Cheque Truncation

Sybrin
Whitepaper
CENTRALISED PROCESSING: It’s Time To Modernise The Way We Process Cheques
The cheque is still currently the most visible and significant mode of payment in most countries throughout the world.
Processing of paper-based cheques constitutes an important segment of the payment and settlement system of a central
bank. Currently in many African countries settlement of cheques is performed by physical presentation of paper-based
cheques to the clearing house for transmission to the drawee banks and for payment thereafter.

The process begins when a customer deposits a cheque at his/her branch. Near the end of the day, that branch's cheques are
bundled, totalled and sent by air or ground courier to the voucher processing centre for that financial institution. A similar
process is in place for cheques deposited at Automated Teller Machines (ATMs). Every business day, hundreds of thousands
of cheques are transported from one financial institution to another, to reach the branches holding the accounts on which
they were written. Some of them log hundreds of kilometres en route, passing through processing centres and countless
hands. The fact that cheques are physically transported around the country creates inefficiencies. At the voucher processing
centre, the amount of each cheque is encoded on it in magnetic ink to facilitate automated processing. Then cheques are
passed through high-speed cheque reader-sorters (transports) and sorted based on the financial institution holding the
accounts on which they have been written. Once the total number and value of the cheques has been confirmed, they are
bundled once again and then transported to another processing centre that serves the financial institution of the person who
wrote the cheque. There the items are unbundled and processed again through another reader-sorter to verify the number
and value of cheques received. Next the cheques are put through the machine again to sort them based on the branch that
holds the account on which the cheque was written. Depending on the financial institution’s internal processes, the cheques
may then be shipped to the various branches.

The paying branch is the last node in the clearing cycle as it exists in the country, and thus the paper cheque is on the move
through the entire cycle from the bank branch of the collecting bank where it is first deposited to the service branch of the
collecting bank, onward to the Clearing House, which acts as a focal point for the cheques of all the banks, and from the
Clearing Centre to the paying bank service branch and lastly the paying branch. And if a cheque cannot be honoured (for
example, due to insufficient funds or a stop payment order), it retraces the entire journey back to the branch where it was
initially deposited. This entire process may involve processing a paper cheque through the reader-sorter up to eight times
and transporting it up to four times. The attendant delays on account of not being able to exploit technological alternatives
available have been engaging the attention of the Reserve Bank of many countries for some time. Many central banks are
now implementing a legal framework for the implementation of cheque truncation. It’s time to modernize the way we
process cheques through the Central Bank in order to reduce the lengthy clearing periods and therefore improve liquidity in
the marketplace.

Cheque Truncation Progress on the International Front

Internationally, in locations as diverse as the United States, Singapore, Spain, Hong Kong, the United Kingdom, Australia, and
even Malawi, a faster, more efficient and safer way to process cheques is emerging – cheque truncation. Due to
improvements in technology, images of the front and back of cheques can now be captured electronically and then
transmitted, or “cleared”, between financial institutions, rather than transporting the actual paper documents as happens
currently.

Many Central Banks throughout Africa are negotiating with Sybrin to embark on an initiative to adopt a new clearing process
based on cheque images - leading to a ‘truncation solution’. Sybrin has already provided the first Electronic Cheque Clearing
House (ECCH) in Africa at the Malawi Central Bank, the first fully truncated national payment system in Africa involving the
Central Bank and 11 retail banks.
 Sybrin's Cheque Truncation Solution
Cheque Truncation is one of the ways to compress the clearing cycle to provide faster clearances of local and intercity
cheques. Cheque truncation, very loosely defined, is the process in which the physical movement of cheques within a bank,
between banks or between banks and the clearing house is curtailed or eliminated, being replaced by electronic records of
their content (image and MICR data) for further processing and transmission. Sybrin’s Complete Truncation Solution enables
financial institutions to leverage images and data imported from Sybrin and any third party voucher processing solution.
Sybrin’s Complete Cheque Truncation involves replacing the physical paper cheque with its electronic image at the bank
branch where it is first presented, allowing the paper cheque to be held or truncated at that point. Sybrin’s Truncation
Solution provides for the encryption and transmission of images and data files from the participating banks to the Electronic
Cheque Clearing House (ECCH). Because the images are just as clear as the actual cheques (and much easier to access) there
is no need to process, file, store, or microfilm the paper cheques, enabling banks to settle their payments through Sybrin’s
Complete Truncation Solution.

Account holders will continue to write cheques as they do now, and when they receive cheques they will deposit them at
their financial institutions as usual (e.g., at the branch or through an ATM). Financial institutions will, for the most part, follow
their current practices for delivering deposited cheques to their processing centre. The paper cheques (as well as other paper
items like deposit vouchers) will be handled only once, at the bank branch where they are first deposited. These paper items
will be retained in the branch while the information is sent forward electronically as a data transmission. From that point on,
the clearing process will change. At the voucher processing centre, the amount of a cheque and its electronic codeline data,
as well as a digital image of the front and back of the cheque, will be captured. Then, instead of moving the actual physical
cheque to the clearing house, the voucher processing centre will transmit the data captured from the cheque and the image
file to the institution that holds the account on which the cheque was written, referred to as “the drawee institution”. As “time
in transit” for the electronic files will be virtually nil, the drawee institution will have access to the cheque image and data
much faster to make a decision on whether to honour the cheque based on this electronic information.

