The UK government has been consulting on a new law which is expected to change cheque payments for businesses.
Young people often see cheques as belonging to another era, a nostalgic era when we still used postal orders and travellers’ cheques. The high water mark for the cheque may have been in 1990 when 5 times more cheques were processed than are processed today. Despite this, cheques are not an obsolete method of payment. They are still very important to businesses. In fact companies still use cheques as their method of payment in 25% of transactions. This is principally because cheques are seen as the safest way to transfer money by post. It may also be that many business people still feel a sense of unease with internet banking. Under the current law a bank can insist on receiving a physical cheque for payment before deciding whether to honour the payment.
The background to the change in the law is simple. We know that companies have operated in a more competitive climate since 2008. This has meant that the period of up to 6 days that companies have had to wait before cheques have cleared for payment has proved very frustrating for businesses. One report showed that 77% of small businesses said that being paid late led to them being unable to pay suppliers in time.
There has been the added expense and frustration of businesses having to go to banks in order to present cheques before they are lodged into the business account particularly if they do not have a physical presence close to the bank. Barclays have said that in the UK each year £300 million of cheques are never paid in. The paper cheque system can lead to delays, cheques being lost and payments being missed.
The UK Government has been consulting on a new law that could provide a solution to these problems. The Government has said that the response to the proposals from businesses had been extremely positive and that they plan to move ahead with legislation on the matter. Instead of having to go to the bank in person, queue up and present the cheque, customers will be able to photograph the cheque on a smartphone or computer and send it electronically to a bank which will then clear the cheque within the much shorter period of two days.
A similar system was introduced in the US in 2001. The US law was enacted partly to reduce the frustration that businesses and banks had in having to move paper versions of cheques across the country. The US Federal Reserve has said that under the new regime the cost of processing a cheque for a business has been reduced by more than 70%. Similar laws have reportedly worked well in Asia and France. In the US large corporations have taken to the cheque imaging process with enthusiasm; they are able to process large volume of cheques from their offices using scanners. Barclays have said that a pilot version of the scheme has run very well in the UK.
The Treasury’s proposals are that:
- Customers will still be allowed to use paper chequebooks as they do now;
- Customers can still lodge cheques at the bank if they so wish;
- Customers will have greater certainty about when money moves from one account to another.
The Government also plans to bring in new measures to prevent fraud or error in the area of cheque imaging. This would include data sharing across banks to prevent the system being exploited. They are also considering submissions from banks in relation to allowing banks to have the discretion to refuse to pay a cheque in electronically. The Government have also raised another advantage of the new cheque system. They see it as allowing “challenger banks to compete with incumbents.” In the past banks with brand recognition and a solid high street presence often had the market cornered. This new cheque imaging system could help lead to an increase in banking competition which could lead to savings for businesses and consumers.
Perhaps the Friday evening bank queue will become a distant memory.
Patrick O’Kane is Compliance Counsel with Cordery in London.
Patrick O’Kane, Cordery, Lexis House, 30 Farringdon Street, London, EC4A 4HH
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