Having converted its banks overnight to a check image exchange system, Hong Kong's central bank -- and the vendors that supported the project -- are holding it up as an example to U.S. institutions.
On June 20 several hundred thousand paper checks were cleared through Hong Kong Interbank Clearing Ltd. for settlement. The following day that number dropped by 80%.
Residents of the former British colony did not stop writing checks. Instead, Hong Kong adopted an image exchange program that called for every bank to send check data to the central bank in a digital format. HKICL says the program is helping it save money and could be used as a small-scale model for how an exchange could be implemented in this country.
"The new image-based cheque clearing system has transformed the clearing process," said Vitus Tai, the general manager for the central bank, in an e-mail exchange. Under the Cheque Imaging and Truncation System, all of the city's 131 banks are now required to truncate the checks they receive and then transmit the digital information to HKICL, which acts as the clearing house for the city's banking industry.
The only exceptions are for questionable items and for checks written for more than $2,560, which are still presented in paper form, and which account for less than 20% of the city's check volume.
The previous average daily paper check volume in Hong Kong was 500,000, and that figure sometimes reached 800,000 after holiday weekends, according to Wing Man Leung, the practice director for payment solutions with Unisys Corp.'s global financial services unit in Hong Kong. City residents use checks for all the same transactions as people in this country, she said.
Unisys was one of the vendors that worked with HKICL and the individual banks to implement the industrywide image conversion project.
Not only does the conversion allow for eliminating most of the check transportation costs, but it "will help banks process checks in a more efficient way," Ms. Leung said. As a result of the program, the central bank have been able to extend by one hour the deadline for banks to submit checks for overnight settlement, and overall float costs have fallen.
The Hong Kong Monetary Authority and the Hong Kong Association of Banks ordered the conversion in early 2000. The project also required some changes in the city's banking regulations to give check images the same legal weight as the checks themselves. Those changes were enacted in March with a law that is similar, but not exactly the same, as check truncation measures the House and Senate approved this year and are awaiting a conference committee.
That legislation would require banks to accept image replacement documents (paper reproductions of checks printed from digital images) in lieu of checks. The conversion is expected to lead eventually to more use of images alone for settling transactions. Check 21, as the bill is called, is not as sweeping as the Hong Kong law, which grants legal parity to the digital versions.
After several years of planning, check imaging equipment was in place across Hong Kong's entire banking industry by this year, and after several months of testing, the bankers flipped the switch on June 21.
"It was a complete overnight transition," said Ian Goodall, a director of archiving product management with NCR Corp., which also worked with Hong Kong's banks on the conversion. "As far as I know, it's working absolutely perfectly."
Gary Cawthorne, a vice president and general manager for global payments with Unisys, said the U.S. banking industry can look at the Hong Kong project as a model for the ongoing adoption of image exchange.
There are significant differences between Hong Kong and the United States, including scale, but the key difference is not size but the more fragmented nature of the U.S. banking industry, he said. Without a mandate from the federal government, it would be difficult to get all of the country's roughly 8,000 banks to agree to a universal exchange program.
However, it would be much easier to forge an agreement with a smaller number of the biggest banks, which account for a substantial portion of the check volume here, Mr. Cawthorne said. "There's no reason why we couldn't get a manageable number of large U.S. banks to do the same thing as Hong Kong."
Mr. Tai said the sheer size of the U.S. financial services industry would make a conversion effort here more difficult than the Hong Kong one. "However, taking into consideration the substantially larger cheque volume, greater geographical dispersion of banks, and the long clearing cycle in the U.S., the employment of cheque imaging and truncation techniques may attain greater benefits compared with Hong Kong."
