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What if we could digitize the cheque payment process for businesses and banks?
Multiple businesses still use cheques for payments. Cheque payments have inefficiencies that can be resolved with a digital post-dated payment platform (PDPP). Read here to know more about PDPP.
Rajesh is a distributor for an FMGC company called“G&P”. He sells his products to retailers on credit for ~15 days and collects his payments from either of the methods -
NEFT/UPI/Cash: Here he has to often chase the retailer on/after the 15th day for payment
Post-dated cheques: Here he has to physically collect the cheques in prior, store them safely, and deposit them in the bank after 15 days (though he doesn’t have to chase for collection, there is an issue of physically depositing in the bank and chance of bounce)
By the way, why do you think cheques are still being used in the age of UPI/NEFT? Can you remember the last time when you wrote a cheque to anyone?
Well, cheques might not be used by consumers per se for person-to-person (P2P) or person-to-merchant (P2M) transactions but they are still being used for business-to-business (B2B) or merchant-to-merchant (M2M) transactions. Even today ~10Cr cheques are processed every month in India. You might wonder why cheques are still being used for making payments.
People (including some industry experts) opine that cheques are used only by those people who aren't tech-savvy. That's true to some extent. But I have noticed that business owners tend to use PhonePe, Gpay, Paytm, etc. for other transactions. So people not being tech-savvy is definitely not the whole reason.
A brief history of cheques
Cheques have been used in banking transactions for ages. Before the advent of internet banking (NEFT/IMPS etc.), there were mainly two modes of payment - Cash and Cheque. Most business transactions operated on credit and future payments were made through cheques.
Cheques used to provide two major conveniences:
(i) They were preferred for large value transactions (cash is not always possible)
(ii) It’s an instrument of choice for making post-dated payments
The other important feature was that it provided legal protection to the receiver in case the payer defaulted.
But there were certain disadvantages that came along with it, like:
(i) The receiver had to collect and deposit in the bank physically
(ii) If the payer and receiver lived in distant locations, the payer had to mail the cheque
(iii) Cheque clearance process (payment settlement) took weeks as the receiver bank had to mail the physical cheque to the receiver bank (now it's been reduced to a couple of days with CTS1). More on this later.
Then arrived internet banking - NEFT, RTGS, IMPS. It resolved these issues. This is why the usage of cheques has come down significantly. But there was one feature these modes of payment didn’t have - an option for post-dated payments.
Before that let’s understand what use cases cheques solve
When a seller sells goods on credit (let's say 15 days), he would ask the buyer to give him/her a cheque because he/she -
(i) doesn’t have to chase the buyer after 15 days (less collection headache)
(ii) is legally protected
*Cheques are covered under the Negotiable Instruments Act, wherein if the payer defaults on a cheque payment, legal action can be taken against him
This is especially useful when the buyer and seller have low trust and knowledge of each other.
Now, what if we have a new mode of payment that has
(i) the benefits of a cheque (post-dated payment, legal protection), plus
(ii) convenience of a digital mode of payment
A Post Dated Payment Platform (PDPP)
Let’s explore how PDPP will bring collection efficiency to businesses. Let's take Rajesh's example again in detail. Here’s how collections happen today. (Consider it as a simplified version)
Seller sells goods on 1st June
(i) Buyer commits to pay on or before 16th June
(ii) Seller collects cheque payment from the buyer that is dated 16th June
Problems with option (i):
The buyer starts sending reminders from the 12th of June. If by 16th June he still hasn’t paid, the seller's collection agent visits the buyer to collect it. Sometimes he has to visit twice or thrice.
Problems with option (ii):
From the payer’s perspective-
As trivial as it may sound, he has to write a cheque (mention amount in words, then in number, receiver name, and sign it). He then maintains a ledger of which cheque is due to whom and on which date. Compare this to a UPI payment through PhonePe or Gpay. He also has to get a new cheque book when one gets over.
From the receiver’s perspective-
Once the collection agent collects the cheques physically, the accounts team sorts the cheque according to dates and enters the cheque number into their accounting system. On the given date, the accounts team visits the bank to deposit these cheques (only if it's not a bank holiday). The amount gets credited the next day.
The point here is that these are all manual, tedious processes and businesses spend money on staff whose primary job is to reconcile cheque payments.
In addition, there are other reasons for a cheque to bounce.
These reasons are unnecessary and can be easily avoided with PDPP.
If a cheque bounces, they have to deposit the cheque again or go to the seller to collect it in cash. They also collect the bounce fee (yes, the depositor is also fined for a bounce which he generally collects from the payer).
On a side note, do you know how banks clear cheques?
You would think everything is automated. But even in 2022, the signature and amount (in words and figure) are all checked/entered manually by people (again banks have these people on their payroll just for these purposes). Without going into too much detail, here’s how it's done-
Receiver deposits cheque with his bank (let's say HDFC). The cheque is of SBI (payer bank). An HDFC employee scans the images (of all cheques deposited in the branch) with a special scanning machine and it's done in batches.
The scanned file is sent to a central clearing hub (managed by NPCI).
NPCI then routes the file to the respective SBI branch, whose employee matches the signature of the payer and checks the amount. If balance is sufficient and signature matches, the cheque is cleared, if not, it bounces.
Note that banks have specific employees, machines and use third party softwares for these purposes (think of the costs!).
(Another side note)
PDPP will be different from scheduled payments (SP), that is currently offered by banks, because in case of SP
It can be cancelled anytime at will by the payer, hence doesn't solve the problem of the receiver (no payment guarantee like in case of cheque)
The receiver doesn't get to know when the payment is initiated. He only gets to know after the payment is deposited on the given date
So now, how can a post-dated payment platform (PDPP) solve these problems?
With PDPP, businesses can collect post-dated payments (can think of this as eCheque). This would bring a lot of collection efficiency in terms of time & resources used for collection. And most of the above-mentioned problems simply won’t be there as there is no physical cheque.
Here are some of the advantages of PDPP model
No physical collection and deposit at the bank
No running to the bank for a new cheque book
No unnecessary bounce charges
No cases of signature mismatch or overwriting
SMS reminders before a debit
No manual accounting entry
Huge cost savings for banks (remember they have employees, software, and machines for these purposes)
With PDPP, not only can cheque usage be brought down to almost zero, but this can open new types of use cases for businesses and banks. Below are a few-
A quick sum up
The digital payment modes available in the current day(NEFT/RTGS/IMPS etc.) lack post-dated facilities, which is one of the primary reasons cheques are being used even today. But the cheque payment lifecycle is very manual and tedious from the point of view of all stakeholders - payer, receiver, as well as banks.
So we need a payment mode that offers the benefits of a cheque (post-dated, legally backed) plus the convenience of a digital mode i.e. a post-dated payment platform (PDPP).
One of the major benefits would be efficient collections for businesses. This will not only eliminate cheque usage, but can also have a variety of new use cases - businesses getting working capital loans at low interest against future payments, improving their credit scores, and introducing new monetization opportunities for banks.
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Abhishek Gaurav is the founder of Vault. These are his personal views.
All designs by Poorvi Mittal. This article has been edited by Monami Dasgupta.
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Cheque Truncation System, where clearance happens electronically without the need to send the physical cheque to the payer bank