Moving toward 100 per cent electronic cheque processing through ACH and image exchange: Exploring the legal issues

Abstract

This paper explores whether the goal of end-to-end electronic processing of all cheques can be achieved by imaging cheques and converting cheques to automated clearinghouse (ACH) transactions. Both routes to end-to-end electronic cheque processing contain a number of impediments. For image exchange, the paying bank's agreement is required at the end of the processing stream; if the paying bank has not agreed to accept images, a substitute cheque (more paper) must be created. Similarly, authorisation is required to move a cheque from paper into the ACH world, as the drawer of a cheque must authorise its conversion at the beginning of the processing stream. Parties handling cheques later in the payment stream lack relationships with the cheque issuers, and so are not in a position to obtain that authorisation. The best way to maximise the shift to electonic cheque processing is to have the appropriate agreements in place and obtain authorisation, where required. The authors believe that the financial services industry may achieve truncation and end-to-end electronic processing for all paper cheques in the future, using a combination of cheque image exchange and ACH conversion. In the current operational and legal environment, however, financial institutions considering an electronic cheque payments strategy must be cognisant of the current challenges and limitations, and how to work successfully to overcome those challenges.