Articles

Writing the future of the cheque in Ireland

The Irish banks, through their industry body IPSO, needed to assess the relative costs and benefits of truncating cheques, via a single shared industrywide processing utility. Currently, there is no truncation or centralised hub for paper clearing in Ireland.

Chaucer Consulting were invited to manage the study, which took place between April and August, 2006, working with IPSO and the 8 full members of the Irish paper clearing.

Context

  • Cheque volumes are remaining largely static in Ireland. This is mostly due to the business sector, which continues to grow year-onyear, off-setting the decline in personal cheque usage
  • The banks have not yet found convenient alternatives to the cheque for business users
  • Ireland is one of the few remaining industrialised countries where cheque use is widespread
  • In Ireland, the clearing banks operate bi-lateral arrangements for exchanging cheques with each other. Only the major banks exchange data files alongside the paper
  • In September 2005, after much industry consultation, the Competition Authority recommended that the industry conduct a cost-benefit analysis for the various options for truncation, on the basis that truncation, and the establishment of a shared utility, could significantly improve efficiency, ease of entry for new members, and hence improve competition.

A new clearing model

Chaucer Consulting agreed with the members that it was essential to study costs and benefits of truncation against a new operating model for the clearing. The following key elements were agreed:

  • A single, shared clearing utility to be used by all full clearing members
  • The utility to receive all paper collected from members, capture and validate to paying bank requirements, during the out clearing process. No in-clearing process would be implemented
  • Paper to be image captured and a shared image archive established
  • Paper to be truncated at the centre
  • Payment functions could continue to be done by the paying banks, but only against an image of the cheque, as the physical cheques would remain at the utility.

The industry study

Key to the study was agreeing a new clearing operating model, for the purposes of the study. The banks put significant effort into developing and agreeing this model.

The 8 individual banks then gathered cost and volume data from their own organisations, to a template provided by Chaucer Consulting.

Chaucer Consulting also engaged leading suppliers through an RFI to provide advice and outline cost information for the new operating model.

Chaucer Consulting pooled the cost and volume data to provide the industry-wide picture, without revealing any information for individual banks.

The results

...are confidential, of course. However, IPSO have allowed us to report the following conclusions from the study:

  • The unit cost of cheque processing is significantly greater than electronic alternatives. And if the industry continues with the current clearing model, unit costs will increase substantially to 2015
  • Moving to the new operating model would restrain this increase in unit costs, and restructure the clearing to better meet a future decline in cheque volumes
  • With a third party operating the truncation utility, the move could be achieved without the banks needing to make a major new investment in infrastructure
  • Moving to truncation through a shared utility would meet the regulatory drivers to improve the efficiency of the clearing, ease of entry and, hence competition
  • Such a processing utility could improve Ireland’s competitive position for payments processing within the eurozone.

Truncation or elimination

Of course, greater savings could be achieved by eliminating the cheque clearing infrastructure altogether. However, this would need significant focus and investment to develop effective alternatives for customers. And achieving the necessary change in consumer habits may be more difficult still.

What next?

With the benefit of a good fact-base on the costs and benefits of the various options, IPSO and the clearing banks are now debating the way forward, in consultation with government and the regulator. Julian Thompson.