By: Gordon Madgwick, Cheque Consultant, (ex-Operations Director, Cheque & Credit Clearing Company)
Cheque volumes are reducing by around 14% per annum but cheques remain an important and indeed essential payment method for various segments of society, with more than one million issued every day in the UK. Critically, you do not need the beneficiary bank account details to make a payment, just the beneficiary’s name, and if posted, then their address. Cheques are the only payment type that is protected by legislation as detailed in the Bills of Exchange Act 1882, the Cheques Acts 1957 and 1992 and a wide range of case law.
We are currently in the midst of the UK banking industry’s commitment to digitise the paper cheque with the roll-out of the Cheque Imaging Clearing System (ICS), thereby reducing clearing times to the next working day following the cheque being banked on Day 1. New methods for paying cheques into your bank account are being introduced, such as capture on your smartphone and remote deposit for businesses using desktop cheque scanners. Subsequently, there is a faster clearing period with value credited and certainty of fate known by the end of Day 2, whilst you are now no longer required to visit your bank or pay in at your local Post Office. The cheque is now finally coming into the 21st century technology revolution.
Decline in Cheque Fraud
Identification of fraud on a paper instrument has been developed and refined over the years with greater use of technology, and bank staff checking for fraud have honed their skills in identifying fraud – counterfeit, forgery and fraudulently altered. The Cheque Printer Accreditation Scheme (CPAS) has also played an important role since its inception in the mid-90s in ensuring that cheque printing production meets strict standards and regulations, the design and ink coverage enables good quality images when captured, and all paper meets minimum fraud prevention requirements.
Fraud losses peaked in 2008 and during the past 10 years they have reduced by more than 85%, far in excess of the decline in cheque volumes over the same period.
Fraud – The Figures
Cheque fraud is at its lowest level ever and currently stands at 1.33% of overall payment fraud, as reported by the UK Finance Fraud the Facts 2017 Publication. Cheque usage may be unfashionable but from these fraud figures, it is currently the safest payment method (notwithstanding coin and paper cash usage).
In 2017, overall payments fraud decreased by 5% compared to the previous year and totalled £731.8m. The cheque fraud figure declined to £9.8m, representing an annual reduction of 28% with case volumes also down by 48%.
2017 Cheque Fraud Losses
|Fraud type||Loss||Annual Percentage|
A cheque printed on non-bank paper to look exactly like a genuine cheque and drawn by a fraudster on a genuine customer account.
A genuine cheque that has been stolen from a customer and used by a fraudster with a forged signature.
|Fraudulently Altered |
A genuine cheque that has been issued by a customer but has been changed by a criminal before it is paid in, e.g. by altering the beneficiary’s name or the amount.
VALUE £9.8m (-28%) VOLUME 1,745 (-48%)
|Fraud Cases||1,745||48% down|
Source of information: UK Finance Fraud the Facts 2017 Publication.
For the period January to June 2018, the reported figure is a £3.2m fraud loss, a decline of 41% on the same period in 2017, with prevented fraud for the same half year being £74.3m – equivalent to £9.59 in every £10.00 attempted.
The Challenges with Imaging
Once the front and back of the cheque has been imaged in readiness for submission into the Image Clearing System it becomes the legal payment instrument and the original paper cheque then has no value.
The ICS automatically undertakes a validation check for file size that includes the images and data. If this validation check fails then the file is rejected, and it is for the collecting bank to correct and represent their submission. An Image Quality Analysis (IQA) check on both the front and rear images of each cheque against the ICS Image Standards is also undertaken following successful validation. Such checks cover readability – not too light or too dark, sizing of image – not too large or too small, skewing, tears and folds. The paying bank is advised for each item whether IQA has failed or passed and it is then for that bank to accept or reject the image.
The paying bank has to be able to read the images, not only to undertake technical checks i.e. words and figures match, within date and correctly signed but also for their fraud detection image analysis to work. Should the paying bank be unable to read the image then the cheque will not be paid with the need for the beneficiary bank to liaise with the collecting bank (usually the same bank) to recapture the image from the original paper and to represent both the front and rear images together with new data. As the cheque has not been paid due to the poor image capture then there is an unwanted and unwelcome delay for the beneficiary to be credited with the funds. Accordingly, the standard of image collection is important and a pre-submission check should be deployed at the point of capture to reduce exceptions within the ICS and to avoid elongated payment decisions. Rework is time consuming and expensive and can easily be avoided.
