Check Presentment

Following a trial in the capital city, the 7,100 Philippine islands are adopting a check clearing system evoking the early days of ECP in the United States.

If you think the U.S. payments system is unique in its attachment to paper, think again. In some pockets of the Asia-Pacific region, where emerging economies have been known to leapfrog established western counterparts with new and emerging technologies, like smart cards, there are still mountains of paper that must be maneuvered.

Consider the Philippines. An archipelago scattered across an area of roughly 187,000 square miles, the Philippines is seemingly unique in its emulation of banking and payments technologies American-style.

In fact, banks in the country even use U.S.-dollar accounts at the Manila-based Citibank branch to clear and settle high-value inter-bank transactions.

Most payments in the Philippines today are transacted by check, although clearing and settlement between Manila-area banks is based upon a combination of electronic and paper exchanges. Now, in an effort to slash the time it takes to clear checks nationwide, the Philippines is embarking upon an ambitious program to move all inter-bank check clearing to semi-electronic mode.

The plan is reminiscent of the early versions of electronic check presentment (ECP) in the U.S., like that developed by the Electronic Check Clearing House Organization (ECCHO). Under the original ECCHO model, participating banks (mostly, big cash management banks) would capture the MICR information from large-dollar check deposits and transmit that information electronically to paying banks in advance of the physical check presentment process. While presentment, legally, did not occur until the paper arrived (usually a day or two later), the electronically presented information was sufficient to support provisional debiting of payee accounts, and, when necessary, a faster return process.

Banks in and around Manila have used a similar model for clearing checks since January 1999. MICR information from deposited checks is transmitted to a central clearinghouse in batches throughout the business day (9:00 a.m.-4:30 p.m.). The corresponding paper items follow, arriving at the clearinghouse by 5:30 p.m., whereupon they are matched against electronic presentments, and any necessary reconciliation occurs. Settlement takes place at the central bank later that evening, based upon net clearing results of the clearinghouse.

The program has proven quite successful, and is now being rolled out nationwide across 27-check clearing regions that serve banks on the 7,100 islands that make up the Republic of the Philippines.

"We hope that by doing this we can shorten float days and reduce operating costs," explains Arturo De Castro, vice president, Philippine Clearing House Corp. (PCHC), which is spearheading the project on behalf of the central bank (Bangko Sentral ng Philippines), which handles final settlement.

The timeline for completion: six months, De Castro says. It's an ambitious plan, but De Castro is confident. "It is not a new system," he says. "We are employing the same MICR clearing system we use in metro- Manila."

The PCHC is a bank-owned consortium, conceived of and supported by the Bankers Association of the Philippines and the Philippines central bank. The clearinghouse handles check clearing for all banks and bank branches located within a 93-mile radius of the capitol city, Manila. On the average day, De Castro says, the clearinghouse moves about 465,000 checks on behalf of 97 commercial banks, thrift institutions and development banks.

The Asian Banker Journal, a Singapore-based research and intelligence company that focuses on the Asia-Pacific region, figures just 10 large banks account for nearly 60% of all checks cleared through PCHC. The value of all checks cleared through PCHC tops 68 billion Pesos yearly, according to Asian Banker. ($1.36 billion) To put the PCHC's size into perspective, the New York Clearing House (NYCH), which supports check clearing across a roughly equivalent land area, reports that it clears nearly 1.4 million items daily between its eight owner banks. The average daily value of those checks exceeds $8 billion, according to an executive with NYCH.

De Castro says he doesn't expect a significant number of checks to be affected by the expansion of MICR-based electronic check clearing, since the majority of the country's commercial activity involves Manila- area banks. But for those added checks brought in under the electronic clearing program, the float reductions should be substantial, he says.

In 1999, the Asian Banker estimated in a report on the Philippines payments system that it takes 48 hours to clear a check between banks in the metro-Manila area. Within each of the other 27 regional clearing zones, Asian Banker reported checks clear within one day. Depending upon the distances involved, inter-regional clearing takes between five and eight days, the researchers reported.

De Castro isn't going public with any projections on time or operational cost savings.

In the U.S., champions of ECP claim substantial monetary benefits-as much as $5 billion a year, industry wide, if all banks were clearing checks electronically. Industry mavens also have coined a phrase for the process: "electronification." The reasoning goes something like this: If you can't move checks to electronic payments, then use electronic technologies to clear checks faster.

Once a territory of the U.S., the Philippines has been an independent republic since 1946. Still, the Philippines payments system has retained many vestiges of the U.S. system, including its heavy dependence on check payments.

"Electronic payments are not yet widely used in the Philippines," explains De Castro. Payments that are made electronically are limited to high-dollar inter-bank remittances, such as loan repayments and foreign exchange, says De Castro. Even then, debits and credits are often affected by paper-based memo postings, he notes. About half the transactions are settled in U.S. dollars, a settlement process handled by Citibank. These transactions typically involve inter-bank foreign exchange transactions or incoming dollar remittances from abroad.

All this is in sharp contrast to neighboring countries, like Singapore, where the majority of payments operations are electronic, and even the "unbanked" consumer population has access to electronic payments in the form of chip-based cash cards.

NETS, the bank-owned debit network that serves Singapore-an island nation smaller in area than New York City-is hoping the expertise it has acquired since its founding in 1985 will prove a valuable export. Systems supporting the cash card program it developed and implemented in Singapore have already been licensed to organizations in at least two other Asian nations, including the Philippines, according to NETS executives.

If cash cards take off in the Philippines, combined with the PCHC's electronic check clearing, the country's paper payments mountain may well begin to crumble.

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