optimising transfer agency settlementthetaforum.co.uk/uploads/8/3/4/4/83443158/final... · 2016. 9....

Optimising Transfer Agency Settlement

Moving away from cheques

This information contained in this document is for the use of TA Forum members only and has been produced for guidance purposes and no accountability regarding the accuracy of the contents will be accepted by The TA Forum. This document must not be copied or distributed without prior consent from the TA Forum.

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Table of Contents

Page

1. Introduction & Executive Summary 2 2. The growth of technology in Financial

Services and payments 4 3. Benefits and key features of electronic

Payment methods 7 4. Inefficiencies of cheque clearing 9 5. Considerations for de scoping cheques from TA models 11 6. Conclusion 11 7. Next Steps 12 8. Appendix: Faster Payments Scheme

Limits 13 9. Sources and references 14


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1Introduction & Executive Summary

There is a growing trend within Financial Services towards electronic solutions – with more digital payment channels than ever before: the narrative in the Financial Services industry at present is around ‘revolution’ and substantial change - driven by technology and innovation.

In this landscape - there is an opportunity to leverage the power of technology to make what we have better, for corporates, using it to eliminate operational inefficiencies. For Transfer Agents (TAs), specifically to provide improved service to their clients.

In this context of growing choice and efficiency of electronic payments - cheques can be seen as an increasingly inefficient means of settlement and enhance the risk of fraud to the extent that TA corporates and our clients should now consider moving away from cheques as a strategic goal and imperative. TA’s should be looking for opportunities to maximise the value of their services to their clients by looking for the most efficient settlement methods.

At a recent TA Forum Settlement Working Party meeting - during a round table review of members - it was revealed that some TA participants have already descoped cheques from their service models. For some context - of those in our group who still issue cheques – the percentage proportion of total payments that cheques represent is based on data received from a number of TA representative companies.

For those who have not descoped cheques from their service models – it was an agreed action of the TA Forum to consider the cessation of cheques as a settlement option in more detail. This paper is the initial result – and examines the case for moving away from cheque settlement in more detail; considers for context the increasing ubiquity of technological solutions in the Financial Services space; sets out some of the drawbacks of cheque settlement and gives comparative consideration to the merits of the digital / electronic settlement methods.

The conclusion reached is that businesses utilising electronic payment methods are able to improve their settlement processes and offer better customer experiences, whilst reducing risk.


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Recommendations for future work in this area are made with the acknowledgement that more work and engagement needs to be undertaken to understand feasibility and to ensure industry wide acceptance.


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2The growth of technology in Financial Services and payments

Change is all pervasive within the Financial Services space, change in the main driven by technological advances and evolutions.

Technology is becoming more ubiquitous within and fundamentally important to the life of corporates and their clients within the Financial Services space and beyond. At a recent Barclays Digital Payments Summit a presentation noted the primacy of ease of accessibility and speed of execution as being key to the customer experience in Financial Services. Acknowledging the evolving landscape of customer expectation the speaker noted that successive generations are now emerging who are totally immersed in and expect to consume their services in digital and mobile solutions (1).

How is technology changing Financial Services and the Payments space?

The appetite for digital payment and Financial Services solutions is clearly increasing in tandem with the evolution of new technology, as the public become more conversant with electronic payments and financial services. Here we consider some areas in which this trend is evident.

Mobile banking: Ten years ago few foresaw the dramatic rise of smartphones and that banking would largely be transacted online and on mobile devices via applications (apps). The BBA reported in Q4 2015 that 22.9 million mobile banking apps have been downloaded to date, a rise of 8.2 million in one year, and that mobile banking is now used for transactions worth £2.9 billion a week. This growth is underpinned by the fact that Banks now spend £3 billion annually in investment into API’s (Application Programming Interfaces) for their retail customers to continue to use banking apps and services via smartphones, tablets and online. (2).

As we continue to evolve the way we use and engage with technology to make payments - 58 million contactless cards were issued by the end of 2014 (3). The UK Cards Association reported a 212% increase in the number of contactless transactions made in January 2016. (4).

Increased utilization of social media and online messaging channels is transforming internal and external communications channels for businesses as


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corporates realize the need to utilize channels their increasingly Tech savvy audience and employees expect and engage with.

Blockchain / Distributed Ledger Technology is creating new potential ways of validating payments and recording information on distributed easily accessible ledgers, potentially updated in real time - changing the way ledgers are accessed. Possible ‘real world’ applications will emerge for Distributed Ledger Technology as banks continue to investigate the underlying technology more widely to ascertain applications in areas that may take in payments and reconciliation amongst others.

