Features, FINANCE

E-check: Old instrument’s new life

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Mikhail Solovyov – Deputy CEO for Development, Platbox online payment system

The present-day international payment market offers a huge variety of services by numerous providers ranging from banking and financial institutions to unregulated entities operating in the sphere. The said services are most diverse, interesting and demanded in their segment. Nevertheless, along with lots of advantages, they do have multiple drawbacks as well. Every service has disadvantages, be that a high cash transfer fee, a lengthy transaction process, mistrust towards non-banking services, or necessity to input and withdraw funds, etc.

The challenge of a comparable importance is currently the fact that all modern electronic services operate as closed systems thus only allowing to perform settlements within a specific and separate payment system, i.e. among the customers of one single provider. The rare exceptions are SWIFT system and plastic cards services (VISA, MC and so on). Most of the SWIFT-based banking transfers can hardly be viewed as modern innovative services meeting the advanced market demands, since the credit institution policies have not been adjusted for decades and are growing obsolete. As for the banking cards systems, even though they allow effecting cross-bank payments from one system to another (VISA to MC, for example), they still have plenty of shortcomings such as high commissions of the acquiring banks, extended terms of transactions between accounts of different banks (up to three days), let alone the fact that far from all banks are able to provide services of international plastic cards settlements.

The settlement services sector is now certainly imperfect. As a matter of fact, that is the cause for an incessant emergence of new systems and services in the market, intended to bridge the gaps or patch the weak points. Among such latest innovations are cryptocurrencies, and Bitcoin in the first instance, which gradually gain popularity. The ideas behind Bitcoin are decentralization, independence from the state, free issue and so on, and they aim to surmount the current banking infrastructure and, more broadly, regulatory policies imperfections. Still, for now, these ideas seem too revolutionary and in fact unable to be implemented within the existing financial ecosystem. For cryptocurrencies to secure a solid place in the sphere of settlements, the very philosophy of the global financial policies should change, but that will take time. As for pressing issues in settlements, the present market needs a compromise solution distinct of all the already existing ones but capable to adapt to the established economic landscape.

Electronic check is an instrument which has been recently employed by various payment services. Even though it has not become widespread yet, interest toward the instrument is steadily growing. The interest is evidenced, among other facts, by a recent launch by HSBC bank of an e-checks settlement system. The project was initially launched in Hong Kong and now the e-checks service is available in some other Chinese banks as well. Another much needed solution is a service offered by a large US system, Deluxe, allowing to cash in an e-check in any US bank.

To comprehend the e-checks specifics, it should be appreciated why their predecessors, paper checks, are still popular in many countries until present, and why even now, in the times of electronic technologies when one single touch or click is required for a settlement, some people keep writing out checks and do not wish to abandon them.

A paper check is in use for over a century. Despite its archaic nature, it is a very convenient settlement instrument. To be paid with a paper check, a payee does not need to supply to a payer a banking account details or a banking card number, since those may just be unavailable at the moment. A payer, in turn, does not need to fill in all the banking information of a payee, therefore there is no risk of making a mistake. On the other hand, a payer may not have sufficient cash readily available. Besides, it is not convenient to always have plenty of cash on oneself. Hence when cash is not available, a check is a convenient means of making a payment to any individual irrespective of the fact whether such an individual has a banking card or a banking account at all.

In many countries where checks circulation is popular, many small companies do not accept banking cards for payment since such a service is quite costly due to high charges of the acquiring banks. In such a situation the remaining options for paying right away are payments in cash or by a check.

The statistics evidence that in 2003 payments by checks constituted 46% of all payments by individuals in the US. In 2012 the figure went down to 12%. Even though the scope of check settlements have been significantly decreasing recently, the share of this kind of payments is still rather sizeable. An essential role is played by habits. But convenience and mobility of using checks are of a certain significance too. Checks sent by mail are still in use even in international settlements. For a check settlement, only a pen and a check form are required. In a case of a check form loss, the risks of damages are nil (unlike in a case of loosing cash), whereas a payment may be done whenever and to whoever, while the charges are lower as compared to charges when making a banking transfer or paying with a plastic card.

With all its advantages, a check has a serious drawback too. It is a lengthy procedure of collection of payment when a check is produced by a payee for encashment at a bank. Still, the problem of a physical relocation of a document is easily solvable in the current telecommunications infrastructure realities when a paper document is converted in an electronic format. An e-format allows to easily resolve a long-standing serious problem of the checks circulation at every stage – from issue to storing. Besides, it will allow to see this settlement instrument is a different light.

In its electronic format, a check will still have the advantages of a paper check, but will gain additional advantages as well. If electronic checks are issued instantaneously and the funds are credited to accounts (similarly to banking cards payments) immediately, checks circulation will expand and will in turn permit using this settlement instrument along with e-money. In comparison to cash, an e-check will have a serious advantage. Electronic funds are issued within a closed system of a specific payment provider and can not exist outside a respective environment. Digital cash is often intended to solve a settlement issue within a separate infrastructure. Due to a unified international regulation, an e-check, unlike e-money, is capable to freely circulate, i.e. when issued by some payment service provider, it may be accepted for payment by any other providers worldwide. Thus, a check is an all-purpose payment instrument while the platform ensuring e-checks circulation, is a potential foundation for a global settlement system. Emergence of a global system in contrast to a great number of closed private electronic systems is nevertheless a great step towards shaping a common payment space uniting different currencies and different payment providers on an international scale. It is most important the legislation on checks circulation has been in existence for a long time and has been adjusted in line with broad practices, therefore an e-checks system will not require any special new regulation. An electronic check is not merely an electronic transaction and not a sort of electronic money, but an independent instrument or a security with its own regulation.

