Cheques are commonplace in Hong Kong people’s everyday lives and I am no exception. I opened my first checking account some 40 years ago. Back then, a stamp duty of HK$0.5 was chargeable on each cheque issued. Therefore, writing a cheque was a nerve-racking task. If your cheque bounced because you got the payment amount or the payee name wrong, your HK$0.5 stamp duty went down the drain. Today, I still use cheques to make various payments from time to time. Nonetheless, as the Chief Executive of the HKMA, I come across all sorts of financial innovation including electronic payment services, thanks to technological advancement. I often wonder, will we still be using paper cheques in ten years or will they become relic you only see in museums?
History and evolvement of cheques
To be sure, cheques existed long before I started using them. The general understanding is that the first cheque was invented in the UK in 1659 when a payer wrote his payment instruction on a slip of paper. The payee then took it to the collecting bank, and the settlement arrangement was coordinated between the collecting and the paying banks.
Cheques of the day have undergone a sea change in standardisation, automation and imaging since their ancestors appeared 350 years ago. First of all, cheque books are printed by the paying bank according to industry standards and security requirements, and then distributed to the clients. Each cheque carries basic security features which include, for instance, the use of watermarks and specialised paper. The payer’s bank account number and the cheque number are pre-printed on the cheques using special magnetic ink and character recognition technology to allow automated processing by banks. Besides, central clearing of cheques by the clearing house had replaced bilateral arrangements among banks.
Limitations of paper cheques
Despite the popularity of electronic payments, paper cheques remain a widely used payment instrument in many places. According to the statistics of the Bank for International Settlements, the numbers of cheques processed in the US and the UK in 2014 were 14 billion and 650 million respectively. In Hong Kong, we issue a considerable 150 million cheques each year, and 50 million of these are ‘on-us’ cheques, i.e. cheques settled within the same bank outside of the clearing house.
Cheques are a much less convenient payment instrument when compared with other electronic means. Payers are required to deliver the physical cheques to payees, who need to deposit them at bank branches. Manual processing of cheque payments is still necessary and this takes up considerable corporate resources. According to a survey in the US, the average cost for corporates to process each cheque can be as much as US$1.5. Cheque processing is also costly for banks ----- around HK$15 to process each cheque on average in Hong Kong, or over HK$2 billion for the entire banking industry of Hong Kong each year, not to mention the environmental costs for paper used in the production of cheques and envelopes for mailing. To encourage the public to switch to electronic payments, the UK Payment Council once considered abolishing cheques starting from 2018, but shelved the idea in the face of strong opposition from the public.
Why does the usage of cheques in Hong Kong remain high in spite of its various inefficiencies? There are two main reasons. First, both the payer and the payee enjoy adequate legal protection, as cheques are governed by the Bills of Exchange Ordinance. Therefore, individuals and corporates often use cheques to settle important transactions, such as property purchases or tenancy agreements. Secondly, unlike certain electronic payments or funds transfers, the payee does not need to disclose his bank account number to the payer in order to receive a cheque payment. The payee also has the flexibility to determine which account to deposit the cheque after receiving it.
Benefits of using e-Cheque: Convenient, Fast, Safe, Eco-friendly
Against this backdrop, the HKMA and the banking sector have been actively developing the infrastructure for e-Cheque in the last few years. e-Cheque is a type of electronic, or digital, payment instrument, transmitted in an image resembling paper cheque in a PDF file. The entire payment process of e-Cheque, including the issuance, delivery and deposit, is done online, overcoming the limitations of paper cheques.
An e-Cheque carries more stringent security features than a physical cheque. It is signed with a highly secure digital signature supported by the Public Key Infrastructure (PKI) technology, which can prevent any tampering with the information on an e-Cheque. There is an additional benefit for using digital signature – cheques will no longer be bounced due to mismatch of handwritten signature with the banks’ records. In fact, many transactions fall through because cheques get bounced for various reasons, causing huge losses and inconvenience.
Payer does not need to append his handwritten signature on an e-Cheque. Therefore, his handwritten signature will not be known to the payee, reducing the risk of signature forgery.
Furthermore, e-Cheques can be issued by the payer and deposited by the payee anytime, anywhere. Imagine a situation where you have to pay someone when you are on a business trip or an overseas vacation, but you do not know the payee’s bank account number (or he may not want to disclose it to you). With an e-Cheque, you can still make payment to him through email or other messaging platforms, in no time. Because an e-Cheque is digitally signed, even if it is intercepted in the transmission process, the payer will suffer no financial loss. On the other hand, if you receive an e-Cheque, you can deposit it through the Internet banking platform or the e-Cheque Drop Box offered by the Hong Kong Interbank Clearing Limited – again, anytime, anywhere. The entire process is convenient, safe and efficient.
For corporates, the automated processing of e-Cheques obviates many of the cumbersome procedures to process paper cheques. Banks also save a lot of costs in processing paper cheques.
Using e-Cheque also helps protect the environment. If half of the paper cheques are replaced by e-Cheque, we save 18 million sheets of paper or 1,800 trees, which in turn reduce 130 tonnes of carbon dioxide emission every year (equivalent to the size of 28 standard swimming pools).
Launch of e-Cheque in Hong Kong in December 2015
e-Cheque service will be launched in December this year with nine retail banks offering e-Cheque issuance service in the first stage, followed by other retail banks at a later stage. Whilst banks will roll out e-Cheque issuance services by phases, all banks will be able to accept e-Cheques deposited by their customers starting from this December. Since e-Cheque is new to the public, the HKMA and the Hong Kong Association of Banks will jointly organise public education activities to enhance public awareness of e-Cheque. In addition, the HKMA will continue to explore with the stakeholders the possibility of expanding the application of e-Cheques to such areas as e-commerce and cross-border transactions, with a view to maintaining the efficiency and competitiveness of the financial infrastructure for Hong Kong as an international financial centre.
Hong Kong Monetary Authority
29 October 2015