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Singapore Example Offers a Blue Print for Change - AFS

The World's First National Check Image Archive
Singapore Example Offers a Blue Print for Change

Presenting an evaluation of the most recent advancement
in transaction processing by Advanced Financial Solutions, Inc.

Produced by:
The Takoma Group, Inc.; Baltimore, MD for
Advanced Financial Solutions, Inc., Oklahoma City, OK

Despite significant advances in computer and communications technologies - some might say because of these very advances - a mountain of paper checks dominates the world's payment systems.

This pile up of paper is most pronounced in the United States, where thousands of banks last year exchanged an estimated 68 billion checks - nearly three times as many as they did 25 years earlier.

Americans are not alone in their attachment to checks, however. Dating back to the 17th century (as the first settlers were landing on the shores of what is now North America) the paper check has a long history as a medium of value exchange. Even in the warp-speed world of Internet commerce, checks are being written today to fulfill electronic purchase obligations around the globe. A 2000 survey by the Gartner Group determined that upwards of 80% of purchases made by businesses through online exchanges and auction sites are completed by check.

People like checks because checks offer a tangible means of conveying value. Banks and the central banks responsible for payments clearing and settlement like checks because they have invested substantial sums in technologies that make it relatively cheap and easy to exchange and settle check payments.

From the early development of magnetic ink character recognition (MICR) line technologies in the 1950s and 1960s, which made it relatively easy to run large volumes of checks through high-speed sorting equipment, to the latest innovations in digital check imaging and image archive, the paper check has withstood nearly every attempt at unseating its paper presence in payment systems.

Indeed, nearly 40 years after the first proclamations of the coming "Checkless Society," check volumes continue to grow, year-to-year, worldwide. Perhaps not at the double-digit rates of electronic payment alternatives, but the number of checks written continues grow, and to eclipse all other forms of non-cash payment.

Resigned to the fact that checks are not going to be eliminated, at least not in our lifetimes, bankers are looking for ways to bridge the technology gaps between the data-hungry Information Age and the labor and capital intensive check system. Digital check imaging and image archive combine to build that bridge.

In this paper, we discuss these technologies and how they combine to transform a centuries-old method of payment, the paper check, into a model of 21st century efficiency. And we offer a close-up view of how they combine to support a National Image Archive serving banks in Singapore. Singapore, an island nation that has been described as an economic bridge between Asia and the West, has become a test bed for this technology combination that bridges check and electronic payment systems.

While many banks in the U.S. struggle with the economics of "check electronification" initiatives, banks in Singapore will soon have access to an electronic archive of all checks written and exchanged in that country.

A Little Background
The check is one of the oldest forms of payment, and like many things old, it enjoys broad recognition and acceptance. In the United States, roughly 87% of households maintain checking accounts. Clearly an economy that is hooked on checks, the U.S. cleared in excess of 68 billion checks last year, according to Federal Reserve estimates. That's more than all the checks exchanged throughout the industrialized world.

The first recorded check was written by an Englishman, in 1659. In the U.S., legislation enacted in the early 20th century gave rise to the modern checking system, as well as the Federal Reserve and its responsibilities for the U.S. inter-bank payments system.

Singapore is an island inhabited by just over 3 million people that was once part of the British Empire. A city as well as a nation, Singapore takes up an area roughly three times that of Washington, DC.

The economic history of Singapore is lined with checks, and in 1999, 92 million checks for a combined value of approximately $245 billion (S$489 billion) were cleared through banks in Singapore. To put this into perspective, 92 million checks, laid end to end would stretch across the globe from Singapore to New York City.

On a per capita basis, Singaporeans write an estimated 30 checks a year.

A Gateway Between Cultures and Technologies
Since achieving its independence in 1965, Singapore has experienced rapid economic growth. Its stable economy, along with a cultural heritage that draws from both Eastern and Western civilizations, have positioned Singapore as a gateway between Asia and the rest of the world. Of 134 commercial banks chartered to operate there, 126 are foreign banks, and include names such as ABN AMRO, Bank of China and Citibank.

Singapore's government and private sectors, meanwhile, have placed the country in the forefront of those embracing technological change.

The Monetary Authority of Singapore (MAS), for example, was the first central banking authority to put in place an electronic check capture program, in the 1980s. Under that initiative, banks electronically capture and transmit check MICR data to a central clearing facility, where it is used to provisionally debit and credit the appropriate banks' clearing accounts. The actual paper is sent later, and verified against the electronic MICR files before end-of-day balances are recorded against banks' clearing accounts.