Another advantage of an e-check and its distinction from e-money is the fact it is a banking settlement instrument, i.e. an instrument of managing monetary resources in a bank account. That means, to make settlements electronically, there is no need to deposit funds in a special system ensuring e-checks circulation whereas e-money systems always require the funds to be withdrawn from a bank account and transferred to an external issuer which takes quite some time.

This is not the only weak point of digital cash. E-money systems are usually created on the basis of institutions which are not financial establishments and hence are subject to less rigorous regulation by central banks, as compared to regular merchant banks. A great number of such systems appear yearly. They offer interesting financial terms and conditions of settlements but nevertheless do not enjoy credibility of the customers. The said factor is one of the causes of the digital cash systems lacking popularity in B2B segment. Clients are accustomed to trusting banks with a long history of operating in the market and a robust regulation system. This makes an e-check a valuable payment instrument. Even though a check circulation is arranged by an alien platform, all transactions with an e-check from its issue to the payment remain within responsibility of financial institutions. This is a big advantage for both the clients and the regulator which is an important factor for the prospects of check settlements.

More so, checks are competitors to both traditional and innovative settlements such as cryptocurrencies.

The main advantages of Bitcoin are:

  • decentralization ensuring unification of transactions and security of settlements in general;
  • issue and settlements without any involvement of the central administrator, i.e. performing such transactions with no mediation of a third party and irrespective of its will.

These two characteristics are prerequisites for establishing a global transnational settlement system with a common currency and high degrees of convenience, swiftness and security.

Still, apart from the remarkable idea of withdrawing the entire settlement system administration from the government control, in every other respect an e-check has all the advantages of Bitcoin.

When issuing a check, no special authorization from the central administrator (in this case, a bank) is required. To issue a paper check, a signature on a filled in check form is required, to issue an e-check, a technological platform is to perform several automatic steps. To make a settlement transaction with an e-check, no authorization from a bank is required either since a check is transferred within the system directly between the transaction participants. That is due to the very nature of a check, namely its characteristics of a security which allow its free circulation outside a banking administration system. There exist therefore two levels of checks circulation. Level one is that of the bank which ensures safekeeping of the funds to secure the issued check, performance of a financial transaction of submission of a check and money transfer between the accounts of the check settlement parties, and the financial monitoring of the transaction performance. Level two is that of a free check circulation where a check is drafted and then transferred among the settlement parties.

Level two is what makes a check similar to Bitcoin from the viewpoint of a possibility of a settlement instrument free transfer. That allows to use an e-check as a foundation for various settlement services which would be problematic to establish on the basis of regular wire transfers or e-money. If smart contracts are employed for settlements at level two of a free check circulation, that would permit to manage check transactions on the terms and conditions set by settlement participants and loaded into smart contracts thus allowing to create convenient and much needed services, for example, for securing performance liabilities at tenders, or the mechanisms similar to such a cost-consuming procedure as a letter of credit issue. Implementing such a technology on the basis of e-money is most sophisticated due to the indissociability between an e-money transaction and respective entries in the core banking system of a bank or in the accounting system of some other payment institution. Once the technology platform is based on blockchain, that will allow to introduce a fully decentralized check circulation which excludes any alien influence on performance of smart contracts involving e-checks. At the moment, implementation of a core banking system based on blockchain technology is not possible for both the banks’ technical inability to introduce it, and the current financial policies.

The advantages of an e-check are much broader than the points above. It is quite evident the instrument is most flexible and multipurpose and may become the basis for creating innovative financial products comparable to cryptocurrency solutions. The two-level checks circulation system combining financial control and free check transactions, is to the advantage of e-checks in comparison to Bitcoin which at the moment is not subjected to any regulation thus causing – at least, temporarily – certain hardships for its embracement by the state.

Bitcoin is a separate currency. Customers keep it, use it for settlements, but as long as Bitcoin has not superseded fiat money (which is hardly foreseeable), at some point digital assets have to become fiat. In these conditions, there is always a risk of an exchange rate drop resulting in unfavorable exchange transactions associated with money withdrawal. In transactions involving electronic checks, such risks are nonexistent a priori, since a check is not a currency but a settlement instrument. A fiat currency that ensures it is always available. It is especially convenient that it may be any currency the parties agree upon. E-checks settlements in every respect abolish the problem of crediting/withdrawing funds.

To sum up the above, a check is indeed a valuable and effective settlement instrument. For a lengthy period of time checks have been in demand in many countries and may remain a popular payment instrument for quite some while. Using checks in an e-format will help to in fact create a new instrument with broad capabilities for establishing a global electronic settlements system both in consumer and business sectors.

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