- Cheque truncation
Cheque truncation (check truncation in the United States) is the conversion of physical cheque into electronic form for transmission to the paying bank. Cheque truncation eliminates cumbersome physical presentation of the cheque and saves time and processing costs.
To settle a cheque it has to be presented to the drawee bank for payment. Originally this was done by taking the cheque in person to the drawee bank, however as cheque usage increased this became cumbersome and banks arranged between each other to meet each day at a central location to exchange cheques and settle the money. This became known as central clearing. Bank customers who received cheques could now deposit cheques at their own bank and their bank would arrange for the cheque to be returned to the drawee bank and any funds credited and debited from the appropriate accounts. If a cheque was dishonoured or bounced it would be physically returned to the original bank marked as such.
This process would take several days as physical cheques had to be transported to the central clearing location, from where they had to be transported to the payee bank. If the cheque bounced it would be transported back to the bank where the cheque was deposited. This is known as the clearing cycle.
Cheques had to be examined by hand at each stage and required a large amount of man power and handling.
In 1960 machine readable codes were added to the bottom of cheques in MICR format which allowed the clearing and sorting process to be automated. This helped to speedup the clearing process, however the law in most countries still required the physical cheques to be delivered back to the payee bank and so physical movement of the paper continued.
Starting in the mid 1990s some countries started to change their laws in relation to cheques to allow for truncation. Cheques would be imaged and digital representation of the cheque would be transmitted to the drawee bank at which point the original cheques could be destroyed. The MICR codes and cheque details are normally encoded as text in addition to the image. The bank where the cheque was deposited would typically do the truncation and this dramatically decreased the time it took to clear a cheque. In some cases large retailers that received large volumes of cheques were also able to carry out this truncation process.
Once the cheque has been turned into a digital document it can be processed through the banking system just like any other electronic payment.
Although technology needed to exist to be able to truncate a cheque, it was the laws related to cheques that were the main impediment to their introduction. New Zealand was one of the first countries to introduce truncation and imaging of cheques, when in 1995 they amended the cheque act 1960 to provide for the electronic presentment of cheques. A number of other countries followed over the next few years, but progress was mixed due to the decline in the use of cheques in favour of electronic payment systems. Some countries decided that the effort to implement truncation could not be justified for a declining payment method and instead phased out the use of cheques altogether.
In 2004, the Check 21 Act was implemented in the United States to authorize conversion of the original paper check into an electronic image for presentment through the clearing process. The law also enacted the recognition and acceptance of a "substitute check" created by a financial institution in lieu of the original paper check. Any bank that receives the original paper check can remove or "truncate" the paper check from the clearing process.
New laws needed to address ways to make sure that the digital image was a true and accurate copy of the original cheque as well as mechanism to make sure that the process could be audited to protect consumers.
It also needed to address the mechanism for dishonoured cheques as cheques could no longer be returned. A typical solution, as defined by Monetary Authority of Singapore for the Singapore cheque truncation system, was that a special 'Image Return Document' was created and sent back to bank that had truncated the cheque.
Operations and clearing
The security related to imaging and creating the electronic cheque needed to be defined and the clearing process adjusted to accommodate electronic cheques.
- ^ "CHEQUE TRUNCATION ABRIDGED REPORT - 2008". Irish Payment Services Organisation. 2008. http://www.ipso.ie/x/File/PublicationsAndReports/IPSOReport/cheque_truncation_abridged_report2008.pdf. Retrieved 1 August 2010.
- ^ "Bills of Exchange (Cheque Truncation) Regulations 2002". Monetary Authority of Singapore. September 17, 2002. http://www.mas.gov.sg/news_room/press_releases/2002/MAS_ISSUES_BILLS_OF_EXCHANGE__CHEQUE_TRUNCATION__REGULATIONS_2002.html. Retrieved August 1, 2010.
Wikimedia Foundation. 2010.
Look at other dictionaries:
Cheque truncation system — (CTS) or Image based Clearing System (ICS), in India, is a project undertaken by the Reserve Bank of India – RBI, for faster clearing of cheques. CTS is basically an online image based cheque clearing system where cheque images and Magnetic… … Wikipedia
Cheque — A Canadian cheque … Wikipedia
Negotiable Instruments Act, 1881 — The Negotiable Instruments Act, 1881 An Act to define and Law relating to Promissory Notes, Bills of Exchange and cheques. Citation Act No. 26 of 1881 … Wikipedia
National Payments Corporation of India — Type Public Company Industry Finance Founded 2008 Headquarters Mumbai … Wikipedia
Mangalore — For other uses, see Mangalore (disambiguation). Mangalore ಕುಡ್ಲ Kudla, Kodiyal city … Wikipedia
Remote deposit — refers to the ability to deposit a check into a bank account from a remote location, such as an office or home, without having to physically deliver the check to the bank. This is typically accomplished by scanning a digital image of a check into … Wikipedia
Check 21 Act — The Check Clearing for the 21st Century Act (or Check 21 Act) is a United States federal law, Pub.L. 108 100, that was enacted on October 28, 2003 by the 108th Congress. The Check 21 Act took effect one year later on October 28, 2004. The law… … Wikipedia
Rhyming slang — is a form of phrase construction in the English language and is especially prevalent in dialectal British English from the East End of London; hence the alternative name, Cockney rhyming slang. The construction involves replacing a common word… … Wikipedia
Credit card fraud — Personal finance Credit and debt Pawnbroker Student loan Employment contract Salary Wage Empl … Wikipedia