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UK banks vote to bounce cheques by 2018

16 December 2009  |  15999 views  |  2
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The UK's major banks have voted to stop clearing cheques by 31 October 2018, bringing to an end the 350 year old payment method.

Cheques are on the way out - so what's the alternative?

16 December 2009  |  9552 views  |  2

Today the Payments Council has announced the target deadline of October 2018 for the end of cheques as a form of payment in the UK. For banks, this is welcome news. Cheques are one of the most expensive forms of payment transaction costing banks around £1 per transaction to process. However, if the cheque is to disappear altogether, the Council recognises that alternative payment methods need to be available and they will undertake a full review in 2016 before any final decision is taken.

The good news is that there are already some payments services available which could potentially fill the gap left by the cheque. The bad news is that others are still in the very early stages of development. Let’s look at a few of the options.

The Faster Payments Service (FPS) is a good alternative for B2B as well as consumer to large business transactions. However, faster payments transactions are done in real time so there is less time to spot potential fraud once a transaction has been initiated. It is important therefore to ensure the initiator and payment are genuine before the transaction is accepted. Two-factor authentication through a smart card reader is one way to tackle this and banks such as Barclays and Nationwide have already rolled out this technology for online banking. Mobile phone based authentication is another option that has also been rolled out by banks in some regions.

However, a replacement for person to person (P2P) and consumer to SME payments requires more thought.  Repaying a friend or paying a plumber or gardener for example will be problematic without cheques. The mobile phone, which is already an integral part of most peoples’ lives could be part of the solution. P2P mobile phone based payments are available today, although the primary focus of today’s services is on mobile remittances, which do not fill the cheque gap. However, with a wave of innovation in the space at the moment and eight years to go before the deadline, mobile P2P payments could well become a viable option for P2P and consumer to SME payments.

Whatever P2P mobile payment solutions replace the cheque, security will be a deciding factor in their success. Consumers will need to trust in P2P payment services to use them. What’s more, the technology must also be interoperable and, crucially, free since customers are unlikely to be willing to pay for an alternative service as up until now at least, cheques cost them nothing. It is clear that despite recent progress the industry still has a way to go in terms of providing an alternative to all cheque uses. However, with the deadline now set, this could catalyse a wave of innovation that results in viable payments alternatives becoming well established before 2018.

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Comments: (7)

A Finextra member
A Finextra member 16 December, 2009, 17:51

So ...

At present, if I want to make a payment to a friend, or a plumber, or maybe a friend who happens to be a plumber, all that is required is that both of us to have bank accounts.

In the future, whatever the solution, there will need to be some form of third-party payment-maker: some sort of device, dongle or gizmo that facilitates the financial connection between me and the plumber.

I think that what is called for is an easy offline solution, capable of transferring value in real time, in a face-to-face, secure transaction environment.

I think, what is called for, is Mondex!

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A Finextra member
A Finextra member 17 December, 2009, 09:46

Hi David, I expect your comment is slightly tongue in cheek :), but you're right that the use cases that Mondex could cover would fill the gap for peer to peer and consumer to small trader payments. I expect today though that mobile phone based solutions will win out as with 70million + UK subscribers and >100% market penetration the mobile a ubiquitous tool nearly all of us carry most of the time.

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A Finextra member
A Finextra member 17 December, 2009, 15:13

Cash my friend is the alternative. Well alternative is not quite right. Love it or hate it cash is already part of the consumer chain as well as the motor of the black economy. Should cheques be demised there will be an increase in line with demand.

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A Finextra member
A Finextra member 17 December, 2009, 17:15

Cash is indeed an alternative. It has universal acceptance, etc, etc. However, the cost to the economy of using it is high - the EPC estimates the cost of cash to the EU economies at between 50 billion and 75 billion euros (http://www.europeanpaymentscouncil.eu/content.cfm?page=cash_is_expensive). There are also risks to consumers of using more cash. If I lose my cards or cheque book or they are stolen and I act quickly I lose nothing. If cash is stolen or lost, it is gone. If there were a risk of a significant switch to cash usage as a result of ending cheque usage this would be a cause for concern, and could be a factor taken into account before taking a final decision on ending the use of cheques.

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Ainsley Ward
Ainsley Ward - CGI - Toronto 21 December, 2009, 10:22

For the plumber it would be simple to fill in a Direct Debit mandate so that he/she could take it out of your account - with the guarantee to fall back on in case of fraudulent activity.

For the friend, a faster payments transfer is quicker and easier than credit transfers have ever been, failing which you could always use PayPal, Moneybookers, Google Checkout, QQ coins, Monilink, postal order, top-up their prepaid card. give them a gift card, or if you're really desperate give them cash.

There are so many in-market solutions to sending money electronically that the cheque really should have been killed off a long time ago.

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A Finextra member
A Finextra member 22 December, 2009, 17:27

So ... 

you don't like my Mondex idea.  Ha!  Just you wait and see.

The problem with the mobile solution, which is essentially the same problem that has scuppered mobile payments for the last 10 years is the indisputable fact that the mobile operators believe that they have some right over the contents of the transaction, and more importantly a right to a chunk of the value transferred.  

Now, can anyone tell me of a simple way of paying for my little girl's school trip, or school photographs; the school informs me of the cost, tells me what it's for and asks for a cheque in the name of the travel agent or the photographer?

I suppose that not even Mondex can do that! 

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Ainsley Ward
Ainsley Ward - CGI - Toronto 23 December, 2009, 09:10

Here in Belgium our local school has two choices. Firstly we have a direct debit mandate with them as the merchant, which allows them to warn us of impending costs like photos, lunches and the like, then take the money. Secondly, Belgium has a standard credit transfer form - if the money is to go direct to the photographer, they send us the credit transfer notice and we action it via internet banking at home. (see http://www.sepabelgium.be/files/Folder-sepa-2009-EN-Q_0.pdf)

FYI - I've seen a few articles appearing on the MasterCard Cash product in Asia - which is essentially pre-authorised debit or credit with a contactless interface and behaves as if it were a stored value card. Perhaps stored value will live on in this new guise as the tapping makes it much easier for consumers to use. (see slide 9 of this deck - http://www.multos.com/downloads/10-years/hitachia.pdf)

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