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The paperless environment has evolved and booming now. Nowadays, financial institutions constantly enhance the choice of the products and services to win the customer. Furthermore, this is the era where banks strive to become excellent service provider by exceeding customer’s expectation. With electronic documents allow a company to save time, increasing efficiency and providing excellent customer service. Hence, imaging technologies gives the required platform that needed to achieve this competitive edge.
Check clearing process in Malaysia has evolved from paper pushing to paperless. Day by day, customer deposit and issue out checks. Despite many payment methods available in Malaysia such as Internet banking, mobile banking, Interbank GIRO, Rentas (Real Time Fund Transfer System) and others, check instrument remains an important payment method used in Malaysia.
According to the statistic from Bank Negara Malaysia (Malaysian Central Bank), it is evident that check payment is the most preferred payment method now and in times to come. Although there is sign of decline from year 2007 onwards which is due to an emergence of electronic banking, but cheque will remain high as the funds movement exceeded trillion. As such, BNM has implemented Cheque Truncation and Cheque Conversion (CTCS) process on 16th June 2008 where all espick participants duly implemented and in operation since then.
Image-based cheque clearing process, replaces the physical cheque flow with electronic data and image flow throughout the clearing cycle. The process eliminates the movement of the physical cheque from various intermediary levels in the clearing process and hence, reduces the delays in the clearing process. Ideally, the movement of the physical cheque should stop at the bank/branch of first deposit (The collecting bank branch). This, in return, increases operational efficiency through expedient payment and receipt of funds, reduces the operational cost through the reduction or redeployment of redundant resources used for handling cash and cheques, and expedites the clearing process in the industry.
Due to CTCS introduction, the physical cheques will be kept by the collecting bank after their images and MICR ( Magnetic Ink Character Recognition(MICR) code line data have been captured and the readability verified. To ensure the quality of images that have captured, cheques will be required to adhere to image friendly design standards and specifications. Electronic imaging places new requirement on the overall design of cheques so that they are readily legible when viewing their images, rather than the physical cheque itself. The design standard has to ensure that all essential information, including hand-written data and machine-printed date, will be captured by the imaging process. The captured images will be usable and legible, and that the file sizes of images will be small enough so that they can be stored and moved in a cost justified manner. Furthermore, check truncation has been implemented in many countries like US, Singapore, Sri Lanka and Hong Kong.
Due to banking secrecy, the name of the bank that will be used in this report is Kaybank Berhad. This is an international bank with 11 branches in Malaysia which is mostly in urban and semi urban area. Hence, this bank has huge customer base including consumer and corporate business.
There are 4 types of processes for cheque clearing
Inward Cheque Clearing
Outward Returned Cheque Clearing
Kaybank cheques that need to be returned due technical error, stop payment or insufficient funds
Outward Cheque Clearing
Other banks cheques deposited at Kaybank
Other bank’s returned check due to technical error, stop payment or insufficient funds
The author will discuss about the Inward Clearing process in this report as it is an important process and high in volume. There is cut off time to complete the process within BNM clearing window (1.00pm) daily. And resources required to perform this task is high. Attached is the process of Cheque Clearing for the industry.
Process Flow of Cheque Clearing
Source : www.myclear.org.my
To elaborate further on this process, if a customer deposited a Kaybank Cheque of RM 20,000.00 into his/her account at Citibank, the image and the data of the check will be transmitted to Myclear (Subsidiary of Bank Negara Malaysia) via a gateaway system (NWI). Base on the MICR data, the said account will be debited of RM 20,000.00 and the funds will be credited to customer’s account with Kaybank. In this case, the collecting bank will be Citibank and the paying bank will be Kaybank. The turnaround time for the availability of funds is 2 days.
