Cheque Processing Systems

Cheque Processing Systems

[ From chapter-21 of the book "Information Technology in Banking" written by Abul Kashem Md. Shirin and Nusrat Tamanna Prianka and published by Institute of Bankers, Bangladesh (IBB) ]

Cheque Processing System or Payment system in short, is a means by which funds are transferred among financial institutions, businesses, and persons. Payment systems are considered as the most important factor for the well functioning of a country's financial system and for successful application of monetary policies by the central banks. Moreover, cross-border connections of the payment systems become essential for development of a country and for attracting foreign capital and foreign investors.

1.         Clearing and Settlement Systems

At present, four clearing systems are operating in Bangladesh. They are:

(a)        Bangladesh Bank's Clearing Houses in Dhaka and its branches in seven other cities;

(b)        Sonali Bank's Clearing Houses in 31 cities where there are no BB branches;

(c)        the BB large value cheque settlement system; and

(d)        the Bangladesh Bank Foreign Currency Clearing System in Dhaka which clears and settles foreign currency cheques and pay orders by the Forex Reserve and Treasury Management Department (FRTMD).

There are four clearings each day at the BB's clearing house. The first clearing starts at 10:30 am and returns of the first clearing are at 5:30 pm The Same Day clearing starts at 11:00 am and returns occur at 2:00 pm. The instruments cleared through the clearing houses are cheques, bank drafts, pay orders, dividend warrant, etc. drawn on commercial banks and BB. Except Barisal and Rangpur office, other branch offices of BB have a computerized settlement process where the commercial banks, in addition to the physical instruments, present diskettes that contain each bank's paying obligations and receivables from other banks. Compared to the volume in Dhaka and Chittagong, the cheques cleared in outstation branches are insignificant.

2.         Conventional Cheque Clearing Process

The conventional Cheque clearing process is a fairly time consuming procedure and it involves many manual processes and physical movement of the instruments. It not only increases the time of clearing, also exposed to higher level of risks and frauds as the instruments are moving in various points and through various persons.

The typical cycle of such clearing process is as under:

3.         MICR (Magnetic Ink Character Recognition)

Since the manual or conventional cheque clearing process is time consuming, the introduction of MICR has come into place. Magnetic Ink Character Recognition, or MICR, is a character recognition technology used primarily by the banking industry to facilitate the processing of cheques. The technology allows computers to read information (such as account numbers, cheque numbers and special characters) printed on the bottom of cheques or other financial transaction documents. Unlike barcodes or similar technologies, however, MICR codes can be easily read by humans.

MICR characters are printed in special typefaces with a magnetic ink or toner, usually containing iron oxide. As a machine decodes the MICR text, it first magnetizes the characters in the plane of the paper. Then the characters are passed over a MICR read head, a device similar to the playback head of a tape recorder. As each character passes over the head produces a unique waveform that can be easily identified by the system. MICR technology is used in the banking industry in many countries including Bangladesh because it allows for fast and reliable document processing.

The major MICR fonts used around the world are E-13B and CMC-7. The E-13B character set is as under:

Whereas CMC-7 character set is as follows:

4.         Cheque Truncation

Cheque Truncation is the process of stopping the flow of the physical cheque issued by a drawer to the drawee branch. The physical instrument will be truncated at some point en-route to the drawee branch and an electronic image of the cheque would be sent to the drawee branch along with the relevant information like the MICR fields, date of presentation, presenting banks etc. Thus with the implementation of cheque truncation, the need to move the physical instruments across branches/ banks would not be required, except in exceptional circumstances. This would effectively reduce the time required for payment of cheques, the associated cost of transit and delay in processing, etc., thus speeding up the process of collection or realization of the cheques.

The Cheque Truncation System, CTS envisages a safe, secured, faster and effective system for clearing of the cheques. In the CTS the presenting bank will capture the data & images of the cheques using their Image Capture System which is internal to them. They have to meet the specifications and standards prescribed for data and images. To ensure security, safety and non-repudiation the PKI (Public Key Infrastructure) is being implemented across the system. The banks will send the captured images and data to the central clearing house for onward transmission to the payee/ drawee banks.

