Comparative Study of ACH and ECH


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Revolutionary developments in marketing, information and
communications technology continue to transform the banking and
financial industry. Distribution of banking services through the Internet is
an important part of this transformation. The objectives of this thesis are
mainly to assess the potential functions of e-clearing with respect to error
free fast funds settlement and to evaluate the competitive advantages of
Electronic Clearing House over Automated Clearing House. The study
explores the Electronic Clearing House in the perspective of time savings,
various costs elimination and maximization of profit for all the
stakeholders. The security measures in terms of digital signature to secure
data and information exchange over the internet would also be examined.

My research work during (Executive MBA 2006 ~ 2008) has been internationally published (Apr-2012) by LAP Publishing Germany. The topic of research was “Comparative Study of Automated Clearing House (ACH) AND Electronic Clearing House (ECH)”

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Comparative Study of ACH and ECH

  1. 1. EXECUTIVE SUMMARY Abstract Revolutionary developments in marketing, information and communications technology continue to transform the banking and financial industry. Distribution of banking services through the Internet is an important part of this transformation. The objectives of this thesis are mainly to assess the potential functions of e-clearing with respect to error free fast funds settlement and to evaluate the competitive advantages of Electronic Clearing House over Automated Clearing House. The study explores the Electronic Clearing House in the perspective of modernization, time saving, various costs elimination and maximization of profit for all the entities involved i.e. banks, their customers and NIFT (e-clearing service providing company). The security measures in terms of digital signature to secure data and information exchange over the internet would also be examined. Another aspect of this thesis will focus on the requirements and implementation of this modern technique for each involved entity. The value added services of electronic clearing house cause the growth of bank in-terms of increase the customer relationship and trust. Purpose The purpose of the thesis is to explore the pros and cons of Electronic Clearing House (ECH) with respect to present clearing setup i.e. Automated Clearing House (ACH). The study explores the efficiency and effectiveness as well as impact of numerous costs and time for both ECH and ACH. 1
  2. 2. ACKNOWLEDGEMENTS After intensive work in carrying out my MBA thesis, I am proud to finally present it. Working with this thesis has been an interesting experience of life, which has given me a valuable insight about the comparison different versions of clearing and the evaluation of their pros and cons with respect to viewpoints of banks and branches of Faisalabad region at Pakistan and secondary data collected from different means. I would like to take this opportunity to thank all those who have contributed to this thesis, directly or indirectly. With respect, I would like to thank my parents and maternal Uncle Mr. Asad Ali Ahmad for encouraging and guidance in entire my life, their kindness and prayers throughout my life. My special thank go to my wife for her support and coordination during the completion of this thesis. I would also be grateful to my brother, sisters and friends for always being there. Last but not least I want to thank my colleagues for encouraging and supporting me in various ways. 2
  3. 3. KEY WORDS (Abbreviations and Definitions) ACH Automated Clearing House ATM Automated Teller Machine CH Clearing House ECC Electronic Cheque Conversion ECH Electronic Clearing House ECS Electronic Clearing Services EDA Exploratory Data Analysis EFT Electronic Fund Transfer EPN Electronic Payment Network ibid In the same place (used when citing a reference) MICR Magnetic Ink Character Recognition NCN National Cheque Network NIFT National Institutional Facilitation Technologies POS Point Of Sale SBP State Bank of Pakistan UPIC Universal Payment Identification Code 3
  4. 4. GLOSSARY OF TERMS Automated Clearing House is one of the Federal Reserve Board's mechanisms for the Inter-bank electronic transfer of funds. Electronic Cheque Conversion. A paper cheque presented for purchase of goods or as payment for services rendered, converted to an electronic item for settlement through the Automated Clearing House. Magnetic Ink Character Recognition. The magnetic ink character recognition line at the bottom of a paper cheque. It is the process from searching to purchase of a product or service on the Internet, where a transaction of some sort takes place. (Defined by the Financial Investment Dictionary) Any transfer of funds, other than a transaction originated by a paper instrument, that is initiated through an electronic terminal, telephone, or computer or magnetic tape and that orders or authorizes a financial institution to debit or credit an account. An example would be an ATM (Automated Teller Machine) transaction. Also called wire transfer. Secure Sockets Layer (SSL) technology protects Web site and makes it easy for Web site visitors to trust in three essential ways: 1. An SSL Certificate enables encryption of sensitive information during online transactions. 4
  5. 5. 2. Each SSL Certificate contains unique, authenticated information about the certificate owner. 3. A Certificate Authority verifies the identity of the certificate owner when it is issued. (Secure Socket Layer, 2010). (Definition by Banking Dictionary) Order to pay funds electronically by wire or telephone instruction, usually involving a large amount of payment. 5
  6. 6. 6
  7. 7. TABLE OF CONTENTS 1 INTRODUCTION AND BACKGROUND 9 1.1 9 1.1.1 11 1.1.2 Clearing 11 1.1.3 Automated Clearing House (ACH) .. 12 1.1.4 12 1.2 History of Clearing House .. 14 1.3 16 1.3.1 Corporate Introduction . 17 1.3.2 18 1.3.3 Automated Clearing House 19 1.3.4 Clearing Services Offered by NIFT .. 19 1.4 20 1.5 Objectives . 21 1.6 Significance of the Study .. 21 1.7 Research Question 21 1.8 Delimitation . 22 2 REVIEW OF LITERATURE 23 2.1 Summary of Literature Review .. 23 2.2 24 3 RESEARCH METHODOLOGY 36 3.1 36 3.2 Research Design . 38 7
  8. 8. 3.3 39 3.4 Sampling Technique and Sample . 39 3.5 Sample Size .. 40 3.6 41 3.6.1 The Process of Instrument Development .. 41 3.6.2 Research Instruments .. 41 3.7 Data Collection . 42 4 DATA ANALYSIS AND INTERPRATATION 43 4.1 44 4.2 45 4.3 Statistical Analysis and Interpretation 46 4.4 64 4.5 67 5 FINDINGS, CONCLUSION AND RECOMMENDATION 69 5.1 69 5.2 . 70 5.3 71 5.3.1 73 APPENDICIES Appendix - 74 Appendix - B (Functional Flow Chart of ACH) 76 Appendix - C (Questionnaire) 77 Appendix - 80 REFRENCES 86 8
  9. 9. operations, clearing houses and customers including corporate and retailer. The modernization and technological expansion like computers, information technology infrastructure, internet and strong communications has become the factors of success in competitive market place. Especially in Pakistan, the modernization in banking sectors is rapidly arising. Banks and branches are getting on-line through Internet and Intranet e.g. the transaction at ATM (Automated Teller Machines), On-line funds transfer etc. (Andreas, 2006). Another significant aspect in various industries is outsourcing i.e. to handover the tasks to third party and accomplish with accuracy, low cost and within the specified time frame. In Pakistan State Bank of Pakistan (SBP) acts as a central bank and few years back all clearing activities were made under payments department of SBP. All member banks representatives were gathered at the premises of SBP on specified schedule and the transactions were exchanged and settlements of payments were managed. This session was named clearing house. A clearing house is a services provider company to all financial institutes involved in payment settlements. Normally their function is the processing of inter-bank transactional claims and final funds settlement info generation. The central bank is responsible to settle (debit and credit) the banks on behalf of such financial information. Reference with outsourcing the function of clearing has been assigned to NIFT by State Bank of Pakistan to accomplish the clearing processes effectively and efficiently. An advance technology and setup named Automated Clearing House (ACH) has been shaped by National Institutional Facilitation Technologies (NIFT) Private Limited. The operations of NIFT have been thru at branch level and facilitates them by variety of products and value added services. The operations of NIFT have been carried out in more than 130 cities by large volume of and financial instruments processing for debit and credit payment settlement. The automated clearing house rules have also been developed by the central bank (SBP). Before proceeding it is important to understand the concepts and basics of Clearing, ACH and ECH. 10
