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Technology Advances Continue to Bolster Old Stalwart, the Check Payment

Thursday, August 22, 2019 (RemoteDepositCapture.com / Patti Murphy)

Much conversation around payments these days is directed at new, faster electronic payments, yet the check, continues to benefit from technologies devised to replace it. Even the potential for fraud can be slashed, thanks to emerging technologies.
Old payment methods never die, they just keep getting more efficient, thanks in large part to technological innovations.
 
Consider checks. Historically paper instruments requiring significant manual processes, check payments could take days, if not weeks, to clear, post to recipient accounts and get debited from check writer accounts. Check image exchange technologies changed much of that, beginning in the 1990s, by eliminating physical hand-offs needed to support clearing and settlement. Ironically, the underlying network technologies that supported electronic alternatives to check payments (think card transactions) were leveraged to support image check exchanges.
 
With the turn of the century came Remote Deposit Capture, and soon after mobile RDC. RDC further electronified the check payment system by eliminating the need for recipients to transport paper checks to financial institutions for deposit. The combination of RDC and image exchange served to compress the time needed to clear and post check payments from a multiple days to a next-day or same-day process.
 
Electronically-created items (sometimes referred to as electronic checks) further compress the clearing and settlement cycles by eliminating paper completely from check transactions. In effect, checks become fully electronic transactions.
 
Taking on Check Fraud
Faster check clearing, paired with access to real-time information and decision-making capabilities, has served to substantially reduce check fraud losses. A report published last fall by the Federal Reserve, for example, revealed an overall rise in the number and value of frauds involving nearly all noncash payment methods between 2012 and 2015. The lone exception was check fraud, which fell in terms of sheer number of fraud incidents and the total value of those frauds, the Fed reported.
 
In 2015, the total value of fraudulent checks represented 8.6% of the value of all noncash payment frauds, down from 18.2% in 2012. In terms of sheer numbers of frauds, checks were just 0.9% of all fraudulent payments in 2015, down from 2.8% in 2012.
 
This does not suggest that check fraud is on a path to extinction. In fact, fake (counterfeit) checks scams continue to plague FIs and their customers “Fake check fraud is an exploding epidemic,” said Elaine Dodd, Executive Vice President at the Oklahoma Bankers Association.
 
A 2018 report by the Better Business Bureau said “tens of thousands of people” are victims of counterfeit check frauds each year, but the most frequent victims are young adults. Better than one in 5 counterfeit check fraud scams reported to the Federal Trade Commission between 2015 and 2017 came from individuals between the ages of 21 and 29, while fewer than 10% of the victims were 70 or older. Fraudulent checks (including cashier’s checks and money orders) often purport to be from businesses or sweepstakes or buyers from online marketplaces, according to the BBB.
 
It’s not just a consumer problem, either. Small business are getting hit hard, too, the BBB said.
 
Adding ‘Chips’ to Checks to Curb Fraud?
So what can FIs and their customers do to combat check fraud? One fraud fighting technology attracting notice is tokenization.
 
Tokenization has been used to secure electronic payment exchanges for years. Most recently tokenization has emerged as a go-to method for securing credit card payments. With tokenization, the credit card number is replaced with a series of randomly-generated numbers (tokens) which has no value or connection to the cardholder or their account, and only valid credit card processors hold the cryptographic keys needed to re-associate tokens and account information.
 
The same tokenization process can be applied to check MICR lines, said Shoaib Shafquat, Founder and CEO of QCheque Corporation. QCheque, based in Sterling Heights, Michigan, has tested the concept and is in talks with several FIs interested in tokenized checks. “We did a proof of concept with one bank and we determined that tokenized check clearing works just fine,” Shafquat said. He likens the tokenization process to “putting a chip on a check.”
 
“The account number [in the check MICR line] is replaced with a numeric value that can be decoded only by the account-holding bank,” Shafquat explained. “Each check is only good for 1 time.”
 
Tokenized checks would appeal to both businesses and consumers, Shafquat said. “Our value proposition for consumers is that this is like positive pay, a premium service that’s only been available in the past to businesses,” he said.  
 
Checks + Tokens + Blockchain
Shafquat is not alone in seeing promise in the application of tokenization to check payments. A 2018 article published in the online publication Programmable Economics suggested pairing tokenization and blockchain technologies would deliver “an immediately useful and down-to-earth solution which takes minimum efforts to implement” and helps to secure the banking industry’s payments franchise.  
 
“A token traveling over blockchain resembles a cheque naturally better than a direct unit of fiat currency,” wrote tech guru Alex Osh.
 
The technology can even be used to support digital check writing, with FIs offering customers less expensive smartphone apps for creating checks, in lieu of paper check stock. And tokenization can pass muster under Federal Reserve Regulation CC, as scanned images simply get replaced by tokens plus metadata. If something goes awry, the truncated check can be created at any time, Osh noted.
 
In a tokenized check scenario blockchain is not a store of money, or a legally defined asset, as the technology is used merely to move documents. “A cheque is great to ‘put on a blockchain’ since it merely represents someone’s solid intention to pay, not more than that,” Osh explained. “That intention is supported by a bank’s confirmation that the person should be able to pay as he intends. Blockchains are great for transporting such ‘confirmed intentions’ at ease, with almost no fees,” Osh wrote.
 
Osh opined that pairing checks with tokens and blockchain technology would drive greater benefits at lower cost than replacing the check payment system outright with a newer electronic payment system. “We believe the illusion of an instant payment settlement is greatly overvalued,” he wrote. “From a user perspective, a modern cheque payment app is as ‘instant’ as any e-money; should a problematic transaction occur, all fiat payments are reversible to the same extent, be it cheques or not.”

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