Looking for… a Secure Replacement for Cheques

For some time, there has been broad acceptance that cheques are in terminal decline, and 2018 is set to be the end-date for cheque clearing in the UK. In line with this development, the Payments Council notes that many people and businesses have voiced their concerns that the target date cannot be met without adequate alternatives being in place.

There is now a strong business case for the payments industry to ensure that everyone is aware of, and comfortable using, existing and new alternatives to cheques, as the questions around security and fraud prevention remain. The industry now sees the importance of identifying a viable and secure alternative payment method for the cheque to ensure that the payment fraud problem is kept to a minimum.

Out With the Old, In With the New

According to a recent report by Action Fraud, the national fraud reporting centre, more than 15,000 UK fraud cases were reported during the first half of 2010, suggesting that consumers lose at least £35bn through fraud each year. Payment fraud is a significant contributing factor to these overall fraud figures and corporates, as well as consumers, are being affected.

In fact, according to a survey conducted by Experian Payments at Payment Strategies, its annual customer event, payment fraud in general is impacting over a third of corporates, with cheque fraud causing a particular headache for almost a quarter of organisations. While cheque fraud affected only 1.8% of respondents in 2009, the figures jumped to almost a quarter of organisations within 12 months.1 With cheques set to be phased out in the next eight years, the question is where this kind of fraud will migrate to next, as it is well documented that fraudsters don’t give up but simply move on to the next weakest link.

The UK Faster Payments Scheme (FPS) is generally considered to be one of the accepted replacement methods for cheque payments. A central feature of FPS, however, is the requirement for transactions to be processed in near real-time. Although the actual processing time per transaction (from the point at which the transaction is initiated) is expected to be no more than 15 seconds, banks still set varying time periods between the transaction being completed and the funds being available for withdrawal. Member banks of the FPS have, understandably, focused on the increased risk inherent in a near real-time system. Eliminating fraud is therefore central to the success of Faster Payments as a replacement method for cheques, both to sustain public confidence in the system and achieve rapid transaction times.

Data Validation

Historically it has been assumed that the best way to reduce fraud is through building a delay into the FPS transaction process post-transaction and pre-settlement. However, from the customer’s perspective this gives an impression of poor service levels and implies that the banks are abusing their position by earning interest on customer funds during the process. From the banks’ perspective, sorting out problems after the event is undoubtedly a more expensive way to resolve fraudulent activity rather than preventing it from happening in the first place.

To help optimise the performance and security of Faster Payments, bank customers will be required to check the beneficiary’s sort code before submitting a Faster Payment to determine the accuracy of the submitted details and that the destination account can accept this type of payment. Previously, transactions submitted to Bacstel-IP have also shown that validation early in the transaction process resulted in the greatest reduction in fraud detection. In addition, unlike Bacstel-IP where payments may be recalled, submissions to Faster Payments are non-revocable. As a viable method for cheque replacement, all these factors should be taken into consideration to increase the importance of introducing highly effective validation processes prior to submission.

With fraud still clearly a concern for those using the FPS, it will be more important than ever before that corporates have the right validation tools and techniques in place to effectively combat the fraudsters. It is crucial that corporates are able to verify the validity of the recipient’s account details at the point of entry to match a customer’s name against their account number, thereby reducing exposure to possible payment fraud. Strong payment validation tools that verify a customer’s identification can also be applied where cheques are still used today as a way to verify the bank account and account owner during account opening for a mobile phone contract, for example.

The Payments Council’s 2009 estimates suggested that the closure of the cheque clearing could lead to cost savings for the UK of up to £1bn per year by 2018. As such, the end of cheque clearing should be a motivator for corporates and banks to future-proof their payment systems now. While the target date for closure of the system may seem some way off, corporates and banks should make the relevant changes now to ensure cheque fraud is not carried over to the new payments channel. That way, corporates will be able to reap the benefits that FPS has to offer, such as better data processing and higher straight-through processing (STP) rates, as well as improved customer service, through making customer refunds, loan transfers or benefit payments more speedily.

Although the target end-date is eight years away, there are still key milestones for the industry to hit before then to ensure that practicable, and more importantly, a secure alternative exists to cheques.

1Research was conducted at Experian Payments’ annual Payment Strategies event in June 2010. Seventy-one UK-based organisations responded to the survey.

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