Executive summary This report analyses the provision of cheque services by Bank of China (Hong Kong) and evaluates the need for providing such a service. Most, if not all, banks provide this service. Nevertheless the report’s aim is to overlook this tradition and give an insight into whether a bank should really be providing this service. The Bank Wide Operation Department is in charge of the bank’s cheque clearing process. A staff member from this department was interviewed regarding the cheque services.
The report reviews the current system setup to deal with cheques and forecasts what the future holds for a cheque service providing bank. Investigation of the current system reveal problems that are encountered in processing cheques such as time delay and administrative complications which bring up the question of continuing the provision of cheque services. Further findings include The Payments Council’s plans to abolish cheques by the year 2018. Nevertheless, the cheque is still favourable to certain groups of consumers who do not have personal bank accounts.
Several recommendations are made to overcome the issues faced when providing the cheque services. There is some truth in the belief that cheques will be used for at least another decade and corporations’ long term decisions usually do not cover very long time periods owing to the rapidly changing nature of the economy. The highly recommended alternative is the prepaid card system. If the bank is successful in implementing this system, to the extent to which it gets as famous as the cheque system, there may be significant improvements to the bank’s performance.
Another recommendation is the coding system which is a modification of the cheque system that employs more advanced technology. These recommendations are suggested after predicting what the future may hold for a bank’s cheque service department. Contents 1 Introduction The cheque is a document and is used as a method of payment in which the payer orders his/her bank to release a specified amount of money in his/her bank account to the payee. According to the Hong Kong Monetary Authority (HKMA), 500,000 cheques were processed each day amounting to 31 billion dollars in Hong Kong ("Payment, clearing and settlement systems in Hong Kong," 2011).
Cheque clearance has been an essential operation of a bank for as long as banks have been around. It can be divided into inward and outward clearing. Suppose Mr Brown issues a cheque to Mr Green. Let Mr Brown’s bank be ABC and Mr Green’s bank be XYZ. When Mr Green deposits the cheque into his bank, XYZ would transfer details of the cheque to ABC via an intermediary. This process is known as outward clearing in XYZ’s perspective. When ABC receives the information about the cheque and handles the clearing from there onwards it is known as inward clearing in ABC’s perspective.
Bank of China (Hong Kong) has 260 branches and is one of the three note issuing banks in Hong Kong. The bank processes on average 240,000 cheques every day. The figure can reach 360,000 during holidays, and the days in the beginning and end of months. The Bank Wide Operation Department in Bank of China (Hong Kong) is set up to handle daily cheque transactions as well as other routine operational activities. This report analyses the cheque service of a bank in the perspective of Bank of China (Hong Kong).
Furthermore, the purpose of this report is to attempt to identify what the future holds for cheques and to recommend methods of dealing with the demands that may arise in the future for a cheque service providing bank. 2 Current system When a customer of Bank of China (Hong Kong) issues a cheque, the payee cashes the cheque at the payee’s bank. The payee’s bank may be different from Bank of China (Hong Kong). The process, in this case, includes the additional transaction accommodated by Hong Kong Interbank Clearing Limited (HKICL) in order to transfer funds between Bank of China (Hong Kong) and the other bank.
Bank of China (Hong Kong) receives cheques of other banks. These cheques are collected at the end of the day and sorted using a machine according to their respective source banks. The micro barcode in each cheque is used to identify which bank it is from. The data from each cheque, such as the amount, the account holder’s name, the recipient’s name and the date, are entered manually to the computer. The image of the cheque is scanned and recorded by the Cheque Imaging and Truncation System (CITS). The cheque data from the captured image will be verified against the data entered manually.
Bank of China (Hong Kong) sends the cheque images to HKICL via a secure network. The images are saved in a backup storage device and transported to HKICL in case the primary copies are lost. HKICL then sends out these images and other relevant data to the respective banks. Bank of China (Hong Kong) also receives information about its cheques from HKICL. The bank links these cheques’ details to their relevant accounts. A verification is performed which involves checking if the issuers’ of the cheques (i. e. Bank of China’s customers) have sufficient bank balance and whether the signatures of the cheques are authentic.
Cheques that fail the verification are rejected. Issuers of these cheques are contacted by the bank via telephone call or mail depending on the urgency of the problem. Moreover, the bank sends the rejected cheques’ information back via HKICL to notify the other corresponding bank. If a cheque passes the verification, the corresponding account is debited and the amount is reimbursed to the payee’s bank. Afterwards, the cheque is packaged and archived. Diagram 1: Cheque Clearing Process 3 Problems in the current system An obvious issue evident in the current system is that the process is lengthy.