In 1997, MAS introduced an image clearing system, using a technology platform from Advanced Financial Solutions (AFS), Oklahoma City, OK. Paper checks delivered to the central clearinghouse in Singapore get converted to digital images. The images are used in lieu of paper in reject processing and balancing operations; and they can be reproduced on compact disks (CDs) for delivery to paying banks upon request.

A Better Image of Check Clearing
Using images in lieu of paper in check clearing creates substantial operational efficiencies. When check information is separated from the physical paper, processing procedures are easily reengineered to avoid the confinements of paper that necessitate serial processing.

The opportunities for savings are most pronounced in areas such as reject processing. The check clearing process is dependent on high-speed equipment that reads and sorts thousands of pieces of paper an hour. Typically, these machines reject about 1% of checks that pass through them because the MICR lines cannot be read, the paper has been ripped, or for some other reason. In the paper world, these checks must be repaired, by hand - itself an error- prone process. In the imaging world, it's an automated process.

Initiatives to "electronify" check clearing and exceptions processing have been undertaken in the U.S., the U.K. and elsewhere, though on a limited basis. By reducing paper hand-offs - it is not unusual for a paper check to be handed off to a dozen different machines and individuals during the clearing and settlement process - these initiatives

offer the potential to slash check clearing times, sometimes from days to a matter of hours. They also offer substantial labor savings, and opportunities to reduce losses from check fraud (since a bank will know sooner if a deposited check is backed by sufficient funds in the checkwriter's bank account).

Industry Size, Geography, Limit Imaging in U.S.
In the U.S., the Federal Reserve, through its Reserve Bank clearing system, has offered various check "electronification" programs since the 1980s, and actively promotes check truncation and image exchanges.

The Fed has long championed payments automation, and has played a critical role both in the development of MICR line standards and the adoption of high-speed check sorting equipment. More recently, the Fed, working with representatives of the U.S. banking and vendor communities, helped develop technology standards to support electronic check presentment (ECP) between banks.

Several of the largest banks in the U.S. have also undertaken programs that support paperless check processing. J.P. Morgan Chase and Bank of America recently announced a plan to create a nationwide check image exchange and archive program. SVPCo, a payments company jointly owned by the New York Clearing House and 22 of the country's largest banks, has supported ECP exchanges for nearly a decade. More recently, SVPCo has been supporting an inter-bank image check interchange program.

None of these U.S. programs are national in scope, however, as the size and geographic dispersion of the U.S. banking industry render it extremely difficult to implement a national electronic check program.

This is not the case in Singapore. With just a few hundred banks operating across a small geographic area, Singapore is an ideal test bed for centralized image-based inter-bank check clearing and archival facility.

Image Archive: Some Basics
Image archive is a 21st century replacement for microfilm. It has been estimated that image archive and retrieval systems available in the market today can reduce by as much as 75% the time it takes to retrieve check images in a microfilm environment, which is the most common storage medium for checks today.

An archive is a file management and distribution system that houses the digital images of documents (in this case, checks), along with associated information captured during the initial digitization of those checks. The images are filed as "objects" for safekeeping and retrieval upon demand in various electronic formats.

Advances in computer and communications technologies have drastically reduced the costs and time frames associated with data storage and retrieval, making image check archive an increasingly viable alternative for banks. For example, using a storage library about the size of a telephone booth, a large bank today can store the images from a year's worth of customer checks, and deliver requested images to employees and/or customers within seconds, at an all-in cost of less than a penny an image.

The Tower Group estimates that U.S. banks spend $200 million each year on conventional microfilm-based technologies that support the capture, indexing, archiving and retrieval of check transactions. Analyses by Tower and other experts suggest banks can reduce check data storage costs by 40% simply by replacing conventional microfilm storage with image archive systems

Global Concepts Inc. has calculated that in a traditional check environment, if 80% of the paper were truncated, with the images used for clearing and settlement and made available to paying banks, upon request, the all-in cost of processing that paper could be cut by at least 15%. Based upon U.S. check volumes, Global Concepts has estimated that total savings to the U.S. banking industry from such a conversion would approach $1 billion a year.

Widespread adoption of thin client computing also helps tip the balance in favor of check image archive. Thin client terminals, so-called because they require little or no local computing power, cost about half as much as do full-blown PCs, and can be connected to application servers using available Web-browser technology.

The Singapore National Image Archive
The National Image Archive (NIA) of Singapore, commissioned by MAS, builds upon an existing, semi-electronic clearing system with supporting archival and retrieval technologies. NIA takes these technologies to a new level of efficiency, creating a truly paperless inter-bank clearing process, known as electronic check truncation.