  10. 10. Generally the payment settlement has been made among two banks or branches through central bank i.e. the financial instrument like cheque, draft or payment order has been deposited by depositor in his account at particular bank/branch. Since that instrument belongs to other bank/branch therefore it has been launched in clearing house for acquiring payment by the payee bank/branch. The payer bank/branch verify/clear that instrument and sends the info to clearing house. The clearing house is operated and controlled by central bank in its defined premises. On behalf of the information by payer bank, the transaction in terms of debit and credit for payee and payer bank has been finalized by central bank in clearing house. Further the payee bank credit the account for which the cheque was deposited. Similarly the payer bank debit the account from which the payment realized against the particular cheque. This complete phenomenon is termed as clearing. All these activities have been performed within specific time frame. In case of cheque return, no funds movement among both banks/branches has been carried out. (Clearings, 2009). Clearing houses are the need of business and financial community because the clearing service accelerates the speed of trade, safe as the mode of payment is cheque rather cash. In its most extensive meaning, the function of clearing implicates the management of post trading, pre settlement credit experiences and provides the confirmation of disbursing the business transactions according to market legislations either the buyer or seller become insolvent before the final settlement. The significant roles of clearing are inward and outward reports, on-line cheque status through web services, risk coverage, return processing and assurance of un-paid info, tax management, and cheque lost handling etc. The arrangement of administration and management of payment settlement and funds transfer among involved banks through central bank by the authorized entity called Clearing House. The clearing house may be outsourced and legally authorized by 11
  11. 11. central bank. It may be association of banks organized to exchange cheques, drafts, or other payments types, including electronic transfers e.g. in Pakistan, NIFT has been authorized by State Bank of Pakistan to establish ACH (Automated Clearing House) for about 15 years. Daily transactional activities held in clearing house must be logged as the requirements of its members. The central bank may authorize the transfer of funds (debit and credit) after finalization of clearing cycle. Normally the payment settlement made by central bank based on the NET or house balance reports compiled by clearing house. (Clearinghouse, 2009). ACH is an advance version of clearing house. Infect clearing house has been operated manually i.e. all entries and transactions are manually furnished which often cause error probability in balancing. Inclusion of automation in clearing house activities e.g. coding, encoding, capturing, and sorting eliminates the error occurrences in house balancing as well as reducing time and cost factors. ACH is the computer based clearing house that performs the payment settlements and funds transfer by electronic debits and credits between clearing house members. ACH is widely used for business to business trade payments due to reliability and fast funds settlement. (ACH, 2009). Electronic Clearing Service (ECS) is the way of funds transfer from one bank account to another bank account electronically using the services of a clearing house organized by the central bank. ECH services are often used when huge amount has to transfer from one account to multiple accounts or more than one accounts debited against one account which would be credited e.g. salary transfer, disbursement of dividend or interest etc. Similarly financial institutes like banks has to transfer the bulk amount to utilities company accounts, government accounts also be debited or credited in terms of govt. payments to many contractors or tax collection respectively. (Electronic Clearing, 2009). 12
  12. 12. Infect Clearing House (CH), Automated Clearing House (ACH) and Electronic Clearing House (ECH) are three assortments of the clearing system. CH means company, association, corporation, agency, partnership, or any other entity which provides payment settlement services. The concept of electronic money can be understood as the money which is not like physical i.e. the amount transfer from one bank/branch account to another and transaction accomplished safely, having authentication and immediate the involved accounts be realized. There are many machines using in e-money some well known are electronic terminal, ATM, telephone instrument, computer, magnetic medium or any other electronic device. The electronic money transfer may be happened among any banking company, financial institution, or any other authorized company or person. There is variety of electronic cheques but more formerly used are image based and e-cheque. The exact image of paper cheque which is generated, written and signed in a safe and secure system having guarantee of minimum safety standards as may be agreed by the State Bank of Pakistan. E-cheque means the account holder of any financial institution generates the cheque using internet medium and authorized application software and that would be authenticated by digitally signed SSL certificate and counter signed by authorized financial institute before presenting in ECH. (Anonymous, 2007). According to Thomas (2006), Electronic Cheque is the electronic form of paper cheque, including all data that holds the paper cheque e.g. date, payee name, payment amount, and signature. Electronic cheques (e-cheques), have been tested by several large banks in terms of paying bills, transferring funds, or other purposes where a paper cheque has been used. However e-cheques bear a Digital Signature (SSL security code) validating payment was authorized by the account holder. (ibid). Written signatures are used for validity and authenticity. Similarly Digital signatures are used to provide authentication. But there is a difference in its format i.e. digital signature is just like a personal identification over electronic media and it may be used by particular authorized person or entity with any message, or electronic form 13
  13. 13. of communication. Digital signatures are used to create public key infrastructure (PKI) schemes in which a user's public key (whether for public-key encryption, digital signatures, or any other purpose) is joined to a user by a digital identity like name, address, telephone-number etc. with public key. And with the unbreakably association public key can be used in terms of identification. The broader term of digital signature refers to any electronic data that carries the intention of authenticity. Infect, not all electronic signatures use digital signatures because electronic signatures have legal significance in U.S, U.K and European Union. However there are still ambiguity and confusion in the applicability of electronic signature due to unspecified cryptography of digital signatures, legal importance etc. (Digital Signature, 2008). associations developed by local banks. These associations are termed as clearing house. By A.D. 800, Clearing Houses were established at Florence and had been professionally shaped by 1463 in Lyons. In 18th century their operations scattered throughout the Europe. However a doubt persists about the development of first modern clearing house i.e. it could be at London in 1773 or at Edinburgh in 1760. In the United States, the Federal Reserve Bank was acted as central bank and responsible for balancing the local clearing arrangements by frequent meetings with member banks of clearing house. The intercity books were settled by electronically transfer of funds on daily basis. Clearing activity was also carried out by trade goods and stock exchanges. The Clearing Corporation of Stock was established in 1920, and at that time its responsibility was handling the clearing related trades at the Stock Exchange of New York (NYSE). Furthermore, the National Securities Clearing Corporation (1976) handled the clearances and overseas transactions for NYSE, the American Stock Market formerly known as NASDAQ, and the International Securities Clearing Corporation. Such clearing houses have been now computerized 14