One reason is the fact that HKICL, the intermediary, and other banks are involved which means more verification and acknowledgements among the institutions are required. When images of cheques or cheques are sent to HKICL they are meant to be processed in batches. For this to be effective cheques are held for a longer period of time so that there are enough cheques to be sent out. This delays the processing of cheques. On the other hand, if cheques are handled in real time, HKICL would receive a cheque immediately after the payee deposited it.
Apart from the issues related to time transporting the cheques physically calls for added resources. It is only a backup method of transferring the cheques to HKICL however it costs more than the primary method (which is sending the cheque images through a secure computer network). It involves collecting the cheques from the deposit boxes, packaging them, loading them onto a delivery vehicle and fuel costs for the trips back and forth. Another problem is the over-loading issue. During peak seasons, such as before holidays, the amount of cheques received by banks will increase drastically. Due to the complicated nature
of the cheque clearing process mentioned above, over-loading might occur when a large volume of cheques are processed. HKICL might not be able to process all the cheques in time. The time required to process all the cheques so that money transactions could be made will become even longer. Account holders might have to wait longer to receive their money. A conversation with a staff member in the Bank Wide Operation Department revealed that an appraisal carried out by Bank of China (Hong Kong) in the recent past revealed that the provision of cheque services did not reap many benefits to the bank in terms of profits.
The identification of these problems lead us to question whether it is worth for Bank of China (Hong Kong) to further invest in the provision of cheque services. The management may want to consider the outlook for cheques. 4 The future of cheques The task of handling cheques calls for added resources in a bank. It requires paper and there are formalities to be considered such as making provision for cheques to be able to be read by a special scanner called magnetic ink character reader. The volume of cheques processed has been dramatically reducing over its lifetime; from around 11 million in 1990 to around 3.
8 million in 2009 owing to more convenient and easier methods of payments provided by advancements in technology ("Key Facts and Figures," n. d. ). The Payments Council, which is made of financial institutions, made plans to abolish the cheque as a method of payment by 2018 (Council, 2009). The main reason for cheques to remain in use even in the 21st century is because of the need to accommodate noncash payment to those who do not have bank accounts. The elderly, those who have been dependent on their cheque books all their lives and those who simply preferred payment by cheque voted against this plan.
Their voices were heard and the Payments Council abandoned the idea. The situation in Hong Kong is no different. The following analysis about cheques may interest the management responsible for the cheque providing service of Bank of China (Hong Kong). 4. 1 Why cheques may disappear A credit card will be immediately rejected if the payer is not in a position to make the payment. In the case of cheques there is no method to check whether the person issuing the cheque has sufficient funds in his/her account until the cheque is cashed.
Telephone and internet banking allows transferring funds almost instantly whereas it usually takes about 4 working days before one can withdraw the money after cashing in a cheque. Vendors are afraid that cheques may bounce. They prefer credit cards or just cash. The cost to banks of providing the cheque as a payment method is not always profitable enough. Banks are trying to discontinue this service (Peachey, 2009). 4. 2 Reasons why the cheque is being used and may still be used in future It facilitates noncash fund transfers to those who do not own a bank account.
There are those who own a bank account but do not wish to disclose their account details. The cheque comes in handy for payments to these individuals. Even though credit cards serve as a good alternative to cheques it has its drawbacks. It encourages people to spend more than what they can afford and has more security issues than cheques. Low income earners and those who do not have access to electronic alternatives prefer to stick to cheques because the cost of changing is too high. The time delay for cheque clearance may also be beneficial.
If someone wanted to write a cheque to pay at a point of sale (knowing that he/she has insufficient funds in his/her account) they could still do it and deposit enough money later on to the bank because the deduction does not take place instantly. For vendors who accept cheque as a method of payment; as opposed to credit cards, cheques do not require any equipment such as a card reader. Accepting cheques also means more choice for customers of payment options. The fact that it is a piece of paper with the recipient’s name on it makes it personal. Cheques are a perfect alternative for giving money as a gift.
