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The cheque processing system has evolved over time to speed up clearing periods, improve physical security, and reduce risk. One major milestone in the history of cheque processing was the introduction of the Cheque Truncation system.
The value of cheque transactions across the globe is only expected to fall below $5 billion by the end of 2025.
2015 World Payments Report
Due to the nature of physical payment instruments, cheque processing is a manual and labour intensive process, requiring complex logistics and manpower to move the vouchers through the system and manually clear them at a country's clearing house. Fortunately, banking institutions have started employing electronic cheque conversion processes to allow electronic settlement, thus reducing the number of physical cheques that flow through the payment system in a bid to eliminate paper from the system altogether.
Simply put, Cheque Truncation is the process of converting paper cheques into an electronic format that are then used during the transaction cycle. With electronic cheques being used in place of physical vouchers, banks don't have to physically transport cheques, leading to a host of advantages.
Countries that are using Cheque Truncation experience a variety of advantages, including:
Lower cheque handling costs.
Lower risk and chance of fraud.
Extended deposit cut-off hours.
Branches and ATMs are no longer geographically tied to processing centres or courier deadlines.
Quicker clearing cycles with faster collection and return of cheques, as well as lower clearing fees.
Faster access to and searching of cheque images and data via online archives.
Enhanced reporting, supporting data metrics that can power intuitive dashboards with invaluable information, graphs, and charts.
Exposure to a range of value-adds, such as automated cheque book ordering, cheque confirmation, and mobile cheque clearing.
These advantages breathe new life into an ageing payment mechanism, speeding up processing and reducing overheads significantly.
While Cheque Truncation provides a variety of benefits, it has its own set of disadvantages:
Costly to implement
Implementing a Cheque Truncation system in a country requires the participation of all regional banks. The cost of implementing such a system can be significant.
Investing in a declining payment mechanism
Cheque volumes have been decreasing at a slow but steady rate, and banks are therefore hesitant to invest too much time and effort. New hardware, software, systems, and processes all add to the complexity of the new system, making it that much harder to justify when positioned against other payment technologies.
The implementation of a Cheque Truncation solution is an extremely complex process with many obvious as well as hidden risks. Having implemented our first Cheque Truncation system in 2003, Sybrin has more than a decade's worth of experience in this arena. We have identified a large number of potential pitfalls that automated clearing houses and banks should watch out for:
From an ACH perspective
Cheques used in countries where Cheque Truncation has been implemented must meet certain specifications. To prevent cheque printing from becoming a bottleneck, cheque printers should be warned about the volume and complexity of new cheque designs.
To differentiate old cheques from new, new cheques should include a unique feature that electronically distinguishes them from the old.
Cheque specifications should include both the minimum size in terms of number of pixels, as well as the minimum Dots-Per-Inch (DPI).
Secure network infrastructure must be available to support improved straight-through-processing and enable the transmission of clearing files from the bank to the ACH.
From a Bank's perspective
A daily process must exist to ensure that each Other Local Bank (OLB) cheque deposited is also cleared out to the other bank.
Banks must ensure that they have sufficient spare scanners that can be used as swap out units whilst faulty units are repaired.
Typically, an online interface is vital to unpay a cheque, due to the limited time available for unpaying.
The system must support the ability to stamp, rescan, and resend a returned cheque so that it can pass the necessary checks.
ISO 20022 was published in May 2013 and prescribes a standard for electronic data interchange between financial institutions. It is the successor of the ISO 15022 standard.
SWIFT is the Registration Authority of the ISO 20022 standard.
The ISO 20022 standard seeks to streamline communication between financial institutions by designating a common “language” for all financial messages. By optimising local and international (i.e. cross-border) financial messages, the standard greatly reduces costs and improves interoperability.
By adhering to ISO 20022 standards, the speed and ease with which Cheque Truncation can be implemented is greatly improved. The standard also optimises messages for all other payment mechanisms, ensuring financial institutions can easily communicate with one another.
The Southern African Development Community (SADC) has chosen ISO 20022 as the standard for automated clearing houses. This standard will assist with payment system integration and cross-border settlement. A growing number of countries have already adopted the standard with numerous other countries investigating its adoption.
Despite the disadvantages, the benefits of Cheque Truncation are irrefutable. Globally, cheques are still used as a payment method in large quantities. While the future of payment systems indicates a move towards a cashless society, cheques still play a prominent role as a voucher-based payment system.
Sybrin has implemented multiple Cheque Truncation systems across Africa and has earned its reputation as a leader in payment solutions. Sybrin has implemented systems in numerous countries and has attained extensive knowledge of:
To learn how Sybrin can assist with your Cheque Truncation implementation, please contact us