A Future with E-cheques

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

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• Introduction of e-cheque

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Need for an alternative of paper cheque

• Resource intensive and costly for banks to
  process cheques (Hong Kong banks need to spend up
  to HK1.7 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

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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
  payers bank
• support HKD, USD and RMB denominated e-cheque
• Target launch date 2H 2015

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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

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

• Link to animated video
• Link to prototype demo

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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

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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 payers bank can be used for
  e-cheque and other banking services of that
  payers bank

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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

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• Business cases for corporates
• to use e-cheque

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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!

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Case 1 Issuance of IPO refund cheques
Paper cheques E-cheques
From issuers perspective From issuers perspective 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 From IPO subscribers perspective 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)
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Case 2 Collection of cheque payments
Paper cheques E-cheques
From corporates perspective From corporates perspective 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
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• Q A