Although cheque truncation will represent a significant shift in the way cheques are processed behind the scenes, very little
will change for the banking customer at the “front-end”. After the image has been captured at the processing centre and sent
to the drawee institution, the original paper cheque will no longer serve much purpose. Shortly after the usability of the
image has been confirmed, the bank in possession of the paper cheque will both physically store and digitally archive the
voucher according to statutory requirements. As physical cheques will no longer be available for enclosure in customer
statements, the Sybrin system can now offer new image-based services to provide equivalent information to clients about the
cheques they have written. Sybrin provides an “image statement” on which copies of the cheques written by that customer
will be reproduced as well as on-line access to images as part of the electronic banking services, and cheque images may
also be provided on CD-ROM for business customers with high volumes of cheques.

All subsequent processing is accomplished by using the electronic image (back and front) and the MICR and captured data
from the cheque. The Paying bank has a fiduciary obligation to establish the validity of the cheque and authorise the paying
of the item. In the past paying banks did this by referring to the physical cheques, however, with Sybrin’s cheque truncation
solution they conduct the validation using the electronic image and data of the cheques. This eliminates the need for
transportation of paper to the Clearing House. The paper is replaced by the electronic transmission of data, speeding up the
cheque clearing process.

2
Benefits of Sybrin’s Truncation Solution

When implemented in a complete nation-wide programme, truncation offers a number of advantages for the national
payment system, participating banks and customers. Banks gain cost savings because they no longer need to sort and
transport paper cheques to other banks. Also, banks can use the cheque images throughout their operations, giving an
increased level of customer service and operational efficiencies. Most importantly, truncation offers the possibility to clear all
cheques within the same day, no matter where in the country they are presented. Implementing a cheque truncation
initiative requires extensive co-operation between all banks. Countries that move today towards implementing complete
cheque truncation will reap great rewards in the near future.

Benefits derived from Sybrin’s truncation solution include:

Proven track record

Sybrin implemented the first truncation system in Africa at the Malawi Electronic Cheque Clearing House (ECCH) in
Malawi.

Clearing House cost savings

The elimination of paper movement throughout the clearing system results in cost savings to all financial institutions.
The most obvious cost saving is from the elimination of the need for bank staff or couriers to carry bundles of cheques
from one branch or bank to another throughout the day, or to and from the Clearing House.

Overall cheque clearing process and service enhancements

However, the communication networks and computer equipment necessary to transmit the cheque data and images
provide an offsetting cost. This cost has kept complete cheque truncation from becoming prevalent until now. Today,
with the availability of new technology, these costs have come down to the point where complete cheque truncation
has become economically feasible. On balance, complete cheque truncation can today provide significant cost
savings to the financial industry and benefits to their customers, as most importantly, complete cheque truncation can
improve the overall cheque clearing process and allow financial institutions to offer their customers a superior level of
service.

Fraud reduction

From a macroeconomic perspective, the ability to clear financial items electronically rather than physically reduces the
risk of fraud and can help to reduce the levels of both settlement risk and liquidity risk within the entire payment
system. Moreover, truncation can accelerate the cheque clearing process substantially increasing the velocity of funds
transfer.

Cutting Down On Cheque Handling

The sorting, balancing, bundling, and delivery of paper cheques for clearing and settlement is an expensive and
labour-intensive process. Cheque imaging, coupled with cheque image exchange, offers numerous benefits to
financial institutions, including speedier cheque retrievals, reduced costs, and less risk of fraud. Prior to implementing
Sybrin’s truncation solution, cheque clearing between banks in Malawi was an extremely labour intensive process,
prone to error, exposing participating banks to a much greater element of risk.

3
 Faster clearing cycle

A financial institution that accepts a cheque drawn on another institution often has no way of knowing whether the
cheque may subsequently be dishonoured (e.g. due to insufficient funds, a stop payment order, or a forged signature).
In today’s environment, if a cheque is dishonoured, the whole process of moving the paper cheque through the
clearing system and rerouting it to the financial institution at which it was deposited may take as much as 5 to 7
business days. With Sybrin’s truncation solution this time frame will be consistently shortened.

Reduced risk

The events of September 11th have shown how a major incident can disrupt cheque clearing processes and risk
affecting the financial stability of financial institutions. More common occurrences such as courier delays due to
weather conditions can also affect clearing performance.

Financial Benefits to Your Institution’s Bottom Line:

Reduce non-earning assets posted the day prior to settlement.

Eliminate the expense of earnings credits and account interest fees for every dollar posted early.

Gain revenue from increased non-sufficient funds fee income.

Reduce float and save non-earnings assets due to the shorter collection cycle.

Save dollars by eliminating at least one capture cycle.

Reduce expenses associated with qualifying paper items for returns.

Reduce the time spent researching adjustment requests.

