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 the single euro payments area (SEPA) and the Payment Services Directive (PSD), as part of a European initiative to establish a single payments area across Europe which 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 (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 Indian rupee (INR) 5 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 renminbi (RMB) 20,000, 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 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.
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.
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