Artificial Intelligence / Robotics is becoming more prevalent within the TA industry to improve automation, efficiency and streamline processes.

Some corporates are looking at Wearable Tech (eg Smart Watches) and in Japan the government have recently begun trialling biometric payments - whereby the retail customer can execute payments in certain outlets by having their retina or fingerprints scanned at account linked Point of Sale devices.

Even the age old and paper immersed bank account opening / management space has initiatives afoot looking at moving away from paper towards digitally hosted portals and solutions where corporates can instruct account opening/ closure and mandate change instructions online into the bank back office system (eBAM or Electronic Bank Account Management). As with the digital payments trend away from cheque – these online processes are geared to deliver faster more efficient account management.

In terms of the choice of digital / electronic payment methods – change is afoot and the variety of options is wider than ever before. The breadth and key features of these options are considered in detail in Section 3.

What of the non electronic payment methods? Cash and Cheque by comparison

The key to all of this change is the desire to make business faster, safer, and more reliable, with evolving technological solutions to support that vision. The increasing trend in the growth of technology and how it is changing the face of Financial Services, including how it is delivered and accessed, also needs to be considered in respect of the traditional ‘non digital’ settlement methods – cash and cheque.

Cash

In 2015 the value of non cash transactions overtook the value of cash ones. Payments UK reported that businesses, consumers, and financial organisations together made 18.3 billion cash payments during the year, versus 19.8 billion non-cash payments. Cash payments made up 48% of the number of transactions, with automated and card


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payments accounting for the remainder. Overall debit cards accounted for 24% of payments, followed by direct debits, at 10%. Cheques accounted for 2% of the market. (5)

In a recent report a further nod towards what economists call the ‘cashless economy’ and further acknowledgement of the primacy of electronic settlement methods was tabled by Peter Sands - the former chief executive of Standard Chartered Bank. The report recommended the phasing out of high denomination notes by central banks, noting that the usage of such notes within criminal, terrorist, and tax evasion circles, led to illegal money flows exceeding £1.4 trillion annually, and that G20 countries should focus on phasing out the notes to address the problem at root rather than focus on criminals. (6)

Cheques

In terms of cheques – their use in the UK has been steadily declining for several years. Business use began falling steeply in 1997 and has continued to decline as businesses increasingly move to automated payments. A 2012 report cited a 45% decrease in volumes of personal and corporate cheque settlement in the preceding five years (7). Whole market cheque usage has declined at an annual rate of 12% since 2008 (8).

(9)

http://www.theguardian.com/money/cheques


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This paper is not about phasing cheques out in the UK market: we know that the Cheque and Credit Clearing Companies ‘Future Clearing Model’ - as enshrined in the governments Small Business Enterprise & Employment Act - will bring about a change in how cheques are cleared in the UK from paper to image and a reduction to 2 day clearing. Despite that change - the fundamental inefficiencies linked to the process of issuing and receiving physical cheques will still be a factor. Indeed - the process of embedding the transition to the Future Clearing Model will itself represent cost for corporates - TA’s and our clients.

This report is about the potential for phasing cheques out in the TA sector - looking to optimise the electronic settlement methods available for the clients we service and their underlying investors, in the belief that those methods are more efficient and that corporates and TA’s employing those methods in place of cheques would be optimising their settlement service models for their clients. It should also be noted that some Fund and Asset Managers do not offer cheques inwards or outwards already - and some TA’s do not either as noted in the introduction.

3Benefits and Key features of Electronic Payment methods

The appetite for digital payment and Financial Services solutions is clearly increasing in tandem with the evolution of new technology, as the public become more conversant with electronic payments and financial services. The payments ecosystem also has more electronic settlement scheme channels and options than ever before:

Faster Payments (FP): offering real or near real time settlement – this scheme is experiencing double digit growth by comparison to BACS and CHAPS. To increase uptake on the outgoing payment side in our space there is arguably scope for the commercials of the proposition to improve - where FP per transaction costs can remain prohibitively expensive by comparison to other schemes eg BACS. There is potentially an opportunity for individual or group lobbying to the banking community from the TA sector – in regards to both the commercials and also urging banks not currently offering the £250k limit to do so.

We know also that FP are reviewing moves to a £500k limit in 2016 and looking beyond at potential uplifts to £1 million and above (10). A table of current bank uptake of FP limits can be found in the appendix. At present only HSBC, Citibank and Barclays offer the upper limit in the UK. £250k rising would absorb much of the retail space traffic in


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terms of our payments out and in conjunction with the above represent opportunities for increased uptake and move away from cheques.

BACS: the BACS suite of automated payments including standing orders, direct debit and direct credit have long been stalwarts of the UK settlement system (first Direct Debit 1970). The scheme uptake continues to grow across all products, with 5.8 billion Direct Debits and Credit processed in 2014. With £4.4 trillion worth of BACS transactions processed in 2014 – BACS is also looking at shortening its settlement cycle with a Board Strategy to review feasibility of moving to a 2 day settlement cycle for credit and debit files. An obvious advantage by comparison to cheque for retail funds inwards is that the DD process – once set up – is repeated periodically in an automated way. Irregular (ad hoc) direct debit could feasibly replace one off cheque investment payments.

CHAPS: CHAPS is a long established channel for both b2b and retail sector same day payment processing: like BACS it can be utilised for the push of funds in preference to cheques, with funds clearance on pay date.

PAYM: works by associating a bank account to a mobile phone number – giving rise to the ability to push funds electronically whilst not needing to be party to the recipients payment account details (thus desensitizing the issue of needing to know account details - akin to a cheque in that regard). Currently 16 bank institutions use PAYM: 1.9 million customers registered for it in 2014; the average transaction value is £54. (11).

Whilst designed for the retail low value sector – possible options for applicability in our industry exist, with some questions and challenges to be navigated. If banked at a bank within the scheme and the bank enable to PAYM option - corporates may be able to associate their receiving account details to a mobile phone number – to be publicised within their marketing literature. This would afford the option of a new funds inwards channel for corporates. Challenges exist around payment referencing / identification and there is a question mark as to whether this channel can be scaled up to become a more ubiquitous and universal payment method – not least of which is the comparatively low limit.

Debit Cards: in the digital payments market the growth and increasing ubiquity of payments cards is considerable: in Jan 2015 the UK Cards Association reported 1.05 Billion transactions – up by 10% on the previous year. The TA sector is seeing an increasing number of its clients wanting to be in this cards collection space. Fraud rates in this space are an important factor to be considered in any increased usage.

SWIFT: Although not per se a payment method - Swift solutions have long been central to the payments disbursement of corporates offering a payment messaging channel utilising the other schemes. At the beginning of April SWIFT announced that 21 banks have signed up to a new global payments innovation initiative intended to improve the experience by increasing the speed, transparency, and predictability. SWIFT settlement continues to be widely utilised in the UK, Europe and globally.


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All of the above methods are available today and it would be advantageous to adopt electronic payment mechanisms where possible over cheque settlement.

4 Inefficiencies of cheque clearing

There are several areas to consider when reviewing the efficiency and applicability of cheque clearing by comparison to electronic methods: some of them follow

Regulatory presentation and liquidity considerations

The very recent changes in CASS regulations have meant that electronic payment mechanisms can be viewed as being significantly more efficient than the current cheque settlement processes where for many corporates issuance and receipt must now be from and to a client money account. Some electronic settlement affords corporates the opportunity to utilise the Delivery Versus Payment (DVP) exemptions.

Cheques can clear across the 2-4-6 standard and vary from bank to bank: this gives rise to a need to hold large unpresented cheque balances within client money accounts and reconcile those positions across extended periods. Cheques can go unpresented for a significant period of time necessitating lock in of monies to client money gone away and unclaimed accounts: this problem with uncleared funds requiring protection is less of a consideration with electronic settlement.

TA’s are also coming under increasing pressure from the FCA to engage clients and attempt to clear these aged held client money balances: continuing to issue cheques will extend the necessity to support a re-issue and repatriation process and add to servicing costs for e.g. client mailings outwards.

Liquidity is more key than ever since the recent CASS 6 & 9 implementations: not needing to hold unpresented balances and lock them up in Client Money bank accounts across several days by clearing with electronic methods gives a cleaner more easily ascertainable picture of available ‘true’ liquidity. This results in


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reduced reconciliation and liquidity management effort and oversight to monitor and account for positions.

‘The payments journey’: Certainty of fate is increased with electronic means: cheques can become intercepted / lost / delayed more readily and once issued the issuer has no sight of / recourse or audit of the whereabouts: this is true to a lesser degree once in clearing but cheques are not traceable in real time within clearing

Interest accrual on funds clearing by cheque will not happen until day two in the 2-4-6 clearing cycle: same day clearing electronically remitted funds will attract interest (if applicable) on day of settlement

Cheques can be bounced unpaid up to 6 days: this outcome necessitates amendments to reconciliations, and the costs and inefficiencies associated to that outcome

Logistical and clearing challenges and associated costs:

There are significant logistics / costs associated to getting cheques into clearing on the inwards side, courier, and physical handling costs. For corporates there is a reliance on physical transportation to get cheques to clearing centres as well as the costs of postage. In the retail cheque recipient space there is a requirement to attend branch to pay cheques inwards

Image Clearing System implementation costs: multi bank corporates have a particular challenge with banking monies inwards: either send their images to the banks through separate bank hosted solutions or become a Direct Corporate Participant to the new image based clearing switch: there will be costs of implementation for corporates, process changes required and potential increases in bank tariffs for cheque clearing post the change.

In a recent development RBS have closed a clearing receipt centre near London and centralised it to their Midlands Shepshed operation – part of pre Future Clearing Model efficiency drives. This centralisation of clearing infrastructure has added cost and timing issues to getting cheques to clearing for corporates and further inconvenience to the logistics of the process

Change admin costs of needing to maintain lithographic signatory mandates and change manage them: significant associated overheads and costs:

Security:

necessity (and risk) of having lithographic indemnities between bank and client to guard against misuse of lithographical fraud


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ease of cheque interception / being lost and falling into wrong hands: ease of conversion and complete manufacture of fraudulent cheques

An important consideration in conclusion is that communication and engagement on the options for settlement is a key factor. Discussing their strategy to move away from Cheque based settlement where possible and permissible within the sectors serviced - at a recent ‘Barclays Digital Payment Summit’ event Andrew Davies Head of Business and Innovation at Capita pointed out that ‘primacy of educating consumers and clients as to the relative merits of electronic payment methods is critical’ if corporates are to successfully pursue this strategy (12).

5Considerations for de scoping

cheques from TA service models

Each member would need to consider process and service model implications inherent in de scoping cheques form their service models both in the payments inwards and outward side

Investor identification and bank account details verification is commonly undertaken by cheque so impacts and alternatives would need to be assessed.

6Conclusion

• The TA forum Settlement Working Group met on the 3rd of June 2016 to consider the draft of this paper.

• The decision of the group is to support the initiative to move away from cheque settlement and consider alternatives, which has been endorsed by the primary group.


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7Next Steps…

• Member review of this white paper for feedback / additions / corrections (completed August 2016)

• As a group – ascertain strategy: undertake a more detailed review of opportunities and applicability of electronic settlement methods to our business models – processes and client appetite, whilst also addressing limitations.

• Engage forum client’s opinion and other industry bodies on their view of applicability / whether they agree to this strategy

• If an agreed strategy – how would this be communicated to the underlying client / investor and implemented by TA’s in conjunction with the clients they service: How can the TA community assist with this communication strategy?


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8Appendix: Faster Payments

Scheme Limits Business / corporate account transaction limits

Business / Corporate One-off and forward dated payments

Branch Phone Online

Bank of Scotland N/A On request £99,999

Barclays UK Business £25,000 Business £15,000 Business £50,000

Corporate/FI £25,0000 Corporate/FI £250,000 Corporate/FI £250,000

Corporate / FI – via Direct Corporate Access (DCA) £250,000

Citibank £250,000 £250,000 £250,000

Clydesdale £10,000 £10,000 £100,000

Co-operative £100,000 £100,000 £20,000

HSBC £10,000 £10,000 £250,000

Lloyds N/A On request £99,999

Natwest £100,000 £100,000 Business £20,000 - 30000 Corporate/FI

100000

Northern Bank Ltd T/A Danske Bank

£100,000 £50,000 £100,000

Royal Bank of Scotland Including Ulster Bank

£100,000 £100,000 Business £20,000 - 30000 Corporate/FI

100000

Santander UK plc N/A £100,000 £100,000

Yorkshire Bank £10,000 £10,000 £100,000


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Information is updated as and when a limit changes. Last update: 11 January 2016

9 References

1: Barclays hosted Digital Payments Conference - 10th May 2016.

2: British Banking Association ‘The Benefits of Banking’ publication – 2015.


4: 3: UK Cards Association referenced in Raconteur publication ‘Future of Payments’ – 24th April 2014.

5: Payments UK 2015

6: ‘Making it harder for the bad guys: The case for eliminating higher denomination notes’ a report of the Harvard Kennedy School for Business and Government- February 2016.

7: ‘Cheques and Cheque Clearing: The Facts. A guide to cheques and the UK cheque clearing system’ – Cheque and Credit Clearing Company 2012.

8: ‘The Demise of the Cheque’ - UK Parliament Report - Library of the House of Commons – author Timothy Edmonds.

9: ‘The Demise of the Cheque’ - UK Parliament Report - Library of the House of Commons – author Timothy Edmonds.

10: Craig Tillotson CFO Faster Payments Service – Electronic Affiliates Interest Group meeting – 22nd Feb 2016.


12: Andrew Davies – Head of Business and Innovation Capita - Barclays hosted Digital Payments Conference - 10th May 2016.

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