Singapore is widely regarded as a pioneer in cheque truncation, but experts aver that the system there would be difficult to emulate here due to the size and complexity. Singapore is a pioneer in image-based CTS, with all banks being asked to move to CTS for transactions in mid-2002. The main reason behind the short-to-medium term target of setting up CTS is the long-term target of completely paper less payment systems.
At the moment though, it’s facing a situation similar to India and even the US--paper cheques don’t look like they are going away in a hurry. The sheer volume of paper transactions that are conducted across the country on a daily basis is enough to give us an idea about the present scenario. Singapore’s approach to CTS, which began in 2001, is similar to ours. The CTS is being jointly developed by the Association of Banks in Singapore along with the Singapore Clearing House Association.
From the initial stage itself, the banks had considered setting up a national archive at the backend for central storage of the cheques, a practice that is bound to reduce TCO through better economics of scale. Closer home, the Central Bank of Sri Lanka had embarked on cheque imaging/truncation project along with LCPL.
The primary drivers for the bank to take this step is to shorten the cheque clearing cycle, particularly outstation ones, and reduce inefficiencies involved in handling and movement of physical cheques. Officially termed the CIT (cheque imaging/truncation) project, it was originally slated to be launched in June 2005. The Lankan central bank required all commercial banks to use image-friendly cheques that adhere to standards.
Apart from this, it had also recommended cheque image capturing centers at the regional level and most importantly, introducing amendments to existing laws governing cheque transactions. The Lankan experience had shown that there were inherent shortcomings in the existing legal framework that were governing all payment, whatever be the medium.
The implementation of CIT itself had run into trouble due to lack of adequate legal provisions. The Central Bank of Sri Lanka had then initiated action to introduce a comprehensive Payment Transactions Law in the country to facilitate CIT and retail payments in electronic form. The law also took care of acceptance of the electronic presentment of cheques. The Bank of International Standards incidentally is also working on a legal framework for payment instruments. This includes cheque laws that will govern the issuance, acceptance and negotiation of cheques. Where such laws are not yet created, common laws or contracts will govern such transactions, until these are eventually governed by the new legislation. The BIS is also creating laws to determine the rights and obligations of payers and payees in situations of fraud as part of the criminal code or the cheque law.
Finally, it is enabling electronic cheque presentment, truncation and imaging. The Bank has seen a need for such measures because of the need to modernize existing law, legislation is usually the preferable mechanism. In Singapore again, where the system went online in July 2003, a shoe box sized scanner is used in the local branch where the cheque is deposited. The scanner is used to capture an image of the cheque and send it to an automated clearing house and on to the paying bank. Returned cheques follow the same route. Other countries that have already decided and initiated steps to implement a comprehensive cheque truncation system are Hong Kong, France and Thailand.
More significantly, in the USA, which has historically had one of the lowest rates of electronic money transmission, the coming into force of legislation enabling image-based cheque truncation in October 2004 (the Check 21 Act) is expected to cause an explosion in the use of such systems. The main advantages of cheque truncation in reducing the delay, high costs and risk of fraud inherent in the paper based clearing system have always been obvious.
In recent years the steadily falling volumes of cheques and consequently rising unit costs have added to these advantages. In the UK the position is slightly obscure although some truncation takes place. The normal procedure for clearing of cheques would involve the cheques being submitted by the collecting bank to the paying bank at the central clearing house and then being sent on by the paying bank to the branch of the paying bank on which the cheque was drawn. In 1996 the Bills of Exchange Act 1882 was amended to allow the collecting bank to collect a cheque by submitting the essential details of it to the paying bank instead of the original cheque.
The banks have not adopted such a scheme: collecting banks continue to submit the original cheques drawn on other banks to the paying banks. However, some paying banks now retain the cheques at a central place and forward details of the cheque rather than the cheques themselves to the paying branch (see e.g. “UK Payment Systems, OFT Market Study, May 2003, p.44). This is known as “partial truncation” or “paying bank truncation”. In doing so the paying banks are assisted by the fact that since 1996 there has been a system (the Inter Bank Data Exchange) under which collecting banks give the paying banks not only the original cheques for collection but the electronic data harvested by the collecting banks when sorting the cheques.
The paying banks pass this information to the paying branches for a decision on the fate of the cheque. It is not clear if those banks which operate partial bank truncation seek to operate within s74A/B of the 1882 Act. Those provisions require that the paying bank gives notice in the Gazettes of the place where the information about truncated cheques may be presented, and that the cheque may be presented by giving the information at that address instead of the original cheques.
Most advanced countries such as Denmark, Sweden, and New Zealand have virtually eliminated cash payment and promoted electronic transfer of money. Truncation straddles many countries across the globe on either side of the hemisphere. These include countries like Denmark and Belgium, which were the pioneers in the truncation process, having introduced complete cheque truncation (dokumentiase clearings) in the early 1980s itself to the island state of Singapore, which is in the final phase of implementation.
Retail payment analysts make a two-fold classification – countries like England, US and France where cheque has always dominated non-cash payments on one hand and the others like Sweden, Norway where giro transfers have been the dominant modes of non-cash payments. Cheque volumes in the second group have historically been low and from the point of view of truncation, manageable, and these countries have been successful in introducing truncation in the clearing process. Sweden is the extreme example of achievement of complete truncation where all cheques can be presented and encashed at any bank branch, irrespective of the bank on which they are drawn.
Secondly, the implementation of truncation has invariably been preceded either by the amendment of the existing laws governing cheques and other payment instruments or by the introduction of new laws. Many countries such as Spain, Italy and Luxemburg have an amount ceiling for the cheques that can be truncated. Cheques that are considered low value are eligible for truncation whereas the higher value instruments still follow the traditional clearing route.
Under most implementations the cheques are truncated early on in the clearing cycle, typically at the collecting branch level or the collecting bank level. Ireland stands out as an example of late truncation, where 95 percent of the cheques are truncated at the paying bank stage. International experiences with cheque truncation show that the geographically smaller countries are the ones that have been able to implement the process of truncation, be it Greece or Singapore or Belgium. Cheque truncation has been less than a complete success in larger countries. USA, for example, is still a laggard in this respect despite having the maximum number of cheques written (237 per head in a year). Nonetheless, it is making progress towards implementation of cheque truncation.
At the moment though, it’s facing a situation similar to India and even the US--paper cheques don’t look like they are going away in a hurry. The sheer volume of paper transactions that are conducted across the country on a daily basis is enough to give us an idea about the present scenario. Singapore’s approach to CTS, which began in 2001, is similar to ours. The CTS is being jointly developed by the Association of Banks in Singapore along with the Singapore Clearing House Association.
From the initial stage itself, the banks had considered setting up a national archive at the backend for central storage of the cheques, a practice that is bound to reduce TCO through better economics of scale. Closer home, the Central Bank of Sri Lanka had embarked on cheque imaging/truncation project along with LCPL.
The primary drivers for the bank to take this step is to shorten the cheque clearing cycle, particularly outstation ones, and reduce inefficiencies involved in handling and movement of physical cheques. Officially termed the CIT (cheque imaging/truncation) project, it was originally slated to be launched in June 2005. The Lankan central bank required all commercial banks to use image-friendly cheques that adhere to standards.
Apart from this, it had also recommended cheque image capturing centers at the regional level and most importantly, introducing amendments to existing laws governing cheque transactions. The Lankan experience had shown that there were inherent shortcomings in the existing legal framework that were governing all payment, whatever be the medium.
The implementation of CIT itself had run into trouble due to lack of adequate legal provisions. The Central Bank of Sri Lanka had then initiated action to introduce a comprehensive Payment Transactions Law in the country to facilitate CIT and retail payments in electronic form. The law also took care of acceptance of the electronic presentment of cheques. The Bank of International Standards incidentally is also working on a legal framework for payment instruments. This includes cheque laws that will govern the issuance, acceptance and negotiation of cheques. Where such laws are not yet created, common laws or contracts will govern such transactions, until these are eventually governed by the new legislation. The BIS is also creating laws to determine the rights and obligations of payers and payees in situations of fraud as part of the criminal code or the cheque law.
