Presented by Deborah Adu-Twumwaah THE TRUNCATION OF CHEQUES AND OTHER BANKING INSTRUMENTS VIA ELECTRONIC MEANS Presented by Deborah Adu-Twumwaah

Introduction Rapid advancement in ICT has had a profound impact on the banking industry and the wider financial sector. The ICT has become a necessary tool that facilitates bank’s businesses, customer service and other related functions.

Customers needs and expectations keeps changing with time and therefore has exposed the banking industry to more challenges. Banks respond to the changing needs by moving from the manual system of operations to a more sophisticated ICT applications in their service delivery.

Negotiable Instruments A negotiable instrument is a specialized type of contract for the payment of money that is unconditional and capable of transfer by negotiation.

It consists of three types of instruments namely, promissory note, bill of exchange and cheque. The major focus here is a cheque as it is the mostly used negotiable instrument

A cheque is a written order from one party (the drawer) to another (the drawee, normally a bank) requiring the drawee to pay specified sum on demand to the drawer or to a third party specified by the drawer. It may be used for settling debts and withdrawing money from banks.

Cheque is the most widely accepted negotiable instrument used in the banking system to settle transactions. Paper cheques provide individuals and businesses with alternative payment mechanism. Lots of cheques are written on daily basis and these cheques drawn on third parties must go through the clearing system.

Introduction of the clearing system A clearing system is a set of procedures whereby financial institutions present and exchange data and or documents relating to funds or securities transfers to other financial institutions at a single location called the clearing house.

Introduction of the clearing system Until recently, the interbank cheque clearing system in Ghana was fully manual paper based operation. This method was cumbersome and clouded with delays, thereby affecting efficient market operations.

Business transactions, involving the use of cheques for clearing, were fraught with delays since the receipt of money into customers’ accounts depended on the clearing cycle. Also the increase number of cheques received daily resulting from the growth of business transactions and economic activities, added more burden to banks.

These problems associated with the manual clearing system have been resolved under the codeline cheque truncation, also known as electronic cheque clearing system introduced by the bank of Ghana and the Ghana Inter- bank Payment and Settlement System (GHIPSS).

Structure of the payment system in Ghana The stakeholders of the Ghana’s payment system are the Central Bank, the Commercial banks, service providers and users of the system. The Central Bank occupies an important and unique position in the payment system. It is an overseer, operator and a participant of the payment system.

Structure of the payment system in Ghana The commercial banks participate in the system by making and receiving payments on their own behalf or their customers. The service providers are the printers of payment instruments and telecommunication companies who provide the infrastructural arrangements for the payment system

Structure of the payment system in Ghana Notwithstanding the unique role of each stakeholder, all of them are users of the payment system, including the banking public.

Cheque Codeline Clearing and Truncation The Ghana Interbank Payment and Settlement System (CHIPSS) in September 2009 launched an electronic cheque clearing system dubbed Cheque Codeline Clearing (CCC) and truncation. This system is believed to enhance efficiency, reliability and timeliness in the clearing of cheques, and eventually phase out the current manual paper clearing system.

Prior to this, cheques to be cleared were transported to clearing houses and physically exchanged among member banks, which made their handing and processing costly, insecure and time consuming lasting for a minimum of three days within the inner zones, and about nine days for outer zones.

The clearing Cycle The times within which value will be given to a payment instrument is referred to as the clearing cycle. These are determined according to the location of the paying and collecting bank branches.

The clearing Cycle Since september 16, 2009, banks in Accra and Tema clearing zones (inner zone) have been clearing their customers’ cheques through the fully-automated cheque codline clearing system. Cheques throughout the country now clears in two working days, as the cheque codeline clearing system became operational in january 15 2010.

