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International
ACH Transactions: An Asian Perspective
Apart from in the US and Europe,
the international ACH payments market is highly fragmented. This is
especially the case in Asia. This article
looks at the changes and challenges taking place in the market.
Demand
will always exist for global payment and settlement services. However,
significant forces of change are at work in the payments business, which will
shape the transaction banking product offerings of leading financial
institutions globally. This is true even for automated clearing house (ACH)
payments, a product that prima facie is often perceived as simplistic and had
come to being viewed as a commoditised offering, often differentiated by
little other than by pricing. Looking at some of the recent developments,
this is not a fair reflection of the ACH payment landscape in Asia or other parts of the world today.
Outside of Asia
To
put Asia into a global perspective, we will begin by briefly reviewing the
ACH landscape in Europe and the US. Both regions are
characterised by mature economies where sophisticated payment and clearing
systems are the norm and ACH payments are widely adopted by both retail and
corporate customers. Following a period of relative stability in the ACH
clearing systems in Europe and the US, we have witnessed significant
structural change in the recent past which will undermine current revenue
streams and business models for transaction banking providers.
Key examples are:
· The introduction of
International ACH Transactions (IAT) in the US, which is driven by regulatory
requirements to align the National Automated Clearing House Association
(NACHA) rules with the Office of Foreign Assets Control (OFAC) compliance
obligations.
· The ‘Faster Payments’ initiative
in the UK,
which will likely reduce the need for corporate clients to go through urgent
payment systems and hence will accelerate the urgent- bulk convergence.
· The launch of single euro
payments area (SEPA) and the Payment Services Directive (PSD), a European
initiative to establish a single payments area in Europe and renders what
were once considered international payments to become European with the
effect that these intra-Europe payments cannot be priced higher than domestic
payments.
The
common theme of these changes is that they represent significant challenges
and cost for banks that are navigating through the multitude of rules
globally while endangering traditional payment revenues. What the above
examples have also shown is that changes in the payments business tend to
take a long time to take effect. For example the SEPA initiative was launched
in 2001, the first SEPA transaction type went live on 28 January 2008 (the
SEPA Credit Transfer (SCT)) and it will take a number of years more before
all of the domestic legacy payments will eventually be decommissioned.
ACH in Asia
As
opposed to Europe and the US,
where ACH payments have been in existence for many decades, we see a more
fragmented ACH environment in Asia. While
developed nations such as Singapore,
Hong Kong, or Japan
have used ACH for a long time, this payment type is a relatively new concept
to a number of emerging markets in the region. This explains why the maturity
of ACH payments differs widely across the region, ranging from simple
clearing mechanisms to technologically sophisticated infrastructures, such as
real-time online payments provided by the Korea Financial Telecommunication
and Clearing Institute’s (KFTC) clearing system in South Korea. This fragmentation is
also a reflection of the varying needs in each of the Asian markets which
results from different factors, such as maturity of the economy, standard of
living, wage levels, acceptance of new technology and customer requirements.
Despite
the heterogeneity of the ACH landscape in Asia
and the relative immaturity of ACH payment schemes in some emerging
economies, we are witnessing a growth in ACH payment volumes across the
region. This is due to the fact that the Asian countries and their central
banks are increasingly seeing the value in supporting their economies by
means of electronic payment systems. ACH is an important component next to
high value payment clearing - typically Real Time Gross Settlement (RTGS) -
and card based payments (in the retail sector). Indeed, it is widely
acknowledged that the effective functioning of the financial system requires
the existence and adoption of safe and efficient payment and settlement
systems.
The
development of the payment and clearing systems in India in recent years illustrates
this point. Traditionally, India
has been largely reliant on cash and cheques for making and receiving
payments, which is arguably not the most efficient way to settle financial
transactions. The biggest problem associated with cheques, especially in a
large geography such as India,
is the physical movement of cheques from the presenting banks to clearing
houses and then to the drawee banks. This is not only a cumbersome and
time-consuming process but also entails the risks associated with loss, theft
or tampering of cheques. Similarly, the handling of cash is a high cost and
high-risk process that makes it equally unsuitable to support the growing
payment volumes in India.
