Understanding Canada/U.S. differences

By Jeff Hempker

When people hear that Canada didn’t roll out its cheque truncation system i.e. converting physical cheques into electronic cheques until 2014 many will say: “They must be 10 years behind the United States,” since the U.S. started its system in 2004.

Actually, the opposite is true: Canada’s system is actually 10 years newer than the American system, which means it’s better in a lot of respects.

Taking advantage of new technologies

What does this mean? Well, for one thing, a lot of technology that is around today simply did not exist back in the early 2000s. For example, smartphones. The first iPhone wasn’t released until 2007: three years after electronic cheque clearing came to the U.S. It took another few years for the industry to figure out how to do mobile deposits.

In countries that have adopted electronic clearing recently—Canada, Brazil and the U.K. among them—this technology was already available and well-known and many banks have been ready with mobile remote deposit capture (RDC) apps from day one.

Other features, such as advanced fraud detection and a national duplicate database, were not available in the early days of RDC and had to be added later at great expense. Countries rolling out truncation now generally build these fail-safes into their systems from the ground up with the latest technology: a considerable advantage in both cost and efficiency.

For that matter, the public awareness of cheque truncation was completely different ahead of the Canadian rollout than it was in the U.S. If you can believe it, back in 2004 many people were against the idea of electronic clearing, viewing the faster clearing times as an underhanded attempt by the banking industry to eliminate “float” (the time between when cheques are written and when the funds are transferred) in order to create more fees from bounced cheques and overdrawn accounts.

But because the rollout took place later in Canada, and because Canadians were becoming used to and expected instant and seamless transactions including with Interac it did not take long for consumers and businesses to be convinced of the value of truncation and RDC. The adoption and “breaking-in” process that took years in the U.S. was condensed into a few months’ time in Canada: a success by any standard.

Part of the reason things tend to go more smoothly in countries with newer systems is because the hardware available is much faster and cheaper and the infrastructure is generally more advanced.

Originally, cheque truncation devices were designed primarily for bank branches and so the only scanners available were high-speed teller devices with price tags in the range of $1,000 or more. At those costs (as well as the original cost of the service itself), no one but a bank or a large company had a business case for using one.

In contrast, today’s RDC-specific devices might cost as little as a third that much, while actually being more accurate and reliable. And the cost for the service has likewise come down significantly.

The software behind the cheque scanners—like nearly everything electronic—has itself become much more refined over the years. For example, a “good” success rate for optical character recognition (OCR) on a scanner a decade or two ago might have been 80 to 85 per cent. Today, with devices that are more sensitive to light levels and contrast, and software that can recognize patterns and perform image cleanup on the spot, that rate is well into the mid-90 per cent range and magnetic ink character recognition (MICR) accuracy rates are within a fraction of a percentage point of 100.

Banking practices dissimilarities

There are minute dissimilarities in banking practices in both countries that can make a huge difference in front-line operations when cheques, and checks, cross the border. For example, take a look at the accompanying image comparing a Canadian cheque with an American one. While the visual layout is somewhat different, they actually look very similar to a machine: the only significant difference is a dash in the Canadian routing number.

Engineers figured out early on how to make scanners recognize both MICR formats; however, it was the human element that gave trouble. Most OCR software could only read in one language at a time. So, if the handwritten dollar amount was in French, the cheque would be flagged as invalid!

Additionally, some behind-the-scenes processes still meant that an American cheque would not clear in the Canadian system, and vice versa, even though both were now electronic. There were slight differences in the formats of the files being exchanged; variations in exception and return rules and then there was the matter of smooth conversion between the two currencies. Until these were sorted out, cross-border payments were still handled by sending the original paper cheques back to their country of origin to be scanned: which could take weeks.

Given the number of payments between individuals and businesses on both sides of the border, this seems like a rather important issue to fix. But from a programming perspective, it was not a trivial challenge. Only in the last few years have effective solutions finally become available.

Serving Canada’s remote locations

Canada’s immense geographical size is good news for electronic cheque clearing because the amount of time and costs saved (compared with transporting the physical paper) is tremendous. On the other hand, there are many isolated communities with bank and credit union branches: and cheque handling hardware and software.

The electronification of many basic banking services, like deposits and withdrawals, has made it much easier for banks to support their branches in remote areas. It has limited, but not eliminated, the amount of cheque handling hardware and software and the need to upgrade and support them. We work with an extensive network of Canadian companies for fulfillment and service on our products. Fortunately for remote areas we’ve found partners who have local staff with some IT knowledge who can be contacted as needed to do troubleshooting and repairs and they’ll have some spares located around the country within a day’s travel of just about anywhere.

Jeff Hempker is executive vice president of Digital Check (www.digitalcheck.com), a leading manufacturer of cheque capture hardware. He led Digital Check’s efforts to address the Canadian scanner market in 2012 and remains actively involved with many of the leading financial institutions and software providers in the region.

 

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