Towards Fully De-Materialized Check Management

Introduction

In the last few years, banks have done a big effort to improve services they supply to customers, reducing costs at the same time. As a part of this effort, a trend is emerging towards progressive de-materialization of banking processes and artifacts. For instance, the term certificates dematerialization refers to investors converting into digital form the physical certificates of shares they have given in custody to a financial institution acting as a depository. In Europe, investors can dematerialize any certificate provided that (i) is registered in their name and (ii) belongs to the list of securities admitted for dematerialization by regulatory authorities like the European Central Bank. De-materialization of banking processes has started to affect loan and investment procedures that traditionally involved face-to-face meetings with customers at bank branches, and can now be carried out online via sophisticated Web portals. In turn, dematerialization has led to downsizing, allowing banks to reduce personnel and other operational costs.

More recently, banks started de-materializing physical artifacts, like receipts, that can now be sent as email and not directly delivered to users, and checks. Processes involving checks are potentially very profitable for banks, as check clearing is carried out within the banking system, without the need of sharing profits with intermediaries. However, two big issues of checks management have hindered their diffusion in the last years:

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  From the bank side, checks involve high management costs with respect to other payment methods (UK Payments Administration, 2008);

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  From the customer side, checks are considered vulnerable to frauds.

Nevertheless, Vines et al. (2012) have shown how checks are perceived by many customers as an attractive payment method. Continued customer interest in checks as a handy payment instrument motivates the development of de-materialization technologies targeted to reducing check management costs and prevent known frauds.

In this chapter, the authors propose a novel framework based on secure traditional encryption algorithms, digital signatures, and online verification systems, to be applied to checks in substitution of obsolete solutions like magnetic ink, ultra-violet verifiers, and watermarks.

Background

Traditional Checks

The notion of check as a payment method dates back to the 18^th century, when the Bank of England produced the first batch of pre-printed and numbered checks. Printed serial numbers were introduced later as a way to prevent frauds. In the Sixties, the use of Magnetic Ink Character Recognition techniques (MICR) for printing and reading serial numbers allowed banks to start using mechanical verifiers, reducing check management costs. Then, in the Nineties, use of checks plummeted due to the increase of credit cards payments and the diffusion of frauds. Recent changes in tax regulations, which authorize cash payments only up to a fixed threshold, boosted again the interest in checks of bank and users alike.

Several stakeholders have started investigating new technologies for de-materializing checks into digital images, allowing an easier transmission of them trough digital channels. De-materialization changes the traditional check lifecycle, removing physical barriers to the collection process.

In the traditional check handling process (see Figure 1), a check is issued by the Drawee Bank and it is characterized by a unique identification number: the check serial number and the Drawee Bank code. All these data are saved in the check magnetic code line. The Drawee Bank produces and issues the check, which is assigned to a specific customer (Drawer). The Drawer fills the check to pay the Payee, writing the amount, the Payee, the payment date. The Payee in turn asks the collection of the amount to his/her bank (Receiving Bank). Finally, the latter agrees with the Drawee Bank the transfer of money from the Drawer to the Payee account.

Figure 1.

Check life cycle

All steps involving the Drawee and Receiving Bank have been fully digitized, paving the way to digital secure checks described in this chapter. In many European countries laws, like Repubblica Italiana (2011), give to digital checks the same value as the traditional ones, giving to Payees the possibility to electronically submit digital checks to collection. A secure check framework should exploit advanced cryptographic techniques to avoid the tampering of checks assigning a unique distinctive code to be associated to them, and an online framework that can be used to Payee and Drawer to verify check integrity.