5 Alternatives to cheques 5. 1 Transfer of funds to those without bank accounts One solution to tackle this problem is to encourage everyone to open bank accounts. However, there are still people who cannot afford one or just prefer not to have one (Sivy, 2012). Another solution is to use a coding system. Instead of handing out pieces of paper (cheques) the payer uses the bank's system to generate an alphanumeric code. This code is sent to the payee who walks up to his bank (because we are assuming that he does not have or want a bank account) and simply submits this code to his bank.
The code corresponds to a transfer of funds between the payer and the payee. The payer's name is also stored along with the code in the bank's system as well as the amount which is fixed as specified by the payer. To generate this code the payer uses a form which can be filled out online via a secure connection to the bank, via telephone banking or in person at his bank. To address security concerns it will be the payer's responsibility to make sure that only the payee receives the code.
The bank will request some form of identification from the payee before giving out cash. The cheque is in no way better than this method in terms of security. An assumption made in the design of this solution is that the request to release some amount of funds from the payer's bank account to the payee is done in real-time; meaning that the system is updated immediately so that the payee can collect the money any time after receiving the code. The main advantage of this solution would be the fact that it gets rid of all paperwork that was needed in the cheque system.
An added feature would be to allow the payer to specify a date and time at and the duration for which the funds would be available to the payee. 5. 2 Tackling payments to those reluctant to share account details The obvious distinction between those who do not have bank accounts and those who are reluctant to share details about their bank account is the ownership of a bank account. Individuals who own a bank account prefer to not travel to their bank to cash in a cheque (if the payment is made to them by cheque – which is what we are concerned about).
Therefore, the solution should make use of the possession of the bank account. The solution can be a modified version of the coding system mentioned previously. Instead of having to travel and deliver the code in person the payee can simply pass on the code received from the payer to his/her bank via internet banking or telephone banking systems. 5. 3 A different kind of ‘credit’ card The credit card seemed to be the best replacement for cheques; however, there were shortcoming attached to it. Addressing these shortcomings may lead to a near-perfect replacement for cheques.
Bank of China (Hong Kong) can issue, what may be labeled as, prepaid cards. This service is already being offered by some service providers such as American Express. Therefore, it is a feasible option. This solution simply takes all the advantages of the credit card such as elimination of paperwork and modifies the system to a non-credit system. The payer transfers a lump sum into the account related to the card and presents the card to vendors who then swipe the card using their card readers to accept payment. The amount that can be paid is strictly capped to the amount loaded in the card.
The differences between the Octopus card (which is a famous method of payment used in Hong Kong) and this prepaid card would be the technology, connection with the bank and pre-load limit. The technology used by the prepaid card would be similar to the magnetic stripe used in credit cards. This means that there is no necessity to rent an octopus card reader – the current credit card readers can be used by vendors. The connection with the bank means that topping up the prepaid card can be done using internet banking or telephone banking anywhere and anytime.
The pre-load limit would not be a thousand Hong Kong dollars instead it would be as much as the customer demands. 6 Conclusion The cheque service is an essential to Bank of China (Hong Kong) as is to all other commercial banks. There is significant demand for it. The service is provided as efficiently as possible by Bank of China (Hong Kong) and the only bottleneck constraining further improvement is the nature of the cheque system itself. Throughout the life of the cheque many alternative methods have been introduced by banks to try and replace cheques.
Some of them have succeeded; however, there is a population of those who are still loyal to cheques. Whatever the reason for them to be loyal might be sometimes there is simply no other option but to use a cheque. Bank of China (Hong Kong) may not be able to completely abolish providing the service. However, there is definitely a possibility to reduce the demand for it by encouraging customers to use alternatives which can benefit both Bank of China (Hong Kong) and the customer better than if cheques were involved. 7 References Council, T. P. (2009). 2018 target date set for closure of central cheque clearing, 2013, from http://www.
paymentscouncil. org. uk/media_centre/press_releases/-/page/855/ . Key Facts and Figures. (n. d. ) Retrieved 28th April, 2013, from http://www. chequeandcredit. co. uk/facts_and_figures/key_facts_and_figures/ . Payment, clearing and settlement systems in Hong Kong. (2011): Hong Kong Monetary Authority. Peachey, K. (2009). Cheques to be phased out in 2018, from http://news. bbc. co. uk/2/hi/8414341. stm Sivy, M. (2012). Why So Many Americans Don't Have Bank Accounts, Banking, Time. Retrieved from http://business. time. com/2012/11/20/why-so-many-americans-dont-have-bank-accounts/