role of it in banking industry

Cheque truncation
Cheque truncation (check truncation in American english) is the conversion of physical cheque into
a substitute electronic form for transmission to the paying bank. Cheque truncation eliminates
cumbersome physical presentation of the cheque and saves time and processing costs.
History[edit source | edit beta]
To settle a cheque it has to be presented to the drawee bank for payment. Originally this was done by
taking the cheque to the drawee bank however as cheque usage increased this became cumbersome
and banks arranged to meet each day at a central location to e!change cheques and settle the money.
This became known as central clearing. "ank customers who received cheques could deposit them at
their own bank who would arrange for the cheque to be returned to the drawee bank and the money
credited to and debited from the appropriate accounts. #f a cheque was dishonoured or bounced it would
be physically returned to the original bank marked as such.
This process would take several days as the cheques had to be transported to the central clearing
location from where they were taken to the payee bank. #f the cheque bounced it would be sent back to
the bank where the cheque was deposited. This is known as the clearing cycle.
Cheques had to be e!amined by hand at each stage which required a large amount of manpower.
#n $%&' machine readable codes were added to the bottom of cheques in (#C) format which allowed
the clearing and sorting process to be automated. This helped to speed up the clearing process* however
the law in most countries still required the cheques to be delivered to the payee bank and so physical
movement of the paper continued.
+tarting in the mid,$%%'s some countries started to change their laws to allow -truncation-. cheques
would be imaged and a digital representation of the cheque would be transmitted to the drawee bank and
the original cheques were destroyed. The (#C) codes and cheque details are normally encoded as te!t
in addition to the image.
/citation needed0
The bank where the cheque was deposited would typically do the
truncation and this dramatically decreased the time it took to clear a cheque. #n some cases large retailers
that received large volumes of cheques could also do the truncation.
Once the cheque has been turned into a digital document it can be processed through the banking
system 1ust like any other electronic payment.
Laws[edit source | edit beta]
Although technology needed to e!ist to be able to truncate a cheque it was the laws related to cheques
that were the main impediment to their introduction. 2ew 3ealand was one of the first countries to
introduce truncation and imaging of cheques when in $%%4 they amended the Cheques Act $%&' to
provide for the electronic presentation of cheques. A number of other countries followed over the ne!t few
years but progress was mi!ed due to the decline in the use of cheques in favour of electronic
payment systems. +ome countries decided that the effort to implement truncation could not be 1ustified for
a declining payment method and instead phased out the use of cheques altogether.
/$0
#n 5''6 the Check 5$ Act was implemented in the 7nited +tates to authori8e conversion of the original
paper check into an electronic image for presentation through the clearing process. The law also enacted
the recognition and acceptance of a -substitute check- created by a financial institution in lieu of the
original paper check. Any bank that receives the original paper check can remove or -truncate- the paper
check from the clearing process.
2ew laws needed to address ways to make sure that the digital image was a true and accurate copy of
the original cheque as well as a mechanism to enable the process to be audited to protect consumers.
#t also needed to address the process for dishonoured cheques as cheques could no longer be returned.
A typical solution as defined by the (onetary Authority of +ingapore for the +ingapore cheque truncation
system was that a special 9#mage )eturn :ocument9 was created and sent back to the bank that had
truncated the cheque.
/50
Operations and clearing[edit source | edit beta]
The security related to imaging and creating the electronic cheque needed to be defined and the clearing
process ad1usted to accommodate electronic cheques.
"anks and financial institutions use cheque truncation systems (CT+) to manage this process. These
systems have to deal with two main processes outward clearing and inward clearing.
#n outward clearing the deposited items are scanned and the operator performs amount entry account
entry item verification balancing and bundling of the items at the branch level. The items are then sent to
a service branch.
#n inward clearing the items received from branches are processed in the service branch where the
operator performs amount entry account entry item verification balancing and bundling of the items.
Once verification is complete the items are sent to the clearing house. Those items that failed validation
due to discrepancies are sent back to the originating branch to be corrected.
+ome banks have modified their own bank systems or built proprietary system to handle truncation there
are also a number of software companies that provide commercial solutions and services. These include.
Cheque truncation system
;rom <ikipedia the free encyclopedia
Cheque Truncation System (CT+) or #mage,based Clearing +ystem (#C+) in #ndia is a pro1ect undertaken by
the )eserve "ank of #ndia = )"# for faster clearing of cheques.
/$0
CT+ is basically an online image,based
cheque clearing system where cheque images and (agnetic #nk Character )ecognition ((#C)) data are
captured at the collecting bank branch and transmitted electronically.
Truncation means stopping the flow of the physical cheques issued by a drawer to the drawee branch. The
physical instrument is truncated at some point en route to the drawee branch and an electronic image of the
cheque is sent to the drawee branch along with the relevant information like the (#C) fields date of
presentation presenting banks etc.
Cheque truncation would eliminate the need to move the physical instruments across branches e!cept in
e!ceptional circumstances. This would result in effective reduction in the time required for payment of cheques
the associated cost of transit and delays in processing etc. thus speeding up the process of collection or
reali8ation of cheques.
doption Challenges[edit source | edit beta]
#ntegration with e!isting large banking systems, >egacy systems are a ma1or #T and operational
investment for banks. (ost "anks have already invested on legacy systems and therefore it becomes
vital that the new system has the capability to integrate seamlessly with the e!isting systems.
!"pected #ene$its[edit source | edit beta]
%or #anks& "anks can e!pect multiple benefits through the implementation of CT+ like faster clearing
cycle means reali8ation of proceeds of cheque possible within the same day. #t offers better
reconciliation?verification process better customer service and enhanced customer window. Operational
efficiency will provide a direct boost to bottom lines of banks as clearing of local cheques is a high cost
low revenue activity. "esides it reduces operational risk by securing the transmission route. Centrali8ed
image archival system ensures data storage and retrieval is easy. )eduction of manual tasks leads to
reduction of errors. Customer satisfaction will be enhanced due to the reduced turn around time (TAT).
)eal,time tracking and visibility of the cheques less fraudulent cases with secured transfer of images to
the )"# are other possible benefits that banks may derive from this solution.
/50
%or Customers& CT+ ? #C+ substantially reduces the time taken to clear the cheques as well enables
banks to offer better customer services and increases operational efficiency by cutting down on
overheads involved in the physical cheque clearing process. #n addition it also offers better reconciliation
and fraud prevention. CT+ ? #C+ uses cheque image instead of the physical cheque itself for cheque
clearance thus reducing the turn around time drastically.
Status o$ 'mplementation[edit source | edit beta]
The )eserve "ank of #ndia first implemented CT+ in 2ational Capital )egion 2ew :elhi from :ecember
5@ 5''@ with $' pilot banks and the dead line was set as April A' 5''B for all the banks. This was
followed by launch of CT+ in Chennai on +eptember 56 5'$$. After migration from (#C) to CT+ the
traditional (#C) based cheque processing was discontinued in 2C) and Chennai.
/A0
"ased on the e!perience gained and the benefits that would accrue to the customers and banks it was
decided to operationalise CT+ across the country. +tarting August $st 5'$A only CT+,5'$' compliant
cheques would be accepted for clearing.
/60
On $@th Culy 5'$A the )"# e!tended the deadline to A$st
:ecember 5'$A.
/40