  14. 14. and have significant in international payment settlements among central banks, key financial institutes, clearing unions etc. The well-known international financial groups involved in clearing activities were European Payments Union. These groups provided economic stability at Europe in 1950 and now they have been dead. (Cowan, 1984). The concept of payment settlement through clearing house was established in 1773, when a clearing house setup arranged at London. Infect before this arrangements, the un-official gathering of tired bankers taken place at coffeehouse and the practice of exchanging their batches of cheques. By the end of civil war, many cities at America copied this way of payment settlement and successfully implemented the clearing house associations in New York, Boston, Philadelphia, and Chicago etc. Gradually the concepts of matching, balancing and funds transfer grown-up. Similarly this technique spread out towards westward countries. About 87 clearing houses were established up to 1900 at U.S and with the passage of time the figure reached to 198 in 1920. Small towns where more than one branches existed, got the advantages of local clearing house or devised nearest local clearing place. Before formation of Federal Reserve, the clearing houses handle other responsibilities for banking community like carrying out the examinations of member banks, releasing reports of certificates to be used in settling clearing balances. These functions got Insignificant in almost every state before starting Civil War when national banking act 1863 arrived. National government started to regulate the banks by issuing the license for currency regulation under national charter by organizing offices of business controller. In 1914 the system of Federal Reserve had been geared up with few regulations for all member banks. Federal Reserve System influenced many cheque clearing regulations in improving the clearing system i.e. About 12 Federal Reserve banks assigned intercity clearing within their respective districts by local clearing houses. Duration of long distance clearing also reduced e.g. cheque clearing between New York and San Francisco had taken eight days in realization. By implementing 15
  15. 15. the new strategies, time frame shrink to two days regardless of delays in the actual physical arrival of the cheques. The development of other banking systems also affected with the improvement of clearing house systems. After World War II, the number of payment transactions decreased through clearing houses because of increasing the trend of credit cards and somehow debit cards. Gradually the practice of computers and accounting machinery in routine life amended the nature of clearing. The initial published reports of American clearing houses were appraised and worthily on the state of economy because before that there were few available in limited manners and business activity is difficult to measure precisely. Nonetheless the economical reports figure about accounts holder became less significant after 1918 when Federal Reserve Bank functioned. Fed Reserve collects and releases the drawn on particular bank either through clearing house or exchanged through cash payments or cheque exchanged between customers and bank. Progressively the ratio of total clearings to total debits declined. In spite of these changes, the function of clearing houses sustained to be necessary features of financial activity in early 2000s. (Garvy, 1959). Few years back, the State Bank of Pakistan, Banking Services Corporation (SBP- BSC) realized the modernization in clearing system. Keeping in view the core competency and outsourcing trend at developed countries like United States, Canada the automation in clearing services are assigned to National Institutional Facilitation Technologies (NIFT) Pvt. Ltd. throughout the country. NIFT established the mechanism of ACH in 1995 and started its full function in 1997 at Karachi the one of the big city of Pakistan. ACH services were provided to all commercial banks and their branches with the excessive cooperation of SBP-BSC. The unique characteristics of the ACH system by NIFT is the image based clearing containing hi- tech equipment e.g. fast Sorters / MICR Readers made by world leader NCR, UNISYS and FUJI. These technologies help towards future phase which is electronic 16
  16. 16. clearing services and physical cheque truncation system. There is a strong I.T. infrastructure in NIFT for non-interruption and smooth processing. In-house application software development and well versed I.T. infrastructure also differentiate NIFT to other organization. NIFT has proved the success in ACH services all over the country. The ACH system has been customized and has a wide flexibility which fulfills the needs of SBP-BSC and all member commercial banks. NIFT beliefs in the process of reengineering and continuously seeks to improve internal organizational systems. To meet the global requirements, NIFT vision and mission demonstrate the acceptance of up-to-date technology, data acquisition software and satisfaction of internal and external stakeholders. The significant characteristic of NIFT operations is to facilitate at branch level, that affects in time, cost and human resource saving. The concept of only main branch can participate in clearing house transactions has been vanished by the NIFT ACH operations. Many banks are operated by multiple branches, wh being provided including outward collection, inward presentment, return collection and final fate delivery. With the cooperation of SBP-BSC, NIFT has expanded nationwide its ACH operations and offered the variety of products like overnight clearing, intercity, same day and dollar clearing. NIFT is functioning in more than 150 cities of Pakistan. The instruments cleared in 2007 were 66,347,664 which are 15% more than previous year. The enhancement shows the success of NIFT as well as fast funds transfer with low cost and time saving features. (Anonymous, 2009). NIFT is a private limited company abbreviated as (National Institutional Facilitation Technologies) and organized at Pakistan in 1995 as a joint business enterprise between a consortium of six banks and entrepreneurs from the private sector. NIFT deals in diversity of business programs whereas the core business is to provide ACH services to all commercial and government banks throughout the country. Approximately 5600 branches of all banks had been included in NIFT ACH grid up to May 2009. The systematic documents processing are being exercised specially in 17
  17. 17. ion is the capturing of physical cheques, automatic sorting and compilation country wide processed data. SBP-BSC makes arrange the gross settlement at the real time to all banks and branches on behalf of that data. NIFT has established the automated services at 20 major cities including Karachi, Lahore, Islamabad, Peshawar, Rawalpindi, Hyderabad, Multan, Faisalabad, Quetta, D.I. Khan, Sialkot, Gujranwala, Sukkur, Bahawalpur, Muzaffarabad, Jhelum, Abottabad, Mirpur, Sahiwal, Sargodha and Rahim-yar-Khan. About 200 satellite cities connected with these major cities are also being facilitated by NIFT ACH. The services of NIFT automated clearing house are cheque clearance, reconciliation, return (un-paid) cheque processing. These services have been incorporated in all type of clearing products like Normal (overnight clearing), Same-day (Express 2 hours clearing), Intercity-clearing and foreign currency (U.S. Dollar) clearing. Following are some significant competencies of NIFT. Cheque Clearing and Settlement Remittance and Lock Box Processing Public Key Infrastructure Cheque Fraud Protection Document Management Knowledge Security Solution National Institutional Facilitation Technologies (Pvt.) Limited is a joint enterprise between group of major banks and private entrepreneurs. The six shareholders banks are: Habib Bank Limited MCB Bank Limited National Bank of Pakistan 18
  18. 18. United Bank Limited Allied Bank Limited First Women Bank Limited There are 14 boards of directors, 7 belong to private sectors and 7 from banks. The Chairman of the board has been elected by the candidates of shareholder banks and CEO is the nominee by private sector and approved by all board members. All Scheduled banks working in Pakistan are the members of NIFT's ACH system and the central bank authority, SBP-BSC examines the overall clearing house operations. NIFT is a certified clearing house at Pakistan. The inward clearing and return marking is web based. All images, data and reports are available on web portal ( The scoreboard facility on the web enables the Treasury Managers to examine their positions as the day progress and enables them to take appropriate decisions. NIFT provides services to all 40 commercial banks and their 5571 branches in over 185 cities. ACH of NIFT is providing four main services: the Normal (overnight clearing), Same-day (high value clearing), Intercity clearing and local United States Dollar clearing. Overnight clearing Including Return Cheque Processing (24 hour Clearing Cycle) Same Day / High Value Clearing including return cheque Processing (3 hour Clearing Cycle) Inter City clearing including Return Cheque Processing (48 hour Clearing Cycle) Countrywide Local US Dollar Clearing (5 day Clearing Cycle) The settlement of inter branch payment claims 19
