Digital cheque payments possible under proposed new UK laws

Under the Small Business, Enterprise and Employment Bill that has been proposed, businesses and consumers will be able to pay a cheque into their bank accounts by presenting "an electronic image of both faces" of the cheque to the bank instead of the paper version. Banks must accept the "presentment" of the electronic image of the cheque "as effective" before the sum of money denoted on the cheque image can be deposited.

"At a time when consumers, industry participants and regulators are calling for greater innovation within the payments space, proposals to re-invigorate an antique payment methodology such as cheques should be welcomed particularly by SMEs and the older demographic," banking specialist Tony Anderson of Pinsent Masons, the law firm behind Out-Law.com, said. "It will be important to ensure that the technology required to enable widespread cheque imaging to occur is cheap and accessible for users."

"Subject to initial set up costs, it also provides opportunities for building societies, credit unions and challenger banks to participate more significantly in the payment system. The perceived costs benefit to the economy including via supply chain efficiencies, should also assist its adoption in the UK. It will important that the banking community get behind this initiative to ensure that critical uptake is achieved at a time when trust in banking and payment systems needs to be re-engendered," Anderson said.

The new Bill, if approved, would also provide businesses and consumers to pay "any other bill of exchange or any promissory note or other instrument" aside from a cheque into their accounts in cases where the payment " requires the instrument to be presented" but where presentation of the "physical instrument" is not possible unless through electronic image.

The Bill includes a power for the Treasury to write new regulations to make banks responsible for compensating businesses or consumers for losses, potentially in cases of fraud, stemming from accepting and cashing cheque images. However, the regulations would not confer liability on "the responsible banker" for such losses and those banks would be able to recover the compensation they pay out from others.

"The government intends to set out a high-level framework placing liability on the payee’s bank for losses arising out of designated types of fraud and error," the Treasury said in response to a consultation it held on speeding up cheque payments (26-page /382KB PDF). "The government notes that the allocation of responsibility will, to some extent, be contingent upon the final design of the new infrastructure - for example, the technical capability for cross-industry data sharing."

"It is also crucial that the new liability framework is sufficiently flexible to adapt over time. Therefore, the new legislation will give the Treasury a power to make regulations to designate the specific matters for which a payee’s bank is liable. The content of these regulations will be published in due course, when a clearer view on the final infrastructure design emerges," it said.

The government said the draft 'cheque imaging' rules would help cut cheque clearance times from six days to two, offer improved convenience for consumers by allowing them to pay in cheques using smartphones and other mobile devices, and help banks streamline and reduce the costs involved in operating a cheque clearing system. It also said the provisions would help increase competition.

"[The measure will] reduce barriers to entry and encourage greater competition in retail banking by helping smaller banks to compete with incumbents where they lack an established physical branch network: paying in cheques remotely via smartphone will help challengers expand their customer base beyond the traditional brick and mortar footprint," the government said in a factsheet (8-page / 68KB PDF) that accompanies the new proposals.

"Key to the government’s long term economic plan is building stronger and safer banks that customers can trust," economic secretary to the Treasury, Andrea Leadsom, said in a statement. "We also want Britain’s consumers and businesses to have far greater choice in banking services and that’s why the legislation being published today is so important."

"The innovations included in this Bill, including cheque imaging, show the government is determined to keep up the pace of our reforms to create a banking sector that delivers for Britain’s hardworking people and businesses," she said.