Sybrin Banking Solutions

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Sybrin's Cheque Truncation

CENTRALISED PROCESSING: It's Time To Modernise The Way We Process Cheques

The cheque is still currently the most visible and significant mode of payment in most countries throughout the world. Processing of paper-based cheques constitutes an important segment of the payment and settlement system of a central bank. Currently in many African countries settlement of cheques is performed by physical presentation of paper-based cheques to the clearing house for transmission to the drawee banks and for payment thereafter.
The process begins when a customer deposits a cheque at his/her branch. Near the end of the day' that branch's cheques are bundled, totalled and sent by air or ground courier to the voucher processing centre for that financial institution. A similar process is in place for cheques deposited at Automated Teller Machines (ATMs). Every business day, hundreds of thousands of cheques are transported from one financial institution to another, to reach the branches holding the accounts on which they were written. Some of them log hundreds of kilometres en route, passing through processing centres and countless hands. The fact that cheques are physically transported around the country creates inefficiencies. At the voucher processing centre, the amount of each cheque is encoded on it in magnetic ink to facilitate automated processing. Then cheques are passed through high-speed cheque readersorters (transports) and sorted based on the financial institution holding the accounts on which they have been written. Once the total number and value of the cheques has been confirmed, they are bundled once again and then transported to another processing centre that serves the financial institution of the person who wrote the cheque. There the items are unbundled and processed again through another reader-sorter to verify the number and value of cheques received. Next the cheques are put through the machine again to sort them based on the branch that holds the account on which the cheque was written. Depending on the financial institution's internal processes, the cheques may then be shipped to the various branches.
The paying branch is the last node in the clearing cycle as it exists in the country, and thus the paper cheque is on the move through the entire cycle from the bank branch of the collecting bank where it is first deposited to the service branch of the collecting bank, onward to the Clearing House, which acts as a focal point for the cheques of all the banks, and from the Clearing Centre to the paying bank service branch and lastly the paying branch. And if a cheque cannot be honoured (for example, due to insufficient funds or a stop payment order), it retraces the entire journey back to the branch where it was initially deposited. This entire process may involve processing a paper cheque through the reader-sorter up to eight times and transporting it up to four times. The attendant delays on account of not being able to exploit technological alternatives available have been engaging the attention of the Reserve Bank of many countries for some time. Many central banks are now implementing a legal framework for the implementation of cheque truncation. It's time to modernize the way we process cheques through the Central Bank in order to reduce the lengthy clearing periods and therefore improve liquidity in the marketplace.

Sybrin's Cheque Truncation Solutions

Cheque Truncation is one of the ways to compress the clearing cycle to provide faster clearances of local and intercity cheques. Cheque truncation, very loosely defined, is the process in which the physical movement of cheques within a bank, between banks or between banks and the clearing house is curtailed or eliminated, being replaced by electronic records of their content (image and MICR data) for further processing and transmission. Sybrin's Complete Truncation Solution enables financial institutions to leverage images and data imported from Sybrin and any third party voucher processing solution. Sybrin's Complete Cheque Truncation involves replacing the physical paper cheque with its electronic image at the bank branch where it is first presented, allowing the paper cheque to be held or truncated at that point. Sybrin's Truncation Solution provides for the encryption and transmission of images and data files from the participating banks to the Electronic Central Clearing House (ECCH). Because the images are just as clear as the actual cheques (and much easier to access) there is no need to process, file, store, or microfilm the paper cheques, enabling banks to settle their payments through Sybrin's Complete Truncation Solution.
Account holders will continue to write cheques as they do now, and when they receive cheques they will deposit them at their financial institutions as usual (e.g., at the branch or through an ATM). Financial institutions will, for the most part, follow their current practices for delivering deposited cheques to their processing centre. The paper cheques (as well as other paper items like deposit vouchers) will be handled only once, at the bank branch where they are first deposited. These paper items will be retained in the branch while the information is sent forward electronically as a data transmission. From that point on, the clearing process will change. At the voucher processing centre, the amount of a cheque and its electronic codeline data, as well as a digital image of the front and back of the cheque, will be captured. Then, instead of moving the actual physical cheque to the clearing house, the voucher processing centre will transmit the data captured from the cheque and the image file to the institution that holds the account on which the cheque was written, referred to as "the drawee institution". As "time in transit" for the electronic files will be virtually nil, the drawee institution will have access to the cheque image and data much faster to make a decision on whether to honour the cheque based on this electronic information.
Although cheque truncation will represent a significant shift in the way cheques are processed behind the scenes, very little will change for the banking customer at the "front-end". After the image has been captured at the processing centre and sent to the drawee institution, the original paper cheque will no longer serve much purpose. Shortly after the usability of the image has been confirmed, the bank in possession of the paper cheque will both physically store and digitally archive the voucher according to statutory requirements. As physical cheques will no longer be available for enclosure in customer statements, the Sybrin system can now offer new image-based services to provide equivalent information to clients about the cheques they have written. Sybrin provides an "image statement" on which copies of the cheques written by that customer will be reproduced as well as on-line access to images as part of the electronic banking services, and cheque images may also be provided on CD-ROM for business customers with high volumes of cheques.
All subsequent processing is accomplished by using the electronic image (back and front) and the MICR and captured data from the cheque. The Paying bank has a fiduciary obligation to establish the validity of the cheque and authorise the paying of the item. In the past paying banks did this by referring to the physical cheques, however, with Sybrin's cheque truncation solution they conduct the validation using the electronic image and data of the cheques. This eliminates the need for transportation of paper to the Clearing House. The paper is replaced by the electronic transmission of data, speeding up the cheque clearing process.

