Change is sometimes described as an ‘evolution’, not a ‘revolution’. But in the case of the new Image Clearing System, it really has been a revolution as it has involved the design and development of an entirely new payments system: a new central infrastructure, a new set of messaging, more robust settlement, new access criteria and a new contractual framework for participants; it was not just an overhaul. So, what has really been going on behind the scenes to build this new system?
Here, Stuart Cole, Director of Business Analysis at the Cheque and Credit Clearing Company (C&CCC), explains the journey he and his colleagues have been on over the past few years…
Cheque imaging – the story so far
Cheques have been a trusted, safe and secure form of payment for millions of people for well over 350 years. However, for many years, cheque processing has not kept pace with technology. People can now make instantaneous electronic payments at the click of a button, whereas cheque clearing has been well and truly stuck in the dark ages.
Over the past decade, customers have become frustrated about how long it takes to clear a cheque and even though hundreds of millions of cheques are written each year, cheque usage has been gradually falling. There was little doubt that the payments industry had to make some major decisions about the future of cheques.
The journey begins
The journey towards cheque imaging really began back in 2009 when the then Payments Council announced that, because of the continuing fall in cheque usage, it would actively manage the decline, with a view to closing down the cheque clearing system completely in 2018. The response to this announcement took many in the industry by surprise. Many major charities, the media, consumer groups, businesses and consumers lobbied the Government hard to try to reverse the decision, there was even a Treasury Select Committee hearing. It became very clear that although the current paper-based system was slow and outdated, people really valued the benefits and ease of using cheques; they were still important to certain groups and for certain situations.
So, in 2011, following pressure from the Treasury Select Committee and the government, the Payments Council reversed the decision on the 2018 closure target and announced that cheques would stay for as long as customers needed them. Customer power had clearly won the day – the future of cheques was secure.
How can cheques be preserved?
Here at the C&CCC, we started to look at how the industry could preserve the cheque clearing service for as long as people needed it; but how could we bring benefits to customers and how could the cheque clearing process be harnessed to become more efficient without losing any of its reliability, whilst also being aware of the gradual decline in cheque usage. It was a very difficult conundrum.
Our interaction and consultation process was wide-ranging. We spoke to the people, businesses and charities that use cheques; to the regulators (HMT, the (then) Financial Services Authority and the Bank of England); to our member banks and building societies and to the challenger banks. We wanted to understand the criticism which had been levelled at the cheque industry over the years (including the Cruickshank Report from 2000) and we wanted to make sure that there were no barriers which might prevent or inhibit an organisation from connecting into, and participating in, any new clearing system.
It was also important that we looked at what was happening in the payments world in both the EU and around the world so that we could take account of any payment trends or wider legislation which might impact the planned image-based system. We spoke to cheque processing companies, to the cheque printers in the UK and also to payments experts in other countries around the world that had already introduced cheque imaging. It was important that we could take the best ideas and best practice from each system and learn from any mistakes they may have made.
In December 2013, the C&CCC’s board gave confirmation to begin the development and implementation of an image-based method of clearing cheques – the revolution in cheque clearing had now officially begun.
One of the first stages in this process involved the Government holding a consultation in the spring of 2014 on ‘Speeding up cheque payments: legislating for cheque imaging’, so that the many interested parties had the opportunity to make any comments or suggestions as to how the new image-based system would work.
In its summary of consultation responses, the Government set out its expectations for the proposed cheque imaging model and the very positive outcome to the consultation gave the change process a welcome boost.
The next hurdle to overcome was the requirement for the law to be changed which would eliminate the need for cheques to be physically transported around the country.
The existing law surrounding cheques dates back to the Bills of Exchange Act, 1882. As you can imagine updating this legislation so that it could encompass the proposed changes wasn’t the simplest of tasks. The changes were finally completed and occurred via the Small Business, Enterprise and Employment Act which became law in July 2016.
The law now makes it clear that once paid into a bank account, the image that has been created may be exchanged with the payer’s bank for payment rather than the physical cheque. Indeed, this is how the Image Clearing System is operating.
In the meantime, the C&CCC was working closely with the banking industry to agree the changes to the infrastructure and technological capabilities that were required before the new system could be introduced. An entirely new system had to be built, tested and rolled out across the country - and it had to give the same levels of security and robustness that the current system offered.
Cheque imaging is also about providing more choice. So, whilst the C&CCC has been building the system, some banks and building societies have been developing products to offer to some of their personal customers enabling them to pay in an image of the cheque – by using a secure mobile banking app on their smartphone or tablet – rather than having to go to a branch to pay it in. For business and charity customers, some banks are working on providing desktop scanners linked to their online bank account, allowing them to pay in any cheques that they receive as digital images.
The new system is launched
In March 2017, the pace of the change process really began to ramp up. We announced that we would start the roll-out of the new image-based system from October that year and industry testing of the new system began at the end of May.
After more than three and a half years of very hard and challenging work which involved hundreds of thousands of man hours, the Image Clearing System finally went live on 30th October 2017.
However, the journey is not yet complete. The system went live with very low volumes at first but gradually the banks and building societies are connecting in their different deposit channels and as time goes on, more and more customers are benefitting from the faster clearing timescales.
By the second half of 2018, all of the UK’s banks and building societies will be able to clear all cheques via the new image-based system. All cheques will then be cleared by 23.59 on the next weekday at the very latest – a huge improvement on the current six weekday paper-based clearing process.