On the Cheque Clearing System: Fix trust to fix the time problem

Recently, the Central Bank announced the deployment of a new system to facilitate the clearing of cheques in two days, rather than the four days it has taken in the past. I congratulate the Bank. We are making progress. But I couldn’t help noting that we can actually do better. It might help to revisit the mischiefs behind cheque transactions.

Cheques between account holders in the same bank are cleared on the same day, in some cases, almost instantly. The bank in issue bears all accounts and is able to verify with a few clicks of a mouse that the issuer in fact has funds to settle the obligation. This bank essentially is a facilitator whose dual role is to verify and complete the transaction. In this case, the mischief is whether an issuer has the funds to honor their obligation.

Where a cheque is issued across to a different bank, the system has in the past taken four days and involved a second facilitator, the Central Bank through its “clearing house.” The involvement of the clearinghouse system was not without merit. Many will recall that in the not too distant past, cheque washing was a common fraudulent practice for which one of the most famous politicians in Kampala spent time in a foreign jail. It was a real problem. When I was in law school many years ago, one of the most controversial topics was on who was a “holder in due course” and whether a bank should honor a cheque held by a “fictitious payee.” These two considerations raised the second most crucial question about cheques: could you trust the signature on the face of the leaf? This was just as important when cheques were still endorsed to meet third party obligations as it is today when we do not endorse cheques any more.
But the world has changed a great deal. Banks do not allow endorsement of cheques any more and I doubt that the average mid career person even knows what that practice was like. But the two central questions above have remained. And they essentially are both questions of trust. A third question then arises: must we rely on the central bank to validate this trust? In their much-appreciated wisdom, the answer to these questions is to use high resolution scanning technology to cut the time in half. But I would like to suggest that technology has evolved so far that we can certainly do better than clearing cheques in two days.

There was once a time when we depended on the post office to deliver our letters from one part of the world to another. Communication took weeks, even months. Then came EMS. Then DHL. Then electronic mail (email). And now we read our messages almost instantly. Many people do not even have a box number any more. Banking has largely stayed static because we are adding “technological” solutions to the same rails. Gmail and Yahoo did not make the post office more efficient. They simply replaced it. This is what we need to do with cheques. Put the system on the Blockchain. Let each bank have a blockchain of their own and let the chains talk to each other. Cheques and payments will clear across banks in minutes or sooner. Using high-resolution scanners to make cheque processing more efficient is like trying to use a fax machine as a wireless router when you can use a smart phone to create a hotspot. Once is more efficient and the other is simply too tedious and costly to maintain. I say we do better. Build a trust protocol.