Cheque Truncation Progress on the International Front

Internationally, in locations as diverse as the United States, Singapore, Spain, Hong Kong, the United Kingdom, Australia, and even Malawi, a faster, more efficient and safer way to process cheques is emerging - cheque truncation. Due to improvements in technology, images of the front and back of cheques can now be captured electronically and then transmitted, or "cleared", between financial institutions, rather than transporting the actual paper documents as happens currently. Many Central Banks throughout Africa are negotiating with Sybrin to embark on an initiative to adopt a new clearing process based on cheque images - leading to a 'truncation solution'. Sybrin has already provided the first Electronic Central Clearing House (ECCH) in Africa at the Malawi Central Bank. The following countries around the world are also taking steps to implement cheque truncation systems:

  • The United States cleared in excess of 42 billion cheques in 2002, more than all the cheques exchanged throughout the rest of the industrialized world. On October 28, 2003, the American banking industry took a major step towards national cheque imaging when the Check Truncation Act for the 21st Century, or Check 21, became law. This legislation will come into effect in October 2004 and allow for the use of cheque images in the clearing system.
  • In 2004, the Banker's Association of Malawi implemented Sybrin's Electronic Central Clearing House (ECCH), the first fully truncated national payment system in Africa involving the Central Bank and 11 retail banks.
  • Singapore, with 134 financial institutions and over 500 branches, has an annual flow of around 92 million cheques. Singapore's central banking authority was the first to put in place an electronic cheque capture program, in the 1980s. In 1997, Singapore introduced an image clearing system, and in 2001 the online Cheque Truncation System was implemented. The National Image Archive stores electronic images of every cheque written in Singapore for instant online retrieval.
  • Australia and the United Kingdom now allow electronic cheque clearing for value. In 1999, 2.8 billion cheques were cleared in the United Kingdom, and 810 million in Australia.
  • In July 2003, Hong Kong implemented its Cheque Imaging and Truncation System. Seven major banks use cheque imaging services to process some 300,000 cheques daily, amounting to more than 50% of the total cheque volume in the Hong Kong market.
  • Sybrin's Electronic Cheque Clearing System for Malawi

    INTRODUCTION

    In 2004 the Bankers Association of Malawi (as part of the National Payments System under the guidance of the Reserve Bank of Malawi) embarked on the first cheque truncation project for African in order to revolutionise the banking sector. The project, known as the 'National Electronic Cheque Clearing House', or 'ECCH' involved the Reserve Bank plus all eleven national banks, and was implemented using Sybrin Software Ltd's complete truncation solution.

    THE PAST SCENARIO

    In the past in Malawi, each bank manually cleared all cheques that were deposited, thereby resulting in clearance delays. In addition, settlement between banks was calculated manually. The new ECCH system is centralised in Blantyre and has numerous operational advantages. Malswitch was selected as the Service Provider for the communications requirements and for the siting and operations of the ECCH and backup site in Blantyre.

    SYBRIN'S COMPLETE TRUNCATION SYSTEM IN MALAWI

    The Electronic Cheque Clearing House System for Malawi is based on Complete Cheque Truncation and Cheque Imaging. Sybrin's Complete Cheque Truncation involves replacing the physical paper cheque with its electronic image at the bank branch where it is first presented, allowing the paper cheque to be held or truncated at that point. The paper cheques (as well as other paper items like deposit vouchers) are handled only once, at the bank branch where they are first deposited. These paper items are retained in the branch, while the information is sent forward electronically as a data transmission. This eliminates the need for transportation of paper to the Clearing House. The paper is replaced by the electronic transmission of data, speeding up the cheque clearing process.
    All subsequent processing is accomplished by using the electronic image (back and front) and the MICR and captured data from the cheque. The Paying bank has a fiduciary obligation to establish the validity of the cheque and authorise the paying of the item. In the past paying banks did this by referring to the physical cheques, however, with Sybrin's cheque truncation solution they conduct the validation using the electronic image and data of the cheques.
    Sybrin handles the capture of images and transactional data off cheques at the time of deposit at the teller window, the correction, balancing and technical verification of this data, upload of data to the host banking system, encryption and transmission to a central clearing facility, the calculation and upload of settlement figures to the Reserve Bank, transmission of clearing data and relating images to participating banks, and the physical management and archiving of the original vouchers at the national archive.