  19. 19. The claims settlement among banks Generation of intra bank Advices Web services for clearing and treasury information Support of e-return and inward clearing instrument through electronic media -desk at organized call centers Comprehensive clearing statistics and reports provided regularly to members of ACH House balance (NET) to central bank for payment settlement to main branches Combined NET for all types of Clearing Services Dynamic Score Board info at Web for treasury of banks showing the complete day progress As we have earlier stated that NIFT services have been expanded to 20 big cities and about 180 related satellite cities include important industrial and marketable municipalities. More than 5600 banks and branches are being facilitated by the huge automated grid. The fast funds settlement is taken place within the ACH members by Real Time Gross Settlement (RTGS) system at SBP-BSC. (ACH at Pakistan, 1995). The comparison of ACH and ECH in-terms of time saving, cost saving, error occurrences, funds settlement and various competitive advantages. Problem Brief Clearing House is based on hand written register setup causing more time consumption and problem of house balancing in the transactional amounts. Automated Clearing House is based on computerized and automated machines which reduces the processing time and eliminates the house balancing issue. An advance Automated Clearing House setup has been implemented and is successfully being functioned by NIFT throughout the Pakistan. Automated Clearing House system is 20
  20. 20. required more resources, more costs and more time than Electronic Clearing House because the financial instruments are physically collected, processed, and delivered in the banks and branches involving human resources, logistics, transportation cost and time. Whereas Electronic Clearing House resides on electronic platform i.e. every task has been accomplished in electronic form which reduces various resources, costs and time as well. 1. To evaluate the competitive advantages of Electronic Clearing House (ECH) over Automated Clearing House (ACH) in banking perspective. 2. To understand the location free concepts in ECH and error free fast funds settlement. 3. To analyze the Electronic Clearing House in the viewpoint of modernization, time saving, various costs elimination and maximization of profit for all the entities involved i.e. banks, their customers and NIFT (e-clearing service providing company). First thing is to analyze the pros and cons of both ACH and ECH with the help of primary and secondary data and extract that which one helps to compete the global market place under the constraints of time, cost and risk coverage. Secondly summarize the benefits of ECH achieved by all involved entities; i.e. State Bank of Pakistan, customers of scheduled and commercial banks and the clearing services provider company at Pakistan (NIFT). What would be the competitive advantages achieved by the banks and their branches through electronic clearing house over the existing automated clearing house setup? 21
  21. 21. To be able to discuss briefly some ethical principles that researchers should take care not to violate when conducting their research. Usually, the first task in the research process is to decide on some aspect of a research problem to investigate. Research stated as questions. The question format serves as the focus of the researcher's investigation. To be able to answer the purpose of the study, we shall address the following research question. The research will be carried out among ACH members in Faisalabad region which includes all banks, their branches and State Bank of Pakistan. 22
  22. 22. From the beginning of 20th century, the payment settlement system at United States was developing consistently. However the banks at U.S. have established the payments claim system among themselves before the setup of Federal Reserve. Before establishing the Federal Reserve, the central bank of U.S. the concept of electronic payment had been arrived. However in 1918 the Federal Reserve started moving money by the means of telegraph. Afterward, during 1960 and 1970, the debit cards, credit cards and automated clearing houses had re-shaped the banking systems and many of them were predicting the cheque-less society as well as Report of August 5, 1974 have been announced that electronic banking is almost ready to bloom into reality. Electronic and paper based funds transfer systems were simultaneously and successfully operating at U.S. With the passage of time the retailers as well as corporate clients of banks were getting aware about e-clearing and hence the electronic funds settlement through ECH was progressing. The culture of trading was gradually transforming, the mode of payments through cash and cheque were getting replaced with plastic cards (debit, credit cards), wire transfers and ACH. The concept of e-money, e-coins, and e-cheques or images of physical cheques were starting to turn. Besides all this modernization, the strong reservations about the methodology, reliability, security, without interruption processing etc. were still there. (Carl, 2005). According to Santomero (2004), the physical cheques and cash are steadily fading electronic structure at United States. However the implementation of modernization in banking industry is the essential need of survival in global market. Strong I.T. infrastructure including internet, e-banking and electronic funds transfer have direct relationship with solid economy. ECH companies at U.S. are the milestones in banking services and all financial institutes may get competitive advantages by acquiring innovative technologies. (ibid). 24
  23. 23. ProgressSoft Corporation at Jordan provides ACH, ECH and various other technology-driven services. According to ProgressSoft (1989), the increase of automation and paper less environment is mandatory for low cost and save time in customer and in case of large amount transaction the electronic mode of payment settlement debited by electronic transformation of payment by the services of ACH. ACH speedups the settlement process causing the reduction of funds transfer cost, banking charges and develops the funds accessibility. ACH services provide all financial memos including direct debit and credit transactions, cheque presentment, clearance or return with reason memos, and final delivery of fate. The electronic cheque clearing by ProgressSoft Corporation comprises multiple varieties. The ultimate objective of each kind is the fast fund settlement. The functions of e-clearing like cheque capturing, image based communication and I. T infrastructure brings vital role in banking performance and gaining competitive advantages under the recent financial vision and legislations. (ProgressSoft, 1989). and has almost covered the big share of market in-terms of payments settlement and funds transfer activities. It is incorporated in 1853 and has come a long way from still is to facilitate the efficient, safe and sound clearing and settlement of payments between financial institutions. No doubt, The Clearing House continues to be a world leader in payments settlement business. The major payment services provided by The Clearing House are Cheque-Clearing, Electronic Cheque Presentment, Cheque Image Exchange, ACH and Wire. (The Clearing House,1853). Wire is a real-time approach for transferring immediate funds and necessary information between member financial institutions. It is somehow expensive as compared other funds settlement services. The services of ACH are similar to Wire -processing and time frame i.e. the normal clearing cycle 25
