada. In the UK, 10% of ATMS have a cheque capability and only a small fraction of these are able to image cheques." To date, two UK banks have implemented cheque image processing, one of which is Barclays, which announced it would develop a smartphone cheque.
Mobile is likely to be the most prominent channel, because every phone can take a picture. In a blog post earlier in 2014, Forrester analyst Oliwia Berdak wrote: "Remote deposit capture is a win-win solution. It cuts the time and cost of check transaction and processing, frees up branch staff for higher-value services, and enables customers to complete their goals whenever and wherever they want."