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The Arrival of Electronic Cheque Imaging in Canada

In Canada, under the current payment clearing system, approximately 5,000,000 paper cheques are transported and exchanged between financial institutions every day. In the near future, this process will be replaced by a technology currently being embraced by nations around the globe: cheque imaging. Paper cheques will become less of a component in payment processing, which could ultimately change the landscape of personal and business payments in Canada forever.

Of course, with any new technology as ambitious as this one, many issues arise. What does it mean for the customer? How secure is it? What other legal factors exist? This article will attempt to serve as a primer to the Canadian customer and financial institutions to guide them through some of these considerations.

What Is It?
The Canadian Payment Association (CPA), the federal body which operates Canada's national clearing and settlement systems, is introducing the capture and clearance of cheques electronically. The CPA has been developing image based cheque clearing systems since 2003 and the official implementation of this initiative, formally titled "Truncation and Electronic Cheque Presentment", is slated to begin by the end of 2008. In fact, by 2009 the plan is to not clear paper cheques at all. Instead, only electronic images will be transmitted from one financial institution to another.

The cheque writing process will remain largely unchanged from the current practice. We will continue to write cheques, and deposit them at branches or ATMs. However, the clearing process will be novel. Once the cheques are transferred to the data centre, the amount of the cheque and its electronic code line data, as well as images of its front and back, will be electronically captured. Instead of shipping the physical cheque, the data centre will transmit the captured data and the image file to the institution which holds the account. This will save processing time, transporting time and transportation costs and the original paper cheque should no longer serve any purpose. The financial institution in possession of the cheque will see to its destruction at the appropriate time.

What Does It Mean?
The only noticeable change for the cheque writer will be the format of the paper cheque itself. In order to comply with certain technical requirements to ensure an accurate digital reading, CPA has issued new standards and guidelines for paper cheques. Although most banks have been providing cheques which are compliant with CPA Standard 006 since 2005, in order to cause a smooth transition, CPA has allowed a grace period for the old format of cheques until September 2, 2008. This will allow businesses to use their existing supplies of cheques and make any required modifications to software before the "old format" of cheque becomes unacceptable by financial institutions.

The main changes to cheque specifications which Canadian users may notice include:

the addition of a numeric date field in a specified format (e.g. YYYYMMDD);
a mandatory serial number in the MICR (magnetic ink character recognition, or the bottom line on all cheques) line encoded at the bottom of the cheque;
minimum lengths of cheques to ensure sufficient space for the mandatory serial number;
specified positions for key fields on the cheque, including the date field and the amount in figures; and
the disallowance of elements that may clutter the capture of images or data from the cheque (e.g. background colours, inverse printing, italics or slanted fonts)

The rise of ATMs, debit cards, online banking and automatic withdrawals has certainly made handwritten cheques seem archaic over the past several years. In 2005, the number of cheques cleared by Canadian financial institutions was down 18% from its 2000 level. It is expected that cheque imaging technology may lead to a renaissance of cheque usage, notably in the form of Remote Deposit Capture (RDC). RDC, already in place in many U.S. businesses, permits the customer to scan a cheque at a machine and process it without ever loading paper onto a truck. Although Canadian companies are providing RDC technology and services to American businesses, the CPA has not expressed an intention to introduce a similar system to banks in Canada. Of course, this type of technology leaves the user vulnerable to a wider variety of fraud stemming from electronic transmission than is the case with cheque imaging, but financial institutions must still take care to prevent fraud at the processing stage in Canada.

Fraud & Security
Cheque imaging will enable financial institutions to offer new products and services to combat threats, such as signature forgery and cheque alteration (the altering of one or more fields to show a value, payee name, and/or a date that was not originally authorized by the cheque writer). Fraud prevention is a matter for the financial institutions themselves to coordinate internally, rather than the CPA, but there are several technologies which exist to provide security against these threats, for example:

image-enabled positive pay - this service forwards an electronic file containing a business's cheque production information to the financial institution. When a cheque is presented for debit, it is validated against this file, and if it does not match, the cheque is reviewed by the business client. With imaging, financial institutions will be able to push images of items directly to payors for validation.
embedded verification - this service can recognize critical information printed on cheques in a bar code or an encrypted seal. Financial institutions would be able to match encrypted codes with the cheque image, and intercept altered cheques quickly.
signature verification software - digitized images will allow for the use of software applications that compare signature profiles systematically against signatures on cheques. This is in contrast to the present situation where, due to large processing volumes, only a small percentage of the signatures on cheques are actually reviewed
faster clearing cycle - a financial institution which accepts a cheque drawn on another institution often has no way of knowing whether the cheque may subsequently be dishonoured. With cheque imaging, this time frame will be considerably shortened, and financial institutions may place a hold on the funds more quickly should cause for concern arise
reduced risk - common occurrences such as courier delays due to weather conditions will have less of an effect on clearing performance with the security of electronic transmission

Other Legal Considerations
As of April 2007, the federal Canadian Parliament passed amendments to the Bills of Exchange Act to allow for the use of images in the cheque clearing system. The purpose of the new CPA specifications with respect to cheque formatting is to allow images of cheques to be captured so that paper cheques can be disposed of early on in the clearing process. After the imaging is completed, banks would destroy the original cheque and return only its image to the account holder who signed it. Therefore, only an image of the original item will remain as proof of payment. In the event that a dispute with respect to payment arises, a bank customer will need to use the image printout and, just as importantly, need to know that it constitutes an official image, under the Bills of Exchange Act. In these cases, the financial institution would verify that the image printout was created in accordance with the CPA's standards. This would provide certification that the image was the legal equivalent of the original paper item.

As business practices and legislation adapt themselves to this new technology, it is worth noting that other legislation already recognizes electronic records as replacements for original paper documents. The Canada Evidence Act, for example, provides for the admissibility of electronic documents in court as long as the integrity of the systems used to record and store the documents can be established.

Will the new clearing system be perfect or will there be the inevitable bumps along the road to implementation? We will see how the universe unfolds.

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