Other benefits include:

Meet cheque clearing deadlines, improved processing efficiency;

Achieve security and finality on the transfer of value through payment systems;

Control system risk and achieve a reliable, secure, integrated payment, clearing and settlement system;

Reduce float, speed up circulation of funds, and increase efficiency in funds transmission;

Proven integration with Perago's Real Time Gross Settlement (RTGS) system. Sybrin and Perago are technology
partners with a proven track record of integrating technologies.

4
Case Study: Sybrin's Electronic Cheque Clearing System for Malawi
Introduction
In 2004 the Bankers Association of Malawi (as part of the National Payments System under the guidance of the Reserve Bank
of Malawi) embarked on the first cheque truncation project for African in order to revolutionise the banking sector. The
project, known as the 'National Electronic Cheque Clearing House', or 'ECCH' involved the Reserve Bank plus all eleven
national banks, and was implemented using Sybrin Software Ltd's complete truncation solution.

The Past Scenario

In the past in Malawi, each bank manually cleared all cheques that were deposited, thereby resulting in clearance delays. In
addition, settlement between banks was calculated manually. The new ECCH system is centralised in Blantyre and has
numerous operational advantages. MalSwitch was selected as the Service Provider for the communications requirements and
for the siting and operations of the ECCH and backup site in Blantyre.

Sybrin’s Truncation solution for the Malawi ECCH

The Electronic Cheque Clearing House System for Malawi is based on Complete Cheque Truncation and Cheque Imaging.
Sybrin's Complete Cheque Truncation involves replacing the physical paper cheque with its electronic image at the bank
branch where it is first presented, allowing the paper cheque to be held or truncated at that point. The paper cheques (as
well as other paper items like deposit vouchers) are handled only once, at the bank branch where they are first deposited.
These paper items are retained in the branch, while the information is sent forward electronically as a data transmission. This
eliminates the need for transportation of paper to the Clearing House. The paper is replaced by the electronic transmission
of data, speeding up the cheque clearing process.

All subsequent processing is accomplished by using the electronic image (back and front) and the MICR and captured data
from the cheque. The Paying bank has a fiduciary obligation to establish the validity of the cheque and authorise the paying
of the item. In the past paying banks did this by referring to the physical cheques, however, with Sybrin's cheque truncation
solution they conduct the validation using the electronic image and data of the cheques.

Sybrin handles the capture of images and transactional data off cheques at the time of deposit at the teller window, the
correction, balancing and technical verification of this data, upload of data to the host banking system, encryption and
transmission to a central clearing facility, the calculation and upload of settlement figures to the Reserve Bank, transmission
of clearing data and relating images to participating banks, and the physical management and archiving of the original
vouchers at the national archive.

Benefits of Sybrin’s Truncation System For the Malawi ECCH

The ECCH resulted in a large number of advantages for the national payment system, participating banks and customers
including:

Faster clearance times Faster resolution of queries;

Greater efficiency in the banking sector leading to Easy accessibility of information;

improved customer service.
Reduced risk of fraud as cheques are processed and
verified electronically rather than manually.
Meeting cheque clearing deadlines;
Enhanced security and finality on the transfer of
value through payment systems;
Enhanced confidence in the usage of cheques;
Improved processing efficiency;
Reduction in 'float', speed up circulation of funds,
and increase efficiency in funds transmission ;
Easy integration with the Retail System;
Electronic images and code-line data enable down-
stream reporting;
Motivate staff by enhancing and streamlining the
cheque handling process;
Facilitate the review of job roles, freeing staff from
mundane manual tasks, and allowing them to carry
out more customer facing roles;
Provide greater understanding of specific business,
technical and operations training requirement and
needs.

5
 The information contained in this document, should be treated as confidential information, provided only for the purpose of
evaluation in connection with your cheque truncation needs.

This document, whether printed or in machine readable form, constitutes confidential, proprietary information and trade secrets
which are the property of Sybrin Ltd. All disclosure and/or reproduction of this document is prohibited without the expressed
permission in writing by Sybrin Ltd.

For more information visit our website at: www.sybrin.co.za

or telephone: +27 11 367 6900

About Sybrin
Sybrin Ltd is a leading provider of enterprise voucher processing and integrated document management solutions. Founded in 1990, Sybrin focuses
exclusively on developing, implementing and supporting end-to-end document management and voucher processing solutions providing the
optimum delivery of business solutions to its customers. Services include software development, systems implementation and systems integration.
Sybrin has implemented and supported systems at many of the leading financial services and private sector installations across sub-Saharan Africa -
South Africa, Zimbabwe, Zambia, Mauritius, Kenya, Tanzania, Botswana, Malawi, Ghana - and further implementations in Gibraltar and the United
Kingdom. For more information, visit http://www.sybrin.co.za
Sybrin Ltd – Richmond House, St Julian’s Avenue, St Peter Port, Guernsey, United Kingdom owns all intellectual property for and the trademarks for
Sybrin™ globally. Core development and product evolution is provided by Sybrin Ltd through its channel of subsidiaries across Africa as well as
directly to partners in the UK. Global business partners include Unisys, Seac Banche, Perago and SSP (UK).
6