  24. 24. Electronic Payment Network (EPN) is successfully offering services for 25 years including many major improvements in ACH network. ACH is a low-cost, flexible and highly reliable payment settlement network that follows national standards and is the only payment system that handles an extensive variety of credit transfers, like payroll, dividends and many more. Debit transfers like loan, bill payments and insurance premiums are also managed by EPN. There is also the provision of electronic payments and it is as easy as writing cheques with the Universal Payment Identification Code (UPIC). UPIC is a safe way of electronic funds transfer from one account to another. It allows to payer and payee to share their accounts and may print the receipt of invoice for evidence. UPIC provides the conversion of physical cheque into electronic mode of payment whereas the companies may keep their accounts be debited unless authorized person or entity certified the claim amount. It also prevents from unauthorized ACH withdrawals, demand drafts and fake cheques. UPIC masks a bank account associated with actual bank account which assures the protection of actual bank account. UPICs are for credits only and can be used with any cash management or accounts payable system. (Electronic Payment, 2009). In the comparison of EPN and SVPCO, the significant perception is the image based cheque clearing by SVPCO because of its rapid increase of the volume of cheques processed. According to press release in 2009, the SVPCO Image Payments year to date in 2008, exchanging a highest 5.6 billion cheque images, which is more about 97% (2.8 billion images) than in 2007. For all of 2008, dollar volume also hit an all-time high of $8.5 trillion, up 71% from $5 trillion in 2007. The members of electronic clearing house has also risen i.e. in 2007 it was 28 and reached to 44 in 2008. The SVPCO (Image Payments Network) commenced its operations in January 2005 and the key aspect of the rise of ECH over ACH is the using of gateway distributed traffic agent (DTA). According to Susan Long, Senior Vice President of 27
  25. 25. ased network is the gateway DTA. The Gateway DTA is a cost effective technique which support smaller image exchange proposal, as well as programs that are just invasion up. Financial institutions can get all the benefits of being part of this network without the cost of installing a dedicated line and computer server. It also makes it easy for sophisticated programs to reach a limited number of specific endpoints in an economical way. However internet connection is obligatory for using Gateway DTA. The core reason of choosing e-clearing in funds settlement by financial institutions is the reduction of cost and time. (Image Payment Network, 2005). InfoMerchant was established in 2001 at Agoura Hills. Its owner Steven Santos has the big contribution for bette payment processing industry. Since 2001 as a leader, InfoMerchant is successfully providing important information like disbursement transfer, financial instruments processing, online transactional processing, credit card terminals and all services involved with accepting payments. These info offers to traders concerning merchant accounts. They also share statistics and guidelines along with the latest technology releases related with payment system. The attractive features of their services are less processing fee than credit cards. However they have conducted survey and got the end result that cheques are remain popular in the market. The use of cheque is still one of the most efficient ways to spend money nowadays. The reason behind using cheque is its reliability, authenticity and guarantee. The people think that there are risks in obtaining any electronic transaction but with ch start paper cheques were used but in the current system cheques have been transferred electronically. The banks have modified their system that allows processors to submit transactions that would be used with e-cheques. The network of e-clearing is different from Visa. The customers get the advantages of fast funds settlement due to on-line cheque presentment in clearing. The e-cheque may be processed direct customer to customer and in this scenario the payee can do it by 28
  26. 26. personal computer application software or credit card terminals as well. It is a batch processing that may be different then accepting Visa or MasterCard and if there are any returned cheques or issues the processor can pay customer back immediately or can take some days. (InfoMerchant, 2001). National Automated Clearinghouse Association (NACHA) is a non-profit organization operates the largest electronic payment network in the world. The majority of NACHA's members are financial institutions, depositary institutions and regional payment associations. NACHA offers the legal basis for electronic funds settlement systems to drive effectively through its managerial and rules making functions. NACHA consistently seeks and update the modern technologies to facilita it works with all interested government agencies (including the Federal Reserve, the Treasury and the state banking authorities) to make sure the integrity of the electronic payments systems used by banking and other depositary institutions. The important making rules and codes of business practices. It continuously manages and monitor quality and ris in 2007. (NACHA, 2010). At United States, in 1996 James Mc Andrews and Willim Roberds analyzed that costs involved in retail payment settlement using cheques are quite extensive in the comparison of electronic payment method. Wells (1996) evaluates that the mean of the cost using cheque processing is approximately $1.60 which is much greater than Clearinghouse (ACH) system. There are multiple reasons of using paper cheques rather using electronic funds transfer. One important reason is provision of property rights that means some payers need delayed in paying and using the paper cheque, they get interval of time. One intention of using paper cheque that the current allocation of property rights within the cheque payment system allows some payers 29
  27. 27. to benefit from delays in cheque clearing times. It is surprised that the cost of paper cheque processing is greater than the cost of electronic funds transfer but the payer is using old technique due to getting time frame. It is observed in retail payment system at United States that the non-cash transactions are gradually rise each year because of low ratio of errors and fraudulent. Approximately 90 billion non-cash transactions are happened each year due to reliability, safety, security, cost and time saving elements in electronic funds transfer through ACH. The interesting thing in American market place is the slow acceptance of modern payment system as compared with Europe and other countries. From past decade the image based clearing houses were getting suitable enhancement in their business due to competition in market. The practices of paper cheque for payments were gradually declining in U.S. Suggestions were arising about revisions in legislation of property privileges through the cheque payment system as well as implementation of ACH and ECH and elimination their flaws. At that time, policy makers were trying to propagate the potential benefits of electronic payments including cost and time saving with more security and reliability. (James & William, 1999). Concerning the membership of electronic clearing house, any financial institute, no condition of the size, may be the member of ECHO. ECHO was formed in 1990 by the consortium of banks to support the electronic funds transfer as well as major change in cheque processing system. In the start the more focus was on payment made by electronic cheques. The prim improvement and efficiency in payment settlement by the exchange of images of cheques. The detail was also described in the act named Cheque 21st century. (Addison, 2002). Another popular clearing house organization at United States is ECHO (Electronic Cheque Clearing House Organization). ECHO is a nonprofitmaking, joint benefit, national clearing house that is totally (100%) owned by its member institutions. The 30
  28. 28. primary activities of ECCHO may be segregated into three functions, Regulations development and maintenance, Industry education and Industry advocacy. ECHO, the Electronic Clearing House, Inc. deals in financial instruments collection, image based processing, return processing and develop final accounts settlement reports as well as procedures. ECHO also involved in debit and credit card processing, cheque guarantee, cheque verification, cheque conversion, cheque re-presentment, cheque collection inventory tracking. More than 60,000 retail merchants and U-Haul dealers (Electronic Cheque Clearing, 1990). Most of the organizations are providing ACH and ECH services simultaneously which means that the customer may choose according to his own requirements. The Visa Point of Sale (POS) Cheque Service allows financial institutions to participate in the program that offers to merchants the provision of conversion of paper cheques from any financial institution into electronic funds transfer (EFT) system. This system transfers the money begin through any platform like electronic terminal, automated teller machine, computer, telephone, or magnetic tape. The terms and condition in shape of agreement have already been documented in July 2001 when ECHO started its operations. ECHO acts as third party processor and the cheques will be routed to ECHO's ACH processing system and the National Cheque Network (NCN) database, that provide the vital infrastructure to facilitate electronic conversion, verification and guarantee of these cheques. Merchant can verify the paper cheque before launching in e-clearing at POS. The validity of cheque includes its authentication, funds availability or guaranteeing payment on the cheque. The facility is also available at ATM machines as well. Once the cheque authenticate, the customer will sign on sales receipt as an evidence of cheque transaction to an electronic transaction. Then merchants cancelled the paper cheque and return to customer along with his or her signed sales receipt. The benefits to merchants include confidence of cheque acceptance, reduce cost, and hassles of processing paper cheques. Industry research shows that personal cheques are used in approximately 31