If the collecting bank chooses not to undertake IQA at capture, they do so at their risk that submitted images may be flagged as non-compliant and unusable with potential reputational damage to both the Scheme and that bank.
With a faster clearing timescale cheque fraud detection has, by necessity, got to become more agile and it is essential for all banks involved in the transaction to diligently undertake their checks to combat fraud, particularly as the paying bank will no longer be able to physically examine the paper cheque issued by their customer.
Normally, the customer will pay cheques into their account at their own bank and hence that bank has to assume duties as both the collecting and beneficiary banks.
The collecting bank has to undertake some legal obligations in their checking process e.g. the payee name is identical to the account name to be credited – cheques in sole name can go into a joint account but a cheque in joint names should not be credited to a sole account. If that is being sought – then investigate. Be aware of any additions to the payee line e.g. T/A (trading as) or For (with another name added), as they may be fraudulently altered.
The collecting bank has the only opportunity in the Image Clearing System to check the security features on the paper cheque e.g. alterations to words or figures and the payee line by checking there have been no changes to UV design – this can be automated with a UV scanner – and to do a ‘wet finger test’ to ensure that the ink smudges as part of the check for counterfeit items.
As the paper cheque is retained by the collecting bank or beneficiary customer at the point of deposit then it is essential for the beneficiary bank to “know their customer” – is the amount to be credited and frequency the norm? Does it fit the profile advised by the customer?
Where the beneficiary bank is not the same as the collecting bank then the ICS can send the beneficiary bank an early notification message providing details of the item being processed and thereby enabling them to be aware and to commence their checks.
When the paying bank receives the image of the cheque then “know your customer” and account profiling are paramount. Is the amount and frequency of cheques issued the norm? If not, check with the customer (e.g. telephone, text, fax message). Have there been previous incidences of fraud? Other checks include the need to ensure that the cheque number is consecutive and the presentation is not duplicated. Handwriting analysis together with cheque layout and design analysis have proved effective in detecting fraudulent changes and counterfeit cheques.
The central Image Clearing System automatically checks for the presentation of duplicate items and issues a warning message to the paying bank to check the item and their data records.
Image Survivable Features
The addition of Image Survivable Features onto the face of the cheque can greatly help with fraud prevention and ‘ISFs’ are becoming more readily available and prevalent. Such features enable the cheque data to be captured and encrypted within a unique coded number or barcode that can be applied to the original paper cheque, thereby ensuring the validation of the item when the image is scanned. Counterfeit items and fraudulently altered items can then be readily identified.
A New Payments Architecture is being progressed by Pay.UK with the aim ofundertaking an end-to-end data analysis across all transactional retail payments – faster payments, bacs and cheques – thereby improving data sharing and analysis to fight financial crime.
As payments become near real-time then real-time data analysis is essential to create a rich and varied database to achieve fraud detection and to further strengthen the fight against fraud.
BRAVE NEW WORLD: A FUTURISTIC VISION OF PAYMENTS
James Booth, VP, Head of Partnerships in EMEA for PPRO
Over the last ten years, the retail e-commerce ecosystem has undergone a wide-ranging transformation. As recently as 2010, the e-commerce and payments value chain were relatively straightforward: Any eCommerce merchant could integrate a payment processor’s front-end HPP into their checkout or perform a deeper API integration for a customised checkout experience. The customer then enters their card details or other bank details, which were passed on to payment platforms and schemes for processing.
In 2020, we are now well into the era of open banking, and things look very different. The volume of payments has exploded. By 2018, global digital payments were worth US$3,417.39 billion, and are expected to increase to US$7,640 billion by 2024. Using integrated real-time payments systems — which incorporate everything from authentication through settlement to confirmation — consumers send and spend money in the blink of an eye. And the speed and volume of transactions are made possible by the increased use of technology and artificial intelligence to do everything from risk assessment to anti-fraud measures.
But this very visible — and much written about — transformation is not the only way in which the payments and e-commerce landscape has been changing beyond recognition. Because while e-commerce over the last ten years has gone increasingly global, the way people pay online is more than ever local. In some markets, low rates of financial inclusion make cash-voucher schemes the best option. In others, bank-transfer apps are the most popular.