    BENEFITS OF SYBRIN'S TRUNCATION SYSTEM TO THE MALAWI ECCH

    The ECCH resulted in a large number of advantages for the national payment system, participating banks and customers including:

  • Faster clearance times between branches of different banks.
  • For example, a cheque issued by Bank A in Mulanje deposited into Bank B in Karonga has a 48 hours clearing period, the same as a cheque issued within the same bank.
  • Greater efficiency in the banking sector leading to improved customer service.
  • Reduced risk of fraud as cheques are processed and verified electronically rather than manually.
  • Meeting cheque clearing deadlines;
  • Reduce excessive cash usage and holdings;
  • Enhanced security and finality on the transfer of value through payment systems;
  • Enhanced confidence in the usage of cheques;
  • Improved processing efficiency;
  • Reduction in 'float', speed up circulation of funds, and increase efficiency in funds transmission ;
  • Faster resolution of queries;
  • Easy accessibility of information;
  • Easy integration with the Retail System;
  • Electronic images and code-line data enable down-stream reporting;
  • Motivate staff by enhancing and streamlining the cheque handling process;
  • Facilitate the review of job roles, freeing staff from mundane manual tasks, and allowing them to carry out more customer facing roles;
  • Provide greater understanding of specific business, technical and operations training requirement and needs.
  • Benefits of Sybrin's truncation solution

    When implemented in a complete nation-wide programme, truncation offers a number of advantages for the national payment system, participating banks and customers. Banks gain cost savings because they no longer need to sort and transport paper cheques to other banks. Also, banks can use the cheque images throughout their operations, giving an increased level of customer service and operational efficiencies. Most importantly, truncation offers the possibility to clear all cheques within the same day, no matter where in the country they are presented. Implementing a national cheque truncation initiative requires extensive co-operation between all banks. Countries that move today towards implementing complete cheque truncation will reap great rewards in the near future. Enclosed are some of the many benefits derived from Sybrin's truncation solution:

    Clearing House cost savings

    The elimination of paper movement throughout the clearing system results in cost savings to all financial institutions. The most obvious cost saving is from the elimination of the need for bank staff or couriers to carry bundles of cheques from one branch or bank to another throughout the day, or to and from the Clearing House.

    Overall cheque clearing process and service enhancements

    However, the communication networks and computer equipment necessary to transmit the cheque data and images provide an offsetting cost. This cost has kept complete cheque truncation from becoming prevalent until now. Today, with the availability of new technology, these costs have come down to the point where complete cheque truncation has become economically feasible. On balance, complete cheque truncation can today provide significant cost savings to the financial industry and benefits to their customers, as most importantly, complete cheque truncation can improve the overall cheque clearing process and allow financial institutions to offer their customers a superior level of service.

    Fraud reduction

    From a macroeconomic perspective, the ability to clear financial items electronically rather than physically reduces the risk of fraud and can help to reduce the levels of both settlement risk and liquidity risk within the entire payment system. Moreover, truncation can accelerate the cheque clearing process substantially increasing the velocity of funds transfer.

    Cutting Down On Cheque Handling

    The sorting, balancing, bundling, and delivery of paper cheques for clearing and settlement is an expensive and labour-intensive process. Cheque imaging, coupled with cheque image exchange, offers numerous benefits to financial institutions, including speedier cheque retrievals, reduced costs, and less risk of fraud. Prior to implementing Sybrin's truncation solution, cheque clearing between banks in Malawi was an extremely labour intensive process, prone to error, exposing participating banks to a much greater element of risk.

    Faster clearing cycle

    A financial institution that accepts a cheque drawn on another institution often has no way of knowing whether the cheque may subsequently be dishonoured (e.g. due to insufficient funds, a stop payment order, or a forged signature). In today's environment, if a cheque is dishonoured, the whole process of moving the paper cheque through the clearing system and rerouting it to the financial institution at which it was deposited may take as much as 5 to 7 business days. With Sybrin's truncation solution this time frame will be consistently shortened.

    Reduced risk

    The events of September 11th have shown how a major incident can disrupt cheque clearing processes and risk affecting the financial stability of financial institutions. More common occurrences such as courier delays due to weather conditions can also affect clearing performance. An exchange based on electronic transmissions can be completed within minutes. Sybrin offers a high performance, redundant voucher processing and truncation solutions with a track record of high availability.

    OTHER BENEFITS OF SYBRIN'S TRUNCATION SYSTEM:
  • Meet Cheque Clearing deadlines;
  • To reduce excessive cash usage and holdings;
  • Achieve security and finality on the transfer of value through payment systems;
  • To control system risk and achieve a reliable, secure, integrated payment, clearing and settlement system;
  • Improve processing efficiency;
  • Reduce float, speed up circulation of funds, and increase efficiency in funds transmission;
  • Proven integration with Perago's Real Time Gross Settlement (RTGS) system. Sybrin and Perago are technology partners with a proven track record of integrating technologies (ECCH Malawi).