For the above purpose, Bangladesh Bank has provided all the banks a software called Participating Bank Module, PBM which enables them to connect and transmit data in a secure way and with non-repudiation to the Clearing House (CH). The Clearing House will process the data and arrive at the settlement figure for the banks and send the required data to payee/ drawee banks for processing at their end. The drawee/ payee banks will use their PBM mentioned earlier for receiving the data and images from the Clearing House. It will be the responsibility of the drawee bank Capture System to process the inward data and images and generate the return file for unpaid instruments.

The Generic Truncation practices are as under:

The infrastructure required for CTS from bank's end are connectivity from the bank gateway to the clearing house, hardware and software for the CTS applications. Bangladesh Bank shall be providing member banks with the PM and the banks have to procure other hardware and system software for the CH and the application software for their capture systems on their own.

Some of the benefits of such system are:

·         Faster clearing cycle

·         Better reconciliation/ verification process

·         Better Customer Service, Enhanced Customer Window

·         T+0 or T+1 day Clearing

·         Elimination of Float. Incentive to shift to Credit Push payments

·         The jurisdiction of Clearing House can be extended to the entire country. No Geographical Dependence

·         Operational Efficiency will benefit the bottom lines of banks

·         Minimises Transaction Costs

·         Reduces operational risk by securing the transmission route

5.         RTGS (Real Time Gross Settlement)

Real Time Gross Settlement (RTGS) systems are funds transfer systems where transfer of money or securities takes place from one bank to another on a "real time" and on "gross" basis. This is the fastest possible money transfer system through the banking channel. Settlement in "real time" means payment transaction is not subjected to any waiting period. The transactions are settled as soon as they are processed. "Gross settlement" means the transaction is settled on one to one basis without bunching or netting with any other transaction. Considering that money transfer takes place in the books of the Central Bank, the payment is taken as final and irrevocable.

6.         BACH (Bangladesh Automated Clearing House)

Bangladesh Bank has taken up the project of automating the payment systems of the country in the name of “Bangladesh Automated Clearing House” (BACH). The project BACH is divided into two parts:

i)          BACPS (Bangladesh Automated Cheque Processing Systems) and

ii)         BEFTN (Bangladesh Electronic Funds Transfer Network)

6.1.      Bangladesh Automated Cheque Processing Systems (BACPS)

Bangladesh Bank has launched the BACPS in 2010. BACPS has been implemented with cheque imaging and truncation activities.

Accordingly the cheque design for the Banks has been standardized. The size, security features and paper specifications have been informed to the financial institutions. The new cheque leaf contains Magnetic Ink Character Recognition (MICR) line which has been designed to provide information on the amount, transaction code, clients account information, routing number and the cheque leaf's serial number.

The new routing numbers have been assigned to the bank branches for easy identification of origin and destination of a cheque. The routing number comprises of 9 digits. The first 3 digits are Bank codes, next 2 digits are district codes, following 3 digits are branch code and the last digit is the check digit.

The system will support both intra-regional and inter-regional clearings. The system is based on a centralized processing centre located in Dhaka and its Service Branches at 64 districts. The proposed processes and systems will conform to best practices and also will represent the most cost effective solution for cheque processing. The first phase of BACPS project, i.e, Dhaka Clearing House is in operation since October 7, 2010.

6.2.      Bangladesh Electronic Funds Transfer Network (BEFTN)

BEFTN will operate as a processing and delivery centre providing for the distribution and settlement of electronic debit and credit instruments among all participating banks. The BEFTN Network is envisaged as a system of participating banks connected with the EFT Operator via communication lines. This network will facilitate the transmission of payments between the banks electronically, which will make faster and efficient means of inter-bank clearing than the existing paper-based system.

The Network will start with simple credit transactions and gradually progress to debit transactions. This will dramatically bring down the operational cost, reduce risk and will also increase the efficiency of the payments process.

EFT, a mode of electronic fund transfer, operates on a deferred net settlement (DNS) basis which settles transactions in batches. In DNS, the settlement takes place at a particular point of time. All transactions are held up till that time. For example, if EFT settlement takes place 2 times a day during the week days (as for example at 11.00 am & 3:00 pm), any transaction initiated after a designated settlement time would have to wait till the next designated settlement time. Contrary to this, in RTGS, transactions are processed continuously throughout the RTGS business hours.