CHECK TRUNCATION: NOT ENOUGH CHANGE?
In India, the majority of funds movements happen through the ubiquitous check (“cheque”). Check collection and payment are governed by the Negotiable Instruments Act 1881, which require these instruments to be written and physically presented for payment in the course of settlement. This naturally inserts delays into the processing of “outstation” checks. There are over 95,000 bank branches in India transacting around 2.6 million checks daily.
Currently, the clearing process uses magnetic ink character recognition (MICR) technology. A check is presented at the clearinghouse by a bank on its customer’s behalf and is sent to the issuing bank via an electronic file along with the physical instruments
for release of the drawn funds. This process is time consuming as the instruments might change several hands before reaching the payer’s bank. This gives rise to:
- situations that create opportunities for their misplacement
- increases the risk of fraud
- increases human effort in reconciliation and clearing differences
- drives up administrative cost of monitoring and controlling the clearing process, and
- also increases operational and maintenance cost, due to the large number of paper related activities(e.g., physical instruments need to be warehoused after payment, clearing staff, couriers, encoding, signature verification and passing of checks, etc.)
Check truncation benefits both customers and presenting/issuing bankers, since it:
- reduces turnaround time for crediting funds to the customer
- verifies and reconciles payments quicker
- has no geographical restriction as to jurisdiction
- reduces operational risk and risk associated with paper clearing
- reduces float, which is important for accelerating economic activity.
Central banks like the RBI and financial institutions have all been closely looking at innovative strategies: to optimize costs in the fast paced and competitive banking sector, effectively manage risk, and enhance returns on investment (ROI) from their technology spends. The Reserve Bank of India (RBI) initiated its Check Truncation System (CTS) project a few years ago. The physical movement of checks is immediately restricted at banks or the clearinghouse by replacing it with the transmission of electronic images of checks.
||The present day scenario involves a clearing check physically traveling to the issuing customer’s branch for signature and balance validation. Only MICR data can travel electronically.
After check truncation, both the check image and the MICR data will be transported electronically all the way to the payee branch.
CHECKS STILL RULE: HOW TO HELP ACCELERATE THE ECONOMY?
The CTS was implemented in the National Capital Region (NCR) in 2009 and in Chennai in 2011. Based on the experience gained, the RBI plans to expand coverage to other centers. However, given the “slower” macroeconomic scenario, the pace at which technology is unleashing increased “productivity” (of funds) is perhaps not enough for businesses who need to focus more on their core priorities.
While not immediately obvious, there are in fact issues that need to be addressed today. Checks still play a crucial role in enabling trade and commerce, and will continue to do so. For example, Indian co-operative banks play a significant role in the economic growth of the country. As “smaller” banks, they constantly face competitive challenges from the larger public and private sector banks. In a scenario where check truncation is yet to arrive and checks still need to be processed, they are fighting to figure out ways to better focus on their core banking activities that will help them remain competitive and expand their presence.
Internationally too, check truncation systems have been adopted by smaller countries like Sweden, Denmark, Belgium, etc. Larger countries, like the United States with its Check 21 law (enacted in 2003), have seen some implementation difficulties.
The good news is that, as electronic payment methods have grown, US check volumes have steadily fallen. And with check truncation, its per item processing costs also fell dramatically. The US system saved over $3 billion in processing and working capital costs in 2010 alone.
But, here is the real “downer”. The US still used 8 billion check/paper instruments in 2010, which still need to be processed. In other large economies, like the UK and Germany too, checks remain key payment instruments.
Clearly most countries, including India, still have huge daily volumes of paper based payment and settlement transactions. Replacing checks is a challenging task and will not be achieved overnight. In the days to come, as technology and communications achieve deeper penetration and support more secure payment mechanisms, more and more transactions will move from cash/paper based instruments to electronic modes of settlement.
HOW OUTSOURCING CAN HELP? EFFICIENT CHECK PROCESSING!
However, in these recessionary and financially stressed times, cash flow is the life blood of businesses. Obviously, helping the banking system to “release” funds quickly will only help grease the wheels of the economy.
In this context, it is well known that the actual processing of checks (whether inward and outward) for the most part requires a relatively low skill set (e.g., data entry, verification, reconciliation, etc.). Hence, deploying tenured employees drives untenably high operational costs.
In our opinion, the still widespread use of checks, the skilled manpower deployed in processing, and the delays in reducing float, clearly indicate the need for banks to further optimize check processing (and alleviate the "stresses" imposed by float ).
We have seen that banks which partnered with an experienced service provider found great check processing and allied service efficiencies. Such an outsourcing services provider can deliver check processing services in a structured, time bound and reliable manner, and helps cut costs by transforming a bank’s fixed costs to variable by aggregating infrastructure/technology platform costs through a “shared services” deployment. Outsourcing also helps the bank to focus on operational excellence and increases its strategic flexibility in a tight market.
In fact, the potential exists to leverage outsourcing providers' "business process" expertise to a number of routine, well-defined activities like: account activation, customer query handling, branch level personal support, deposit mobilization, fixed deposit processing, locker rent collection to loan/advance evaluation, transaction audit review and revenue leakage studies. What's more, many of these services can be contracted on outcome-based terms, and thus can prove highly cost effective for banks, particularly in today's uncertain economic environment.
What are your views on paper processing vs. electronic transaction? Do share with us how outsourcing your check clearing process has helped you?