Our research has shown that between 2017 and 2019, the number of UK online transactions paid for using a bank transfer increased by 36%. Driving the use of bank transfer payment methods by UK consumers to now account for 8% of all British online transactions, with cards and e-wallets, including PayPal, leading the race. In fact, card payments account for 56% of transactions, followed by e-wallets (25%), bank transfers (8% ) and lastly cash (7%).
Some markets prefer e-wallets or primarily use locally issued credit cards. In the Nordics, deferred payment methods are becoming the norm. And in countries such as Germany, most online shoppers prefer via direct debit.
The result is a global online and digital payments market that is now incredibly diverse. And even more complicated. Even markets right next door to each other may have very different payment preferences. In Latvia, for instance, 49% of online transactions are paid for using a credit card . In neighbouring Lithuania, it’s just 24%.
Globally, by 2021, only 15% of all transactions will be paid for using the brands of credit cards familiar to most Western merchants. That number is only set to decrease. Today, local payment methods account for 77% of e-commerce spend; by 2024, it is forecast that this share will increase to 82%. There are an estimated 450+ significant local payment methods worldwide, so considering the UK mostly rely on PayPal and card payments, there is a big world of alternative payment methods the British public are yet to realise. To truly go global, merchants don’t just need break down language barriers, but also payment barriers.
Already, Klarna, one of Europe’s most popular bank-transfer and pay later app, processes €53.4 billion in online payments every year. Merchants operating in or entering Europe which doesn’t support Klarna are effectively saying that they’re not interested in any part of that €53.4 billion. And this situation is not unique; it applies to markets throughout the world.
Local payment methods, as they drive financial inclusion, will only proliferate.
When we look forward to the state of e-commerce in 2030, a personalised shopping experience is not a nice-to-have. It is an absolute requirement. Consumer preferences must be noted; if they aren’t, retailers will miss out on sales. Almost half (47%) of UK consumers will end a transaction if their preferred payment method is not available, according to PPRO research, so customising payment options for cross-border shoppers is vital. This is highly important to attract international customer bases beyond a retailer’s local remit. It’s no longer adequate to offer customers one single way of paying – in-store or online. Payments aren’t a one size fits all approach.
The best brands do this already. Those who don’t will struggle to make it to 2030.
ENTERPRISE BLOCKCHAIN: DRAGGING INSURANCE OUT OF THE DARK AGES
Ryan Rugg, Global Head of The Industry Business Unit at R3
The history of insurance traces back to the development of modern business and insuring against its risks; property, cargo, medical and death. Insurance helps mitigate losses, wary of the financial losses a capsized ship could cause, forward-thinking vessel owners established communal funds that could pay for damages to any individual’s ship within the group. While this basic concept holds strong to this day, insurance is now a multi-trillion dollar industry that impacts almost every other sector of business, from healthcare to capital markets and aviation.
Despite the insurance industry’s image of being a conservative sector, insurers have been consistently innovative in the property and perils they protect against, but the supporting technologies and infrastructure have remained antiquated and unfit for purpose. Operational inefficiency is the single biggest threat facing the insurance industry today, and insurers are now taking steps to tackle this challenge head-on with purpose-built enterprise blockchain technology.
Inefficiency and fragmentation
Blockchain provides a solution to drive efficiency and security that would allow private data to be shared in a secure manner. Many policies are still sold over the phone rather than online, and the policies themselves are then processed on paper contracts, introducing huge potential for manual errors in claims and payments. This anachronistic infrastructure is even more surprising when you consider the complexity of the insurance ecosystem and the amount of parties involved in a transaction, including consumers, brokers, insurers, reinsurers and more.
The costs of this inefficiency and fragmentation are well documented. Inaccurate, disparate sources of data acquisition lead to long underwriting cycles and inaccurate risk profiling. Extensive manual intervention is required across the insurance value chain, ranging from contract placement to claims settlement. Archaic billing systems and complex billing processes lead to high reconciliation costs. Ambiguity in loss conditions, assessment procedures and claim settlement delays leads to increased litigation risk. It has been estimated that as much as 60% of customer premiums is consumed by these inefficiencies.
In addition, increasingly stringent and dynamic regulatory requirements continue to impact areas such as renewals and claims assessment. Insurers often have a complete lack of visibility of their liabilities and obligations, and a lack of transparency across the entire business. In today’s regulatory climate, it is unsurprising that authorities are beginning to demand more from insurers.
