A Future with E-cheques Mr. Shu-Pui Li Head, Financial Infrastructure Development Division Financial Infrastructure Department Hong Kong Monetary Authority 23 June 2014 Hong Kong General Chamber of Commerce Financial & Treasury Services Committee Roundtable Luncheon

2 2 Agenda Introduction of e-cheque  Key drivers for the development of e-cheque  Nature and benefits of e-cheque  High-level operating model  Security features of e-cheque Business cases for corporates to use e-cheque

Introduction of e-cheque

4 4 Need for an alternative of paper cheque Resource intensive and costly for banks to process cheques (Hong Kong banks need to spend up to HK$1.7 billion a year on processing cheque) Increasing challenge for banks due to a wider usage of RMB cheques (e.g. for RMB IPO and RMB insurance policies) Paper based meaning not environmental-friendly Not convenient to use as it requires physical delivery and presentment

5 5 E-cheque e-cheque: issued, delivered and presented electronically Key features:  bill of exchange under the Bills of Exchange Ordinance (BOEO)  non-negotiable and non-transferable  digitally signed by payer and certified by payer’s bank  support HKD, USD and RMB denominated e-cheque Target launch date: 2H 2015

6 6 Benefits of e-cheque Retain all basic features and benefits of paper cheque and with the following additional benefits:  remove the need for physical delivery and presentment  carry enhanced security features  remove the costly and manual processing of paper cheque Possible to expand to cross-border usage in the future  overseas residents with bank accounts in Hong Kong can easily issue and present e-cheque  Potentially cross-border cheque collection service can be facilitated by e-cheque

7 PayeePayer Payee’s BankPayer’s Bank Clear and settle e-cheque E-cheque Flow (for banks which provide e-cheque issuance and presentment services on their own) HKICL Verify signature, payee identity and credit deposit Create e-cheque Digital signed e-cheque through Internet Banking or other authenticated means Request for issuing e-cheque Digital signed e-cheque Digital signed e-cheque Present e-cheque through Internet Banking or other means Outward clearing file and signed e-cheques Inward clearing file and signed e-cheques Alternatively, payer can send e-cheque to payee via (if payer wishes to send e- cheque to payee, probably together with other documents) Verify signature, internal records and check for duplicate presentments Digital signed e-cheque Send e-cheque to payee by payer’s bank by 2 4B A 9 8

8 PayeePayer Payee’s BankPayer’s Bank Clear and settle e-cheque E-cheque Flow (for banks which ride on HKICL’s centralized e-cheque presentment portal to provide presentment service to their customers) HKICL/ Centralized Presentment portal Verify payee identity and credit deposit Create e-cheque Digital signed e-cheque through Internet Banking or other authenticated means Request for issuing e-cheque Digital signed e-cheque Present e-cheque and input payee’s bank details through centralized portal Outward clearing file and signed e-cheques Inward clearing file and signed e-cheques Verify signature, internal records and check for duplicate presentments Digital signed e-cheque Verify signature Alternatively, payer can send e-cheque to payee via (if payer wishes to send e- cheque to payee, probably together with other documents) Send e-cheque to payee by payer’s bank by 4B 4A

9 9 Animated video and Prototype demo Link to animated video Link to prototype demo

10 Security measures Virtual cheque book: Avoid unauthorized access to cheque books 2 factor authentication (2FA): Protect bank customers from internet banking fraud Digital signature using PKI technology: Ensure the integrity of e- cheque E-cheque issuance records: Allow payer bank to check the presented cheques against its own issuance records Centralized presentment service: Guard against duplicate presentment

11 Use of PKI technology in e-cheque E-cheque will be signed using the digital certificate issued by one of the recognized Certification Authorities Two types of digital certificate can be used:  General purpose or personal digital certificate Safe kept by the owner; can be used for all purposes  Special purpose digital certificate Safe kept by payer’s bank; can be used for e-cheque and other banking services of that payer’s bank

12 Progress made System development under way Based on survey results, most retail banks have indicated interest to offer e-cheque service to their customers Marketing campaigns will be organised closer to the service launch Overall speaking, the project is progressing as planned It is our target to launch the service in 2H 2015

Business cases for corporates to use e-cheque

14 Cost and benefit analysis for corporates to use e-cheque Costs Bank fees: based on our understanding, banks are not going to levy any fees for their customers to use e-cheques, except for bulk issuance which will also be less costly than that of paper cheques Internal costs: Nil as corporates can easily issue and present e- cheques through internet banking platforms Benefits Easier to do reconciliation based on electronic records Enhanced processing efficiency due to automation Possible cost saving for bulk cheque issuance The benefits of using e-cheque substantially outweigh its costs!

15 Case 1: Issuance of IPO refund cheques Paper chequesE-cheques From issuers’ perspective Time needed to issue IPO refund cheques More time needed for cheque printing and mailing Shorter time needed to issue e-cheques Costs involvedProcessing, printing and mailing costs Significant cost saving for using e-cheques (as there is no printing or mailing cost) From IPO subscribers’ perspective Time needed to receive IPO refund cheques 1-2 days after refund day due to postal delay Shorter time needed to receive e-cheques (i.e. likely for them to receive e-cheques on refund day)

16 Case 2: Collection of cheque payments Paper chequesE-cheques From corporates’ perspective Efforts needed to do reconciliation (e.g. checking against invoice amount and due date) Substantial efforts neededMinimal efforts needed Presentment cut-off time Cheques presented at or before 5pm on a business day will mostly be treated as same day clearing. Cheques presented after 5pm will be treated as next day clearing Possible for banks to extend the presentment cut-off time to 7pm or 8pm, thus providing a longer window for e-cheque deposit for same day clearing and allowing corporates to receive good funds earlier

Q & A