Public consultation on the technological specification of a digital debit payment instruction, a digital substitute for paper checks
The Bank of Israel sees the importance in this process being carried out in consultation with as wide a range as possible of professional parties at interest, who are not involved in day to day dialogue with the Bank of Israel. Thus, the Bank of Israel is publishing this public consultation regarding the technological specification required for this means of payment. You are hereby invited to submit a proposal for the technological solution and architecture for the new means of payment, based on the requirements and conditions that appear in the public consultation document.
The significance of the digital debit payment instruction is a switch from the physical world to a digital world, and is an additional pillar on the way to a more digital economy. The new means of payment will serve as an efficient and advanced solution to carrying out direct debit transactions, as a fully digital substitute for the physical paper check.
Usage patterns of checks in Israel
a. There is marked use of checks in Israel: The scope of payments via checks in Israel was approximately NIS 890 billion, on annual average, in 2018–20. This was about 12.5 percent of the total financial amount of retail payments in those years; compared to an annual average of NIS 319 billion in credit/debit card payments, which is about 4.3 percent of the value of retail payments in each of the years 2018–20. The average value of checks is relatively high, and is on an upward trend, and in 2020 the average value of a check paid was NIS 9,350.
b. Checks serve as additional credit, without a credit facility, such as credit to suppliers: Discounting and endorsing checks are common financial activities. These allow financial conduct even without the need to increase credit or to utilize collaterals at the bank.
The need to switch to digital—the advantages of the digital process rather than the paper check
a. A paper check requires a physical process that weighs on the conduct in carrying out a payment—starting from the need to order the checks, filling in the details on the check, physically giving it from the payer to the beneficiary, as well as the beneficiary keeping the check until it is deposited on the date written on it. A digital solution is expected to increase the efficiency of the process, to reduce and even prevent the risks of loss or forgery, and will make it possible to carry out faster and simpler payments and clearing.
b. A notable share of returned checks is due to their being an actual physical check—switching the check to a digital product will make it possible to reduce and prevent nearly all the technical returns, such as invalid date, nonmatching signature, and lack of correlation between numbers and words, and thus keep down check returns, the value of which totals tens of billions of shekels each year.
In the past decade, the financial share of check returns for technical reasons was around 3 percent of total turnover. In 2020, there were 2.69 million checks returned, of which 1.79 million checks were returned for technical reasons. The value of returns in 2020 totaled NIS 30 billion, which is 3.7 percent of total checks, the financial value of checks returned for technical reasons was about NIS 25 billion, at 3.1 percent of total checks cleared.
c. Future digital debit payment instructions make additional credit available without a credit facility—currently, a customer who receives a product or service and pays for it with a post-dated check, essentially receives credit without interest and without a credit facility at the bank. In some cases, the beneficiary, which in many cases is a business, benefits from the customers receiving the credit and increasing their acquisition budget, which makes the transaction possible. In 99 percent of the cases, the check that is presented is covered. In addition, the beneficiary can endorse the check and in many cases receive financing for it from a check discounting company. The digital debit authorization is expected to keep the characteristics of endorsement and discounting due to their importance in financial conduct, mainly among businesses in Israel, and even make the process easier due to its shift from a physical process to a digital one.
Payment and Settlement Systems Department Director Mr. Oded Salomy said, “The development of the digital check will provide a response to many existing needs in the Israeli payments market. It will enable us to use new and advanced means of payment, which can, via future debit authorizations, increase the efficiency and ease of use of checks, which are an extremely common means of payment, and to serve as additional credit without a credit facility that also increases the revenue of the beneficiary businesses. The public consultation document that we are publishing today invites all interested parties to take part in the technological specification of the solution.”