The
shortcomings of traditional payment and settlement modes highlighted above
have prompted many countries in Asia to
establish more efficient, electronic payment systems over time. India, for
example, set up the RTGS clearing systems in March 2004. The National
Electronic Funds Transfer system (NEFT) was introduced in addition to the
Electronic Clearing System (ECS) as a nationwide electronic payment system in
November 2005. In a bid to encourage customers to move from paper-based
systems to electronic systems, the Reserve Bank of India (RBI) currently
regulates the charges that banks can levy on customers for electronic
transactions. For example, the maximum charges for NEFT are INR5 and INR25
for transaction value up to INR100,000 and above INR100,000, respectively.
Similarly, the RBI on its part has also extended an existing waiver of its
processing charges to banks for electronic modes of payment until the end of
March 2011.
Another
example of the growing importance of electronic payments in Asia can be found
in China,
which has been historically cash-reliant. For the past decade, there has been
a sustained increase in the use of electronic payment systems that was
supported by the country’s development of infrastructure to facilitate
non-cash transactions. The most important step towards electronic payments
was the introduction of the China National Advanced Payment System (CNAPS),
which comprises high value payment system (HVPS) and bulk electronic payment
system (BEPS). HVPS refers to China’s
high value payments system and is based on RTGS clearing. On the other hand,
BEPS is akin to ACH payments and caters to ordinary credit and debit
transactions as well as bulk payments and collection processing, such as
monthly salary payments or utility charge collections. BEPS operates in
Designated Time Net Settlement (DTNS) mode and can be used for transaction
amounts below RMB20,000, underscoring its ACH/bulk payment nature. In terms
of retail payments, bank cards have become the most popular non-cash payment
instrument in China
as a result of concerted efforts by the central bank and commercial banks to
accelerate the popularisation and use of electronic payment instruments.
Apart
from India and China, many countries in Asia
have also introduced electronic payment systems, complemented by incentives
and policies to promote their adoption, thus reflecting a strong support in
moving away from cash and cheques. ACH is one area that has benefited from
this development in terms of greater visibility and higher transaction
volumes. However the introduction of numerous electronic payment systems has
not been all boon for banks, as this means that banks are faced with a
growing number of domestic clearing systems which they have to connect to in
order to offer the full suite of payment services in each country. Another
challenge faced by banks is the increasing competition with non-bank payment
providers, including invoicing and collection agencies, internet payment
providers and mobile payment operators. In a dynamic environment like Asia, transaction banking providers that have an extensive
international network, direct access to the clearing systems and strong
onshore expertise will hold an advantage.
Given
the multitude of challenges that may come from within and outside the
traditional payment channels, banks have to play an active role in payment
innovation to remain relevant. They are challenged to develop value added
services around the actual payment, such as supporting the account
receivables process of corporate customers with timely and accurate data.
This is because ACH clearing systems in Asia
do not typically cater to rich remittance information (unlike the SEPA
formats). Another example is financial supply chain management where banks
offer sophisticated technology platforms that allow buyers to link up with
their suppliers to arbitrate between the credit ratings of the parties
involved in a transaction. As cash and cheque clearing will continue to exist
alongside these new, innovative forms of payment, the challenge lies in
constantly recalibrating the investment priorities to stay on top of the
market demands.
Summary
Besides
US and Europe, the ACH payments market is still highly fragmented,
particularly in Asia. Accompanied by the
different maturity levels of ACH payments across the regions, each region is
represented by its own set of changes and challenges. In the US and Europe, this is driven by increasingly
onerous regulatory requirements and standardisation whereas challenges in Asia revolve mostly around the heterogeneous ACH
landscape and the increasing pace of innovation in the payment space. Against
this background, this is where payment providers who are innovative and
resourceful will be able to identify many viable business models to support
their clearing needs across the regions.
Article by Leif Simon joined Deutsche Bank in Frankfurt, Germany
in 1999 and spent seven years in head office covering different roles in
transaction banking. He started as an implementation manager for Europe before taking on an assignment as business
development manager for one of Deutsche Bank's e-commerce initiatives. He
subsequently became a product manager in channel management where he was
responsible for devising a strategy for browser-based and host-to-host
communication security. In 2005, Leif moved to Deutsche Bank's Asia-Pacific
head office in Singapore
to head product management for cheques and payments in the Asia-Pacific
region. Simon holds a BA and MA in Economics from University
of Sussex, UK
and a Maîtrise in Business Administration from Université de Grenoble, France.
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