  29. 29. half of all personal expenditures, yet less than one percent was converted to electronic transactions. ECHO service can be expedited if flexibility, reduction in cost and time provides to consumers in cheque payment settlement through ECH as compared with traditional funds transfer methods. (Business Wire, 2000). Changing trends in payment systems for selected G10 and EU countries 1990-1998 is the research conducted by Sheri M. Markose and Yiing Jia Loke, Economics Department, University of Essex, UK. March 2000. This has been published in International Correspondent Banking Review Yearbook 2000/2001, April 2000. In this research article the authors have discussed about various means of payments in developed countries. As well as the most effective and secure payments system. The mode of payment is cash and non cash payments. Non-cash payments include EFT- POS, Plastic cards, ATM, Paper cheque and Electronic cheque. In conclusion, it has been predicted for the coming year that E-cash will grow with the reservation of safety and security. However risk can be covered but the technological advancement and awareness is the basic entity for its growth. The predicted increase of E- commerce of about 20% of total household consumption in the next 5 years is still tied to traditional card payment methods. Nevertheless, the earlier cited savings in costs of clearing that E-cash generates will no doubt encourage its growth and development. (Sheri & Yiing, 2001). The has been conducted by Dwight V. Denison, Merl M. Hackbart, Juita-Eleana (Wie) Yusuf, and Jay H. Song of University of Kentucky, Martin School for Public Policy and Administration in 2007. The objective of the research is the implication of electronic payments through ACH or debit or credit cards for taxes or other fees. The study explores some other ways of electronic payments rather cheque payments. These may be business related taxes, debit and credit cards funds transfers, utility 32
  30. 30. reductions in electronic payments are also highlighted in the report. (Dwight, Merl, Juita-Eleana, & Jay, 2007). Several customers quoted that Alliance payment technologies inc. is the best among ACH provider companies. Alliance payment technologies inc. is quickly grown internet based, ASP (Application Service Provider). They provide the provision of branchless (remote submission/origination) platform with advanced security features, detailed reporting and web services allowed for work station/client integration and automation. At the POS (Point of Sale), customer has been provided the facility of Electronic Cheque Conversion (ECC) i.e. the image of paper cheque will be sent as ACH item. The significant benefits of ECC service are no need of deposit slips, time saving due to prevention of long banking lines etc. These ACH items are treated First In, First Out because in electronic form. Time and transportation cost is also reduced in case of return the electronic instrument. The return charges deducted by bank are substantially lower than physical cheque return. The system includes advanced security features, detailed reporting and web services enabled for client integration and automation. Alliance is benchmark in providing top quality software for ACH industry. The necessary requirements for processing the item in electronic ACH are the use of MICR (Magnetic Ink Character Recognition) on cheque. It is mandatory because of comprising account info, payer bank branch code, and cheque number and transaction code that helps in fast fund transfer. All the cheques received in the mail can be scanned right into our Image Archive and the transaction sent through the Automated Clearing House as an ACH item by Alliance's Internet-based imaging solutions. The comprehensive reporting provides a full audit trail. Another electronic instrument which processed more fast than ECC item is WebCheque. The Alliance WebCheque is perhaps the most flexible of its kind which has been designed to meet any online payment application and quite easy to configure as on need basis. (ACH Services, 2006). 33
  31. 31. We have got the elaboration in detail about the impact of ECH at developed countries like U.S, U.K etc. Let us examine the e-clearing advantages and implementation at under developed countries. The clearing system in Zambia has recently been automated. This meant that all clearing participants send their clearing data electronically to the clearing house. The IMF and the World Bank provided funding for research and various studies to identify a cost effective, efficient and rapid payment system to help foster trade promotion and economic growth. These researches and studies culminated by Citigroup such as, creation of an independent clearing house operated and managed outside the Central Bank. The electronic clearing house will be operated and managed by Bankers Association of Zambia. The electronic clearing only deals in local currency. The foreign currency clearing will be operated and managed by the Bankers Association of Zambia. The foreign currency clearing is manually executed. It only deals in foreign currency designated cheques drawn on the banks in Zambia. Settlement is through the banks' correspondent banks. Settlement for electronic clearing is through the Central Bank books under advice from the Controller of the local clearing house. Settlement is considered final and not recoverable once confirmation found by the Central Bank and transactions passed through the Central Bank books. Transmission of electronic clearing files from banks to the clearing house is done once a day. The cut-off time for receipt of the electronic files is 6pm. At the same time, physical cheques are also delivered to the electronic clearing house by 6pm. The physical cheques are required for verification of the electronic files only. At the end of clearing session, each bank would know its net settlement position. (Clearing System, 2007). In 1996, Government of Tanzania enounced their NPS (National Payment System) to be modernization using reengineering and automation application. The vision of payment system was to become central, more efficient and including maximum facilitation for customer. The project was assigned to Bank of Tanzania and after developing and testing the live running started on March 01, 2002 at the Dar-e- Salaam Electronic Clearing House (DECH). MICR equipments must have to be 34
  32. 32. installed by members of DECH. The features of such equipment are reading, sorting that facilitates automatic data capturing and generation of electronic files and journals. These files are used by the BOTECH system at the Dar-e-Salaam Electronic Clearing House. The payments dramatically boosted due to such hi-tech electronic clearing house. The DECH processes about 80% of all cheques in the country. (Payment System, 2000). It has been concluded by above analysis that ECH has multiple advantages and has the ability to handle millions and trillions of transactions which are almost impossible in traditional and those clearing houses where more human resources are utilized. Time and cost are critical factors for any entity in current economy of the world. One big edge of ECH is to provide less cost and time saving attributes. Banks and branches are getting competitive advantages using this secure and fast funds settlement at U.S. because U.S. payments settlement system is the biggest one in the world. Daily millions of transactions, valued trillions of dollars, have been realized between sellers and purchasers of goods, services, or financial assets through clearing house associations. Most of these payment settlements have been accomplished by Reserve Banks. The Federal Reserve performs an important role as an intermediary in clearing and settling interbank payments. Banks settle payment transactions by debiting the accounts of the depository institutions making payments and by crediting the accounts of depository institutions receiving payments cost-effectively. Later 1970, the ACH started to process credit and debit transfers electronically i.e. ACH credit transfers are used to make direct deposit payroll payments and corporate payments to vendors. Whereas ACH debit transfers are used by consumers to authorize the payment of insurance premiums, mortgages, loans, and other bills from their account. The ACH is also worked by businesses to consider funds at a primary bank and to make payments to other businesses. In 2003, the Reserve Banks processed 6.5 billion ACH payments with a value of $16.8 trillion. (Federal Reserve, 2005). 35