Blockchain technology is not a panacea for all of these problems, but with the right architecture a platform can address and reduce inefficiencies. There are also new revenue and growth opportunities in cutting-edge sectors such as cyber insurance that blockchain technology can help enable.
Tackling the blockchain privacy challenge
Blockchain offers insurance firms a new way to coordinate information between each other, by using a pre-agreed technology solution instead of relying on a third party’s bookkeeping. The technology enables disparate parties to connect via a shared platform environment. While this premise may appear simple at first glance, the insurance industry has specific requirements in relation to privacy and security that only certain blockchain platforms can fulfil.
For example, if a blockchain has the appropriate data privacy architecture in place, each insurance firm can maintain the same amount of control over their data as today, but with more flexibility. Unlike the traditional permission-less blockchain platforms – in which all data is shared with all parties – Corda shares information with those who have a “need to know,” ensuring the confidentiality of trades and agreements while also capturing the benefits of a shared distributed ledger infrastructure.
Blockchain platforms such as R3’s Corda have been purpose built for enterprise usage in industries such as insurance and tackle issues such as data privacy, scalability and security head-on. Following a period of experimentation with multiple consortia and technologies, insurers are now consolidating their blockchain efforts around Corda.
Testament to this is the recent decision of the industry-leading B3i consortium to port from IBM’s Fabric to Corda or RiskBlock decision to port from Ethereum. All the major insurance groups and ecosystems are coalescing on Corda in order to effect change and form standards. As Metcalfe’s Law states, the value of a network is proportional to the number of connections in the network squared – the more insurers that build upon on a common platform, the more valuable the platform becomes to all participants due to the interoperability of applications. The consolidation around Corda creates network effects industry-wide.
Contract placement: leveraging the network effect
To more tangibly examine the benefits of these network effects, we can look at a specific insurance use case that involves a network of many different entities and counterparties – contract placement.
Contract placement is the process of negotiating a potential insurance contract between a broker and an insurer in order to issue the contract to provide coverage for an end customer. For most commercial and specialty insurance scenarios, except for small commercial and some mid-market products, this is an arduous, complex process involving several entities – a broker, one or more insurers, and potentially a reinsurer and reinsurance broker. Furthermore, outsized risks generally mean that multiple insurers come together to insure the risk at the requested limit price, resulting in additional complexity for the broker in managing the placement process.
Contract placement, with the extensive negotiation cycle between a broker and insurers, as well as between an insurer and reinsurers – with or without a reinsurance broker thrown in – has several inefficiencies related to inter-firm coordination. Extensive manual intervention and reconciliation is required for brokers, insurers and reinsurers to keep track of requests and responses; high IT spend is required for all participating parties to maintain an audit trail of the negotiation history between different entities; and each firm must make heavy investments in document storage systems to maintain separate contracts over the policy lifecycle.
Leveraging the network effect by connecting brokers, insurers and reinsurers onto the same blockchain platform can deliver numerous benefits. These include:
- Near-instantaneous communication between participating parties to eliminate delays associated with reconciliation and coordination;
- Real-time consensus among all parties involved in the contract on coverage, price, terms and conditions;
- Complete audit trail from all sides of negotiations and data exchanges;
- Greater regulatory compliance throughout the insurance industry due to instantaneous communication of in-force contracts to the regulator;
- Eliminating the “double spend” problem of having the customer buy the same policy from different insurers by involving the notary (regulator);
- Reduced IT spend for individual firms, with eventual decommissioning of legacy document storage systems and reducing spend on document generation systems.
A brighter future
Blockchain technology offers great promise across many avenues, not only contract placement. Platforms like Corda can add value to many insurance business segments – commercial and specialty insurance, life insurance, personal lines and health insurance, along with niche areas like marine and trade credit.
The industry’s recent consolidation around Corda reaffirms that data privacy is pivotal for a network of enterprises and that the platform’s peer-to-peer data sharing approach matters for insurance blockchain applications going into production. For a highly regulated industry like insurance, only Corda can ensure that the entire supply chain of brokers, insurers, reinsurers and consumers can interact in a seamless, secure and private manner.
From contract placement to insurance as an industry, we are excited to see the new opportunities and efficiencies that blockchain technology will enable between this wide ecosystem of participants now that the right network – Corda – is in place.
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