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

22

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

44

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

55

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

66

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 settlee-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

Createe-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

Presente-cheque through Internet

Banking or other means

Outward clearing file and signede-cheques

Inward clearing file and signede-cheques

Alternatively, payer can send e-cheque to payee via email (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 email

2

4B

5

7

3

6

14A

9

8

8

PayeePayer

Payee’s BankPayer’s Bank

Clear and settlee-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

Createe-cheque

Digital signed

e-cheque

through Internet

Banking or other

authenticated means

Request for issuing

e-cheque

Digital signed

e-cheque

Presente-cheque and input

payee’s bank details through centralized

portal

Outward clearing file and signed

e-cheques

Inward clearing file and signede-cheques

Verify signature, internal records and check for

duplicate presentments

Digital signed

e-cheque

2

5

7

3

6

1

10

98

Verify signature

Alternatively, payer can send e-cheque to payee via email (if payer wishes to send e-cheque to payee, probably together with

other documents)

Send e-cheque to payee by payer’s bank by email

4B

4A

99

Animated video and Prototype demo

Link to animated video

Link to prototype demo

1010

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

1111

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

1212

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

1414

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!

1515

Case 1: Issuance of IPO refund cheques

Paper cheques E-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 involved Processing, 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)

1616

Case 2: Collection of cheque payments

Paper cheques E-cheques

From corporates’ perspective

Efforts needed to do reconciliation (e.g. checking against invoice amount and due date)

Substantial efforts needed Minimal 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