  33. 33. According to Kotler & Armstrong (2006) the purpose of exploratory research is to define problems and suggest hypotheses with the help of collected initial data. Normally exploratory research relies on secondary research or existing literature or qualitative method. Qualitative approach can be understood as the informal discussion with related population like consumers, employees, management etc. (ibid) Usually the result of exploratory research is not helpful in decision making but it can provide important imminent into a given situation. Even though qualitative method often" or "how many". Qualitative research is exploratory in some sort of kind and uses procedures such as in-depth interviews and focus group interviews to get clear or deep perception of a situation. (Qualitative Research, 2010). Usually exploratory research employed in social science study. Exploratory research r cultural strength? What are the meanings they give to their actions? And what are the matters concern them. In short without involving explicit expectations. (Russell & Schutt, 2006). Exploratory pursues several possibilities simultaneously, and in a sense it is not quite sure of its objective. Exploratory research is designed to provide a background, to ct. A part of exploratory research is the investigation of relationship among variable without knowing why they are studied. It borders on an idle curiosity approach, differing from it only in that the investigator thinks there may be a payoff in application somewhere in the forest of questions. Three typical approaches in exploratory - research. 37
  34. 34. Refer with our exploratory research, qualitative and flexible design will be employed. Research design refers to the blueprint for the research. The basic issues addressed in research design are: 1. Study of the research environment 2. Number of observations to be studied? 3. Decision about sample chosen? 4. What sampling procedure would be adopted? Research design can be assumed as the structure of research, it performs the binding force or glue that keeps together all the research elements in particular project. Research design often describes to summarize a complex structure efficiently. The aim of the quantitative research is to determine the relationship between an independent variable (one thing) and a dependent or outcome variable (another thing) in a population. Normally two approaches are taken in Quantitative research designs. These are descriptive (subjects usually measured once) and experimental (subjects measured before and after a treatment). As we have discussed that a descriptive study creates only associations between variables while experiment method establishes causality. To get accurate estimation in descriptive approach, sample size will have to select in hundreds or even thousands depend upon subjects. In other hand few samples are required in experiment method. The estimate of the relationship is less likely to be biased if there is high participation rate in a sample selected randomly from a population. (Will, 2002). Robson (1993) agreed that research design has strong relationship with the questions asked to population in testing project. To get precise results, questions for data collection must be designed very carefully. Every research design has its positive and negative sides. Research design can be illustrated as fixed design and flexible research designs. Further to understand, research design is frequently be 38
  35. 35. distinguished in quantitative and qualitative manners. However, fixed designs need not be quantitative, and flexible design need not be qualitative. Fixed design has Generally, fixed designs are theory-driven; otherwise it is not feasible to imagine in advance that which variables need to be controlled and measured. Often these variables are quantitative. There is provision of more freedom in flexible designs when collecting the data. A significant reason for using a flexible research design may be that the variable of interest is not quantitatively measurable, as in our study, the comparison among two services, qualitative aspects (Appendix-C) have been exercised. Population means the totality or aggregate of observable entities having the potential measurements or values. In this proposed research, population will consist of: - All the automated clearing house members of Faisalabad region i.e. more than 300 banks and their branches. - State Bank of Pakistan, Faisalabad branch - NIFT Pvt. Ltd. Faisalabad branch and Head Office Karachi One of the most important steps in the research process is to select the sample of individuals who will participate in the study. Who is to be observed, questioned, or tested? Sampling refers to the process of selecting these individuals. Conventionally sampling methods can be categorized as: probability and non- probability sampling. Probability sampling is mostly linked with survey-based research where researcher needs to make conclusions from the samples. It helps to researcher to meet research objectives. Non-probability sampling provides a variety of alternative techniques based on researcher immanent judgment. In order to focus proficiently and accomplish the purpose of better understanding the effect of funds 39
  36. 36. transfer in the comparison of ECH and ACH, non-probability sampling was selected. To gain better understanding from banking perspective as well as customer perspective the comprehensive approach has been incorporated in the designing of questionnaire. The detailed data regarding Electronic Clearing House set up will be collected by using questionnaire (interviews and mailed) from the authorized personnel belong to NIFT, SBP Faisalabad and Automated Clearing House members banks. A comprehensive questionnaire comprising close and open ended questions will be pre-tested and examined in term of workability, suitability and validity of each and every question. The pre-testing will be helpful for necessary modifications in the questionnaire. The samples are preferred according to distinctive background, diverse age group and different banks. There are three frequently used non-probability sampling methods i.e. convenience sampling, judgment sampling and quota sampling. Judgment sampling involves the selection of the fields of study to finalize that what is required, which is the best situation and how the desired information can be obtained. (Samouel, 2003). All banks and their branches are the member of NIFT Automated Clearing House setup. The sample size will comprise of: 120 Managers and other supporting staffs from significant banks and their branches. 05 Persons from SBP Faisalabad (01 Chief Manager, 01 Deputy Chief Manager, 01 Assistant Chief Manager, 02 Officers). 15 Persons from NIFT (01 General Manager, 05 Managers, 05 Asst Managers, 04 Officers) 40
  37. 37. What instruments can be used to obtain information to test a hypothesis? For many researchers, instrumentation is one of the most intriguing parts of planning a study. It is, at the same time, one of the most important and sometimes difficult aspects of research. There are many tools that may be used to obtain information. The significant concepts that are related to the process of instrumentation are reliability and validity. The basic knowledge about ACH and ECH has also been provided in questionnaire for achieving better results. At this point, it may be helpful to make a distinction between instrument and instrumentation. An instrument is a device or procedure for systematically collecting information. Common types of instruments include tests, questionnaires, rating scales, cheque lists, and observation forms. Instrumentation refers not only to the instrument itself but also to the conditions under which it is used, when it is to be used, and by whom it is to be used. All of these can affect the instrumentation process, especially if the procedure is done incorrectly or by someone disliked by the respondents, if testing conditions are noisy or inhospitable, or if respondents are exhausted. Keeping this in mind, researchers must decide upon the instruments to be used in a particular study. (Norman, Wallen & Jack, 2001). In order to collect the data and exploratory research, pre-tested Questionnaire (Appendix-C) has been designed. The questionnaire has been created in the light of for the Council of State Governments, Financial Services Working Group as well as the significance of secondary data and current ACH setup. 41