PROCEDURES UNDER THE CCC Under the current clearing system, the clearing cycle for cheques is day of deposit (D) plus one day (D+1). The process is as follows: Day one, customer deposits or pays in the cheque at the bank. The collecting bank then examines the cheque and scans it and uploads images of the cheques collected electronically to the clearing house hosted by GhIPSS. For normal clearing cheques are send to GhIPSS between 6.0pm the previous day and 8.30am the next working day The physical cheque is retained by the collecting banker Day two (D+1), GhIPSS then send the cheque images electronically to the paying bank for payment(clearing) The paying bank verifies the cheque image before allowing payment. The decision to pay or not to pay cheque is bases on the image and the codeline data rather than the physical cheque

PROCEDURES UNDER THE CCC Clearing begins by 9.00am and completed by 4.00pm after which the value of the cheques are debited to the accounts of banks. The clearing process is therefore completed by 4.00pm on the same day (D+1) that cheques are submitted to the electronic clearing house by the banks. Banks are expected to credit the accounts of their customers with the proceeds of cheques collected soon after the end of the clearing cycle.

PROCEDURES UNDER THE CCC Rejected cheque images (Cheques that will not be honored )are transmitted through GhIPSS to the collecting bank that same day On the third working day the collecting bank uses the return cheque report to retrieve the physical cheque for sending to the depositor. A paying bank after payment may request for the physical cheque from the collecting bank for investigation relating the transaction but has to return within 5 working days

WAYS OR FORMS OF CLEARING PROCESS Outward clearing – cheque of another bank paid into customer’s account for clearing -Normal clearing- clearing is done within the normal working days (2working days) - Express clearing-cleared and paid by the paying bank the same day. Inward clearing- the image of a cheque of the same bank paid into a customer’s account.

Challenges The collecting banker retains the physical cheques, while the paying banker debits customer upon receipt of the scanned cheque (truncated cheque). The major problem or challenge that the paying bankers face is that, they give value to the cheque based on the scanned results of the physical cheque.

Challenges In an instance where the cheque has been ‘clonned’ or counterfeited, it becomes extremely difficult to detect it, meaning that paying banker could still go ahead to pay such a fraudulent cheque. Counterfeit cheques are not written or authorize by legitimate account holder.

Challenges The existence of counterfeit cheques is supported by new technology. Thieves use printers, copiers and newest software to make clone cheques with high resemblance to the original. Many times these are hard to recognize as false even by experts.

GHANA AUTOMATED CLEARING HOUSE The Ghana Automated Clearing House (GACH) is an electronic payment network used by individuals, businesses, financial institutions and government organizations to receive and transfer funds. It is more or less an electronic form of standing order Electronic ACH payments provide better cash management capabilities and lower costs than traditional paper payments.

GHANA AUTOMATED CLEARING HOUSE The GACH network allows funds to be electronically debited or credited to a company's or individual's deposit account. The Ghana Automated Clearing House (GACH) replaces the manual paper credit clearing system. It enables the electronic transfer of funds between financial institutions on their own account and on account of their customers.

SYSTEM PARTICIPANTS The main participants in the GACH direct credit and debit scheme are the originator or payer, the originator’s bank, the beneficiary and the beneficiary’s bank.

FORMS OF OPERATION BY GHANA AUTOMATED CLEARING HOUSE GACH normally operates in two forms namely: Direct credit also known as credit push payment Direct debit

DIRECT CREDIT/ CREDIT PUSH PAYMENT A GACH direct credit is a payment order or request from a payer to the payer’s bank to debit a specific account of the payer and effect payment by electronic transfer to the payee’s account at a Depository Financial Institution (DFI). Direct credits are of two types, single credits and bulk credits.

The single credit is used to effect bill payments which involve one debit and one credit of the same amount while the bulk credit is used to pay salaries, wages, pensions, dividends etc. which involve one large debit and many small credits.

DIRECT DEBIT A GACH direct debit is a payment instrument for making collections in GHS throughout Ghana from accounts designated to accept the debits for the collections. Instructions for the collection of funds are submitted to the GACH by the creditor’s / payee’s bank on instructions of the originator / creditor. The originator / creditor relies on the agreement between it and the debtor.

The payer enters into an agreement with a service provider e The payer enters into an agreement with a service provider e.g electricity, mortgage, electricity or insurance provider, under which he/she signs a mandate, authorizing his/her bank to accept future payments from the service provider. Direct debit allows for the collection of utilities etc. Ghana_Automated_Clearing_House_-_1.mp4