Process Map for Inward Clearing process at Kaybank
Data transfer to Check verification System
Download of Inward file from Myclear
Upload of espick data to Kaybank system
Reject the image Yes
Second level checking
Reversal of customer’s account
Upload Returned file to Myclear
Kaybank’s key strategy is to grow their Consumer business and Corporate business. The consumer business division continuously invests in new products and service innovations to increase its presence in Malaysia and to expand its private banking segment. However, its Corporate business has a core group of customers to which Kaybank leverages global presence to provide excellent quality financial products and services. However, both businesses have continues to improve the customer experience. It has also improves operational efficiency by constant reengineering programs.
The main objective of Cheque Clearing Unit is to support both businesses by delivering excellence service to the customers by managing their Current Accounts with error free and to manage operational cost effectively. By shifting to CTCS process, Kaybank has improved the performance objectives of operation in clearing process as follows;
Banks are losing million of money due to fraud cheque. With CTCS process, banks reduced the losses tremendously as the liability to pay in the event of fraud check has been shifted to collecting bank. The collecting bank has to check under the Ultra Violet and the security features on the check and tag the item if it is fraud to preempt the paying bank.
System is controlled by Myclear and quarterly testing been conducted to ensure no vulnerability of the system. Continuity of business plan has been established in the event there is a crisis due to network issues or others.
Automation where cheques been automatically debited by the system instead of manual posting.
Straight through processing been achieved where no manual invention is required.
Reduced customers complaint on missing cheques when mailing out as it could be lost in transit. Now, with image base returned item, customer can’t use back the same cheque for representment.
Data file will be encrypted before sending files to respective branches or clearing house.
High security features established and files sent or received would not be compromised.
Better reconciliation and fraud prevention
Customers are happy as float days of cheque was reduced from 8 days to 2days. And house check payment is given an immediate credit.
Under the manual environment staff needs to perform 500 physical cheques verification for 5 hours but with CTCS each staff can perform 750 checks in 4 hours.
Customer’s complaints will be resolved within a day as under the manual environment it takes 3 days.
Staff productivity increased and performing multi tasking.
Staff overtime has been reduced tremendously and having quality time with their family. Manual process requires 12 working hours for each staff compare to just 8 hours now. Calculation of saving are as follows:
Cost saving on Overtime = 30 Staff x 4 hours
= 120 hours a days x 23 days
= 1760 x 22.50 per hour
= RM 39,600.00 per month
Hence, for month the bank has saved an approximately RM 39,600.00 in overtime due to CTCS process.
Cost of purchasing the system is only one time and maintenance and licensing rental is lower compare to physical cheques management.
Staff transport claims and meal allowances were reduced to none as theay are not required to work long hours anymore.
No shipment of cheques to Clearing House is required now due to transmission of data.
There are 30 staff been employed previously to manage inward clearing volume of 40, 000 daily but now only required 18 staff. The other 12 staffs were redeployed.
Retention period of cheque is only a year under CTCS as compare to 7 years previously. Daily a total of 40,000 cheques processed daily and requires 10 boxes to place the cheques. The saving calculation is as follows;
= 10 boxes x 23 working days
= 230 boxes x 2.50 monthly storage per box
= RM 575.00 x 12 (months) x 6 (Years)
= RM 41,400.00
Hence, for month the bank has saved an approximately RM 41,400.00 due to CTCS process.
Maintain Audit Log where it monitors the user details and accessibility
Prepares or generate MIS report for volume tracking and for departmental budget planning.
It is also a core banking system online approach to upload or download data or batches.
Interfaces with internal and external system like signature verification system, Cheque deposit Machines and clearing house.
It has provided centralized cheques clearing processing and supporting branches from Penang and Johor Bahru where previously under difference clearing zone.
Customers are happy with the service as their cheques are now safe from fraudsters.
Inward Clearing process is simple and the staff can perform multi function and deliver good quality of work as they are not required to work long hours.
Each transaction under CTCS is controlled by Unique Identifier Code (UIC) which is a unique reference number printed on the back of the cheque by the collecting bank and it will make the retrieval for investigation ad presenting of unpaid items are easier.
