Paper Clearing - The Next Step

In early 90s it was felt that the prevalent manual clearing system to clear banking instruments was in adequate to meet the needs of growing financial sector of the country, by 1995 major banks of Pakistan had embarked on a enterprising project of installing an automated clearing system in the country starting from the city of Karachi an unrivalled business hub of the country.
Though a late starter the joint venture between banks and private entrepreneurs had the clear advantage to leap-frog into setting up a state of the art image based Automated Clearing House (ACH) while clearing through electronic data and truncation of banking instruments at deposit points (depositing banks) was well proven and accepted in the developed world.
I am sure in those days only a few had envisaged that conversion of cheques to images and their exchange will become a necessity for a speedy and low cost clearing and settlement of paper documents.
All this while a lot has been said and written about disappearance of paper as a medium for storing and exchanging information between individuals and business entities but I doubt if any of the paper manufacturers have gone out of business for lack of demand any where on the globe.
In a very short time the image based ACH proved its worth to the end users and it was ready to replicate itself and spread to other parts of the country.
Towards the end of 1999 Ministry of Science & Technology felt the need to evaluate country's preparedness to embark on e-Commerce and conducted a study through Institute of Business Administration and by the beginning of year 2000 it had set up various workgroups to discuss and recommend best route to take for the introduction of e-Commerce in the country.
With these deliberations some important facts of e-Commerce to came into lime-light. Any amount of success was clearly linked to; easy and low cost access to networks, general awareness, advanced payment systems, necessary legislation to provide legal equivalence to electronic documents and of course last but not the least, the security, trust and confidence in this way of doing business.
During early stages various concerted efforts commenced to achieve the goals set by participating stakeholders, one of course is more notable in the scope of this writing; that is ECH Task Force set up by State Bank of Pakistan to evaluate the existing payment systems and recommend steps to keep pace with changing times.
The resulting recommendations were focused and clear in setting priorities and while praising the efficiencies added by the existing ACH a clear need for shared ATM networks was canvassed. Today we have two shared networks that communicate with each other and provide clear convenience to the end-user - The Consumer.
On the other hand by year 2002 government came up with a new legislation, Electronic Transaction Ordinance (ETO) 2002, to recognise electronic documents, digital signatures and digital certificates and declared them legal equivalents of their counterparts in the physical world.
The above legislation encouraged the ACH - National Institutional Facilitation Technologies (NIFT) to take another bold step and it launched first Certificate Authority (PKI) in the year 2004 to issue digital certificates and signatures to identify and authenticate individuals, entities and devices in the cyber world.
Again only a few believed that PKI one day will become a major facilitator for ensuring data integrity, privacy and non-repudiation needed to transact electronically with confidence and trust that the prevalent procedures, customs and practices in the physical world had already achieved.
It was PKI's recognition in the countries like USA, Switzerland, India, etc that pacified our beating hearts and generated a wave of confidence in the baby steps we were taking towards modernisation.
USA came out with the famous Check-21 Act to add indemnities, warranties and legal force to prevalent customs and practices in clearing of instruments through image exchange. India also modified its Negotiable Instrument Act of 1881 to make provisions for images and their exchange for clearing and settlement.
In our own case, we have used cheque images for longer than any other country in the region and having image based ACH in all major cities we are better primed for the next step in paper clearing that is electronic presentation and truncation of clearing instruments at deposit points using images already being produced every day. Then why is that we are slower than many others in moving to the next step. Well let's take a closer look at the issues we need to resolve to successfully achieve the goal.
It is also important to appreciate that our systems may seem similar to many others but at the same time they have their unique demands to be met for a successful and sustainable solution. Financial Institutions have their offices in geographically disperse locations, unlike many other countries our banks not only do business they are also required to provide services in many areas where balance sheet alone cannot be a measure of viability. And thus "20% of our bank/ branches do 80% of the business" resulting in lesser technological investments in 80% of the bank/branches.
Now let's venture into the description of anticipated issues.
Lack of ICT infrastructure available - as mentioned in paragraph above there are a large number of branches located in sub-urban or rural areas that do not have good ICT infrastructure available to them thus these branches may continue to depend on delivery of physical instruments.
Lack of interest in investing in the technology - again many branches may show little interest in spending on expensive technologies to be able to reap the fruit.
With these two issues in sight it can be safely assumed that any system that is chosen will have to cater to a variety of end users (branches), that is, the system will have to be a hybrid solution to service all; the technologically capable branches, the manual branches or branches fitting into any scale between the two. This peculiarity will give rise to the need of conversion of instruments into images at the capable ends and conversion of images into substitute physical documents at the less capable ends.
Lack of necessary legal cover - well don't be surprised our legal system did not provide indemnities, warranties or protections for conducting business electronically until the passage of ETO-2002. But unfortunately ETO-2002 explicitly excluded Negotiable Instruments and Notarisation to avoid the complexities in handling these areas.
Though modifications at point in time to Negotiable Instrument Act 1881 have made the provisions for presentation and negotiation of "Certified True Copies" as negotiable instruments but conversion of an instrument into digitally signed image may not be interpreted by many as falling into this category.
In addition, as the image is converted into a substitute instrument it will also need provision of legal acceptability from State Bank of Pakistan.
To fill these gaps State Bank of Pakistan has in fact put forward Payment Systems & Electronic Fund Transfer Act 2005 for its approval and promulgation.
This Act is already long awaited by stakeholders and any more delays will prohibit us from keeping pace with rest of the world. To add a positive note here, it is worth mentioning that the SBP's effort to automate interbank settlements (RTGS) is ready and will add great value to even net clearings such as overnight clearing, high value clearing, intercity clearing and express cheque clearing - yet to be added in the portfolio of services.
The refinements in self-service kiosks like Cheque Deposit Machines (CDM) now provide imaging facility and envelope-less deposits to be able to provide image-statements or receipts of deposits to the consumer - another comfort and added confidence to the consumer.
These machines, undoubtedly, can be used to extend a banks physical presence wherever it is needed and availability to whenever it is needed. The banks conveniently reach the consumer at his doorstep to allow cheque/cash deposits and facilitate payments like taxes utility bills etc while also providing the convenience to make deposits to their own accounts.
Road to success is probably not as smooth as portrayed here but we all have the expertise and rich hands on experience to make it happen. SBP needs to take much larger role and in this to encourage existing service provider and couple of banks to roll-out a proof of concept project.