The NIA uses thin client and Web browser technologies to support access to stored images of checks from any bank branch in the country. Once it is fully operational, the NIA will store electronic images of every check written in Singapore, thereby eliminating any need to transport paper checks between bank branches and the country's central clearinghouse facility.

The core archive technology supporting the NIA in Singapore was designed by AFS and is known by the product name Image Depot.

Under Singapore Automated Clearing House (SACH) requirements, banks in Singapore have the option of installing one of three SACH-approved check image capture solutions for integrating with the central clearing house. ImageVision, an AFS product, is included as one of these approved solutions. These systems are used at the bank and or branch level to capture MICR and images of the fronts and backs of all checks deposited by customers. The MICR and images are sent via private data lines to the central clearinghouse where the items are cleared and then moved to the ImageDepot archive.and the ImageDepot archive.

ImageDepot, a Windows NT/2000-based system, supports storage of complete check images (front and back), as well as retrieval based on a variety of criteria, such as check number, amount or date.

A bank in Singapore accessing the National Image Archive will be able to retrieve an image of a requested check in seconds. Authorized individuals will access these images (as well as related items) using a web browser and AFS-supplied thin client software that interrogates the ImageDepot archive via a secure SACH web server. Advanced Security provisions will ensure that users only have access to their items.

A thriving international financial center, Singapore is positioned to lead a revolution of change in financial services. "Electronifying" inter-bank check clearing is the latest example of the country's leadership role in this revolution of change.

Since achieving its independence in 1965, Singapore's gross domestic product (GDP) has grown at an average rate of 8.6% per year; real per capita GDP has grown more than eight fold, from $2,000 (S$4,000) in 1965 to over $16,000 (S$32,000) in 1999, according to government data. And nearly every major financial institution in Asia and the West maintains a representative office in Singapore.

Singapore also has emerged as a leader in electronic payment initiatives. The country, for example, supports an extensive national smart card program. Smart cards - so called because of the computer chip embedded in each to keep track of bank accounts, transactions, passwords, etc. - are used by Singaporeans primarily for small-dollar purchases that might otherwise be paid by cash.

Known to Singaporeans as CashCards, these stored-value chip cards are accepted at thousands of retail locations, libraries and post offices, and for highway tolls and parking fees. As of the end of 1999, there were about 14,000 CashCard-enabled terminals installed throughout Singapore, according to MAS. That year there were approximately 77 million CashCard transactions, valued at about $44 million (S$87 million), up from 700,000 transactions valued at roughly $4.7 million (S$9.4 million).

In 1998, Singapore became one of only a dozen nations to implement systems and procedures supporting real-time gross settlement (RTGS) for high-value inter-bank funds transfers. MEPS, the RTGS system developed by MAS, operates similar to the U.S. FedWire system - assuring instantaneous and irrevocable transfers of funds between participants.

Several individual banks in Singapore, meanwhile, are using the Internet and telephone channels to offer electronic bill presentment and payment (EBPP) services.

The decision by MAS to develop a national
program of check truncation and archive is perhaps the boldest payments initiative yet undertaken in Singapore. Eventually, MAS expects to eliminate the need to transport any paper checks between local banks and the central clearing facility, in effect eliminating paper flows through the country's payments clearing and settlement systems.

As we enter the 21st century, payment systems around the globe are facing an era of unprecedented change. The National Image Archive that is being created in Singapore offers a blue print for facilitating that change. This blue print is available for adaptation by individual banking organizations and payment system operators, alike, to direct the migration from paper-based check systems to electronic payment techniques.

The individual institutional and systemic efficiencies that made available by this migration - from labor savings to reductions in payments fraud and improved customer services - are unparalleled in the modern history of payments.

Singapore's enthusiasm for innovation - especially innovation on the payments front - reflects a strong sense of confidence in technology, and in where new and emerging technologies, like image archive, can lead the people and businesses of that nation. As this enthusiasm spills over into other economies, throughout Asia and the West, we can expect to see, eventually, a deconstruction of the "paper mountains" that today dominate the world's payment systems.

At AFS, we are proud participants in this deconstruction process, combining image technologies and Internet applications to provide unmatched technological support to banks and their customers.

Advanced Financial Solutions, Inc. (AFS) is a leading supplier of Item and Document processing solutions for over 7500 institutions worldwide. AFS has the portfolio of document imaging, check imaging, remittance, and internet products and services, technologies, and strategic alliances to help financial and non-financial institutions meet their customers needs and to compete efficiently in today's rapidly changing business climate. For more information about AFS' products and services, please visit our web site at, or call 1-800-454-4516.

First published on 1/16/01

First published on 01/16/2001

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