Better controls established due to simplified process and enhancement and will not lead to financial losses or customer issues.
Cheque Verification System
Kaybank has invested in a E-flow system for check verification. This system is supported by in house Technology team. Once Inward Clearing data downloaded from the Gateaway system, it will be downloaded to the E-flow system for verification. Each workstation will have a single Central Processing Unit (CPU) and 2 monitors. One to view the image and the other monitor is to display the signature. There are 7 types of cheques processed and each will have a different process and approach. Hence, images and MICR data downloaded to E-flow system and will get sorted and channel to the respective station. For control purpose, the main function for this system is display the image for verification purpose and reconciliation. Kaybank has also emphasized on second level verification for certain threshold to avoid any mistake done by the first level verifiers.
However, there are some flaws in this system as follows;
The system has limited products. As of now, the system was designed to cater 7 products and if there is an additional product in the market and Kaybank wanted to implement it, there will be an issue. It may mix up with other products.
If a particular product it to be ceased, then the station will be remain there. For example, Credit Card cheque has been stopped by Kaybank due fraud vulnerability since Septemeber 2010. The station is there and it can’t be removed as it would involve cost.
Any changes or addition into this system involve cost and it is expensive.
Tagging of checks as altered by the collecting bank is subject to readability of the person who verify the said cheque. Hence, the CTCS ruling astablised by myclear is unclear. As it is subjected to apparent alteration sight by the processor. In the event, the cheque has been washed and altered and the alteration on the check is not apparent, then the collecting bank is not liable for the losses. In turn, it will be shifted to the paying bank to pay the losses. This rule in unclear and it is not good for the industry.
Inward Clearing Volumes from January 2010 till October 2010
Source : Internal MIS for Inward Clearing Transactions
On the other hand, cheque fraud costs Malaysia millions of losses a year and presents severe challenges to the industry. Hence, a better system needs to be deployed for the effectiveness of the current process. Payee Match Positive Pay Application technology has already started in U.S as it was developed by Parascript, LLC, Niwot, Colorado, U.S. The main objective of this system is to combat cheque fraud. The system is designed to read a cheque’s payee line information and cross validate the data provided to the bank by the customer via Cheque Issue File. This system assures accuracy and significant reduction of check fraud. Furthermore, with if this system should be implemented, funds can be made available in T + 1 (One day Clearing). If the adoption of this technology is feasible, then they will be no impact to the process as it works the same and the only difference is the system. Referring to the projected volume, for product like Paylink, Manager Check, Payment Order and to some extent corporate customers the verification can be automated. Since companies update Kaybank with their list of the cheques issued out the beneficiary, this system can perform auto match and approved the transaction without manual intervention. The system could be expensive but in long them, there will be no fraud cheque .
Genichi Taguchi (Nigel Slack, Operation Management), has highlighted to test the robustness of a design to ensure it withstands any change. However, in this case the changes only affect the system as all verifiers need to verify some number of cheques daily. The terminal is stationed at their respective workstation. Hence, there is no impact on the job design, layout and flow or operations. Although, the volume will decrease to some extent as with current capacity, staff may need to verify cheque lesser. On the other hand, with the implementation of new system, staff has to be trained and they could be error prone as this will be totally a new system.
With regards to the system enhancement, Myclear as a regulator should take the lead and supervise clearing process. Internally, Kaybank may able to deploy a good system but Positive Pay system is very new and extremely expensive where a single bank will hesitate to buy the system. However, with the involvement of Myclear and all member banks, all should share the cost to bring the system to Malaysia to develop together. With this, the cost will be cheaper and can be affordable and all the intermediaries will have a common platform to work with.
Although, the current system deployed by Kaybank is reliable, there will be no assurance when the fraudster will strike the banking industry with their sophisticated technologies. Hence, BNM, Myclear, ABN (Association of Banks) and member banks must pursue other alternative to prevent fraud attempt by the fraudsters sooner. The Police too have to amend laws to draft severe punishment to nab the fraudster.
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