  38. 38. There are several methods of data collection typically used in research studies. Data from two or more sources will help precisely to support the research answers. The field of qualitative research has six forms of sources of evidence for the data collection. Documentation Archival records Interviews Direct observations Participant observations Physical artifacts The objective of data collection is to get intensive data that fit our research. The collected exclusive data depends on the questions asked in questionnaire and the part of its evaluation. Myers and Avison (2003) suggest that the researchers should have intensive plan about the data which have to be collected e.g. list down the complete resources required, proper documentation, plan how to conduct interview, how to get self observation during interview, etc. It is recommended to beginner researcher that th The aim of this research phase is to assurance of data validity and reliability so that d through primary and secondary sources. The major primary sources are the Managers, Officers and other related staffs from selected banks and branches of scheduled and commercial banks, NIFT and SBP Faisalabad. For that purpose a Questionnaire has been designed. Whereas, the secondary source will be the academic literature, reports, Journals, text books, news papers and internet resources published by different national and international institutes. 42
  39. 39. Generally the qualitative responses of respondents have been computed through the technique called Scaling. In other words the attempt of measuring the attitude connected to their feelings, perception, likes, dislikes, interests and preferences. Attitudes are the outcome of various internal and external factors. The suitable scale has to design for measuring the attitudes. The most frequently used scales in business and marketing research are Nominal, and e-commerce environment of our country the questionnaire would be designed as simple as possible and emphasized on Nominal and Ordinal Scales in attitudes measurement. The typical applications of nominal scale is in classification of nominal scale is applied when the association between two attributes is to be studied. Nominal and Ordinal scales help when there are variety of categories and responses have to be analyzed. Concerning our study with the reference of marketing research the ordinal scales may have the best provision of measuring simplest attitude of all categories of respondents. In case of ranking, the ordinal scales have become more powerful than nominal scales. The Ordinal scale allows the respondents to rank some alternatives by some common variable. An illustration of this would be the ranking of three brands of ice cream by a group of consumers on the basis of perceived variety or quality. The positional statistical measures like Median and Mode are purposeful for ordinal scale. The differences of the nominal and ordinal scales are taken care of in the interval scale. The scale has an arbitrary zero point with numbers placed at equally appearing intervals. The statistical operations including addition, subtraction and computation of mean can be done on interval scaled data. There are variety of scales and scaling techniques comprising the evaluation of collected data. We have to choose the most appropriate technique to suit the research being done. 44
  40. 40. The statements contained in questionnaire have prepared in such a way that the answers received can easily be converted into numerical values. Generally there are three components of attitude. These are Affective, Cognitive and Behavioral. Affective our study, this component can respondents, see question numbers 1, 6, 8, 13, 14, 15 and 16 in Appendix-C. The purpose of such questions is to make sure that how much respondents have the awareness of electronic clearing and its benefits. For the collection of primary data questionnaire was surveyed to more than 120 respondents and obtained 96 filled questionnaire forms. The statistical analysis has been carried out in different perspectives and focused the objectives of our study. Primarily the processing of data means: Editing Coding Classification and Tabulation The data collected through questionnaire (Appendix-C) is edited in two stages. First stage comprises field editing which means that the clearly amend the abbreviation used during interview so that it could be understand further. The next stage of editing is central editing which was carried by me on the data collected through questionnaire. The purpose of central editing is to correct the data in terms of entry in a wrong place by respondent or any ambiguity, misunderstanding etc. 45
  41. 41. Coding is the process of assigning some symbols like alphabets, numeric or both to the answers of respondent so that the data manipulation and analysis could become comfortable in statistical techniques. In the questionnaire (Appendix-C), all multiple choice questions have been assigned numeric values that helped in its exploitation e.g. question number 6, 7, 10, 14 and 15. The raw data collected through survey need to be reduced into homogenous groups for any considerable analysis. The purpose of classification is to drawing meaningful conclusion. The descriptive questions like comments or remarks (see question 2, 8, 15 and 16 in Appendix-C) of respondent are classified according to pre-defined categories which help to analyze the data statistically. Moreover the data also have been classified according to Banks, Experienced respondents, considering Age, Knowledge about e-clearing etc. The collected data is entered in SPSS (Statistical Package for Social Science) software for further manipulation. Statistical data can be presented in the forms of tables and graphs. In the tabular form, the classification of data is made with reference to time or some other variables. The graphs are used as a visual form of presentation of data. The tabulated data is presented in Appendix-D. The primary data have been analyzed in the key prospects of time, cost and competitive advantages. The collected data from questionnaire have been thoroughly and deeply analyzed statistically using Chi-square, Cross-tabs, and measure the confidence level. Probability level and significance levels have been derived by cross 46
  42. 42. tabulation and the results drawn graphically. Mode means that what the maximum respondents react towards a specific question(s) i.e. most frequently occurring value within specific array. Keeping in line with research objective the collected data through questionnaire have been analyzed along multiple prospects. Some exclusive cases have been defined to elaborate the results. The confidence level or probability level of the cases illustrated in table 4.1 and each case have been analyzed and interpreted below: In electronic clearing, the financial instruments from branches are floated in electronic form using the internet platform. Whereas in ACH, the instruments are physically moved between bank/branch and clearing house i.e. the logistics and transportation costs with a big cost of time are applied. Various costs are involved in 47
  43. 43. Further the confidence level for cost effectiveness has been determined using cross tabulation. We will also examine it by simple Mode method i.e. what the maximum respondents says? The result in table 4.2 illustrates that ACH is too expensive than ECH. 93% respondents agree that the services provided by ECH have more economical than services provided by ACH i.e. the elimination of big costs for example Logistics, stationary and transportation. Hence the confidence level of cost saving perspective is .93 with 7% significance level (see Table 4.2) Time saving reflects various cost saving and its impact goes to maximization of processing is always faster than the combination of manual and machine work. ECH is pure electronic processing and ACH is partially electronic. The deployment of resources in terms of manpower can also be eliminated in ECH setup. 50
  44. 44. and awareness about ACH and ECH. In the questionnaire, some questions were planned to identify the knowledge of respondents. There were relationship among multiple questions to judge that how the respondents react? It involves the features like safety, security and fast funds settlement. Though the data and business transactions through internet are risky and unsafe, but the inclusion of digital signatures (SSL certificates) by VeriSign Inc ensures the safety, security and authenticity of data on internet. The probability level level that ECH is more secure than ACH is 0.91 with 9% significance level (see Tables 4.4, 4.5a and 4.5b). The frequency descriptive statistics for cahs flow is shown in table 4.4. Table 4.4 53
  45. 45. This case is relevant to risk factors and impact of cash flow. The ultimate result of time saving factor in ECH produces the more payments settlement. More settlements within specified time frame will affect more cash flow and more trust of the stack holders. Therefore one can say that ECH offers risