Cheque Truncation
Advantages & Disadvantages

With rapid innovation in the payments sector, and a host of new start-ups revolutionising payment channels, many people consider cheques an antiquated payment mechanism.

blog 21 August 2017

However, in many countries, cheque usage is still robust, as highlighted by the following finding:

According to the 2015 World Payments Report, the value of cheque transactions across the globe is only expected to fall below $5 billion by the end of 2025.

The cheque processing system has evolved over time to speed up clearing periods, improve physical security, and reduce risk. One major milestone in the history of cheque processing was the introduction of the Cheque Truncation system.

Truncation Defined

Due to the nature of physical payment instruments, cheque processing is a manual and labour intensive process, requiring complex logistics and manpower to move the vouchers through the system and manually clear them at a country’s clearing house. Fortunately, banking institutions have started employing electronic cheque conversion processes to allow electronic settlement, thus reducing the number of physical cheques that flow through the payment system in a bid to eliminate paper from the system altogether.

Simply put, Cheque Truncation is the process of converting paper cheques into an electronic format that are then used during the transaction cycle. With electronic cheques being used in place of physical vouchers, banks don’t have to physically transport cheques, leading to a host of advantages.

Truncation Advantages

Countries that are using Cheque Truncation experience a variety of advantages, including:

These advantages breathe new life into an ageing payment mechanism, speeding up processing and reducing overheads significantly.

Truncation Disadvantages

While Cheque Truncation provides a variety of benefits, it has its own set of disadvantages:

Implementation Pitfalls

The implementation of a Cheque Truncation solution is an extremely complex process with many obvious as well as hidden risks. Having implemented our first Cheque Truncation system in 2003, Sybrin has more than a decade’s worth of experience in this arena. We have identified a large number of potential pitfalls that automated clearing houses and banks should watch out for:

ISO 20022

ISO 20022 was published in May 2013 and prescribes a standard for electronic data interchange between financial institutions. It is the successor of the ISO 15022 standard.

SWIFT is the Registration Authority of the ISO 20022 standard.

The ISO 20022 standard seeks to streamline communication between financial institutions by designating a common “language” for all financial messages. By optimising local and international (i.e. cross-border) financial messages, the standard greatly reduces costs and improves interoperability.

By adhering to ISO 20022 standards, the speed and ease with which Cheque Truncation can be implemented is greatly improved. The standard also optimises messages for all other payment mechanisms, ensuring financial institutions can easily communicate with one another.

The Southern African Development Community (SADC) has chosen ISO 20022 as the standard for automated clearing houses. This standard will assist with payment system integration and cross-border settlement. A growing number of countries have already adopted the standard with numerous other countries investigating its adoption.

Conclusion

Despite the disadvantages, the benefits of Cheque Truncation are irrefutable. Globally, cheques are still used as a payment method in large quantities. While the future of payment systems indicates a move towards a cashless society, cheques still play a prominent role as a voucher-based payment system.

Sybrin has implemented multiple Cheque Truncation systems across Africa and has earned its reputation as a leader in payment solutions. Sybrin has implemented systems in numerous countries and has attained extensive knowledge of:

To learn how Sybrin can assist with your Cheque Truncation implementation, please contact us.

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