When only a cheque will do…

When compact discs were first released in the 1980’s, people were amazed at the thought of digital music and it took some years for music listeners to think about replacing their vinyl records with CD’s. However, with the vinyl record consigned to history, step forward to today and over a fifth of all albums purchased in the UK is now vinyl. Research shows that the main driving force behind this vinyl revival is actually millennial and Gen Z consumers. Around half of those buying vinyl records are under 35, and young people are spearheading the modern rebirth of this traditional medium.

Whilst this shift back to vinyl may be a subjective or artistic trend, it highlights the cyclical nature of cultural needs. We all are used to email, social media and other digital communication methods. However, the demand for ‘traditional’ paper documents remains. Printed matter, letters and posted items still have a place in an increasingly digital age. The High Street, for instance, is still home to multiple card shops, as people enjoy the experience of sending or giving a tangible physical token. Even the likes of Moonpig and Funky Pigeon, who offer the benefit of an online shopping experience are still providing a paper card service.

At a recent cheque seminar in London in December 2021, a spokesman for one of the UK’s Clearing Banks revealed that during the COVID lockdown, there were increasing numbers of business start-ups driven by millennials working from home. This also saw the number and usage of business cheque accounts rising significantly as cheque users realised the financial control benefits of the paper cheque.

Despite claims that digital payments habits have become increasingly embedded during the pandemic, just 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 business processes.

Whist it is clearly evident that 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, by businesses of all sizes, charities and many other sectors.

In 2021, following the pandemic, over 152 million cheques were processed with a value of over £202 billion. The cheque remains one of the most secure means of payment, and is certainly the only (non-cash) mechanism available to make a payment 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’ provides 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.”

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.” However, cheque fraud prevented, during the same period, was equivalent to £9.51 in every £10 attempted and represents just 1% of the total fraud loss.

With the introduction of the much-awaited Image Clearing System (ICS) in the UK, which replaced the paper-based cheque clearing system, bank customers are provided with greater choice 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. A major benefit to many.

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, saw 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. In research carried out by the Cheque & Credit Clearing Company (C&CCCo), a Pay.UK member, 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. 

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 underpinned and, as previously mentioned, speeded-up the clearing time of 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. Again, a comment from the recent cheque seminar highlighted the use of cheques amongst Gen Z. The trend to not carry cash, for instance, has resulted in a greater awareness of other payment methods. An anecdotal story revealed a sibling receiving a regular cheque in the post from their grandparent and having great pleasure in scanning this cheque into their bank account using a mobile app. A ‘win-win’ situation for both parties as the grandparent did not have to send cash in the post and the grandchild deposited the cheque without having to visit a bank branch or Post Office.

In these difficult times, the changing face of business, with unfortunate closures brought about by the pandemic, has provided another new channel for cheque payments. The cheque has ‘hidden’ benefits that work in favour of the payer 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.

The volumes of A4 cheque remittances or letter cheques being produced by accredited printers further emphasises this ‘hidden’ benefit as more organisations explore the use cheques payments for their customers, whether old or new. Major utilities and the energy sector, for example, are using cheques for remediation payments to their customers.

As a result of this change in cheque usage, the cheque digitisation is not restricted to the back end of the process. Accredited security cheque printers can provide bona fide bank customers with the option of issuing cheque payments on their behalf. Customers supply, via secure data links, cheque data from which the accredited printer then produce 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.

The UK’s Payment Systems Regulator (PSR) in its five-year strategic plan has focused on protecting users and promoting competition in the sector. The plan is designed to provide payments systems that meet people’s needs and that are secure, effective and efficient. Whilst not overtly mentioned, cheques remain a part of that strategic plan as a fair, open and transparent means of payment. The introduction of ISFs to cheques have made them one of the most secure forms of payment and follow the PSR’s strategic action area of ‘protection’, ensuring that businesses are sufficiently protected when using the UK’s payment systems.

Once again, the cheque proves its value and flexibility in the modern business setting. Any organisation, no matter what their size, typically relies on a steady cash flow to maintain its existence and so 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 still many who prefer to use cheques for some or all of their business banking. The ability to make and receive cheque payments still the perfect secure and trusted payments solution that offers organisations a differentiator in their particular marketplace.

Remember, trends are cyclical and whilst the paper cheque may not match the recent remarkable rise in vinyl sales, new generations can form a new attachment to this payment method. Who knows, even the online card suppliers may start including a cheque as an added service to their customers!

 Long live the cheque…