Finally, it is enabling electronic cheque presentment, truncation and imaging. The Bank has seen a need for such measures because of the need to modernize existing law, legislation is usually the preferable mechanism. In Singapore again, where the system went online in July 2003, a shoe box sized scanner is used in the local branch where the cheque is deposited. The scanner is used to capture an image of the cheque and send it to an automated clearing house and on to the paying bank. Returned cheques follow the same route. Other countries that have already decided and initiated steps to implement a comprehensive cheque truncation system are Hong Kong, France and Thailand.
More significantly, in the USA, which has historically had one of the lowest rates of electronic money transmission, the coming into force of legislation enabling image-based cheque truncation in October 2004 (the Check 21 Act) is expected to cause an explosion in the use of such systems. The main advantages of cheque truncation in reducing the delay, high costs and risk of fraud inherent in the paper based clearing system have always been obvious.
In recent years the steadily falling volumes of cheques and consequently rising unit costs have added to these advantages. In the UK the position is slightly obscure although some truncation takes place. The normal procedure for clearing of cheques would involve the cheques being submitted by the collecting bank to the paying bank at the central clearing house and then being sent on by the paying bank to the branch of the paying bank on which the cheque was drawn. In 1996 the Bills of Exchange Act 1882 was amended to allow the collecting bank to collect a cheque by submitting the essential details of it to the paying bank instead of the original cheque.
The banks have not adopted such a scheme: collecting banks continue to submit the original cheques drawn on other banks to the paying banks. However, some paying banks now retain the cheques at a central place and forward details of the cheque rather than the cheques themselves to the paying branch (see e.g. “UK Payment Systems, OFT Market Study, May 2003, p.44). This is known as “partial truncation” or “paying bank truncation”. In doing so the paying banks are assisted by the fact that since 1996 there has been a system (the Inter Bank Data Exchange) under which collecting banks give the paying banks not only the original cheques for collection but the electronic data harvested by the collecting banks when sorting the cheques.
The paying banks pass this information to the paying branches for a decision on the fate of the cheque. It is not clear if those banks which operate partial bank truncation seek to operate within s74A/B of the 1882 Act. Those provisions require that the paying bank gives notice in the Gazettes of the place where the information about truncated cheques may be presented, and that the cheque may be presented by giving the information at that address instead of the original cheques.
Most advanced countries such as Denmark, Sweden, and New Zealand have virtually eliminated cash payment and promoted electronic transfer of money. Truncation straddles many countries across the globe on either side of the hemisphere. These include countries like Denmark and Belgium, which were the pioneers in the truncation process, having introduced complete cheque truncation (dokumentiase clearings) in the early 1980s itself to the island state of Singapore, which is in the final phase of implementation.
Retail payment analysts make a two-fold classification – countries like England, US and France where cheque has always dominated non-cash payments on one hand and the others like Sweden, Norway where giro transfers have been the dominant modes of non-cash payments. Cheque volumes in the second group have historically been low and from the point of view of truncation, manageable, and these countries have been successful in introducing truncation in the clearing process. Sweden is the extreme example of achievement of complete truncation where all cheques can be presented and encashed at any bank branch, irrespective of the bank on which they are drawn.
Secondly, the implementation of truncation has invariably been preceded either by the amendment of the existing laws governing cheques and other payment instruments or by the introduction of new laws. Many countries such as Spain, Italy and Luxemburg have an amount ceiling for the cheques that can be truncated. Cheques that are considered low value are eligible for truncation whereas the higher value instruments still follow the traditional clearing route.
Under most implementations the cheques are truncated early on in the clearing cycle, typically at the collecting branch level or the collecting bank level. Ireland stands out as an example of late truncation, where 95 percent of the cheques are truncated at the paying bank stage. International experiences with cheque truncation show that the geographically smaller countries are the ones that have been able to implement the process of truncation, be it Greece or Singapore or Belgium. Cheque truncation has been less than a complete success in larger countries. USA, for example, is still a laggard in this respect despite having the maximum number of cheques written (237 per head in a year). Nonetheless, it is making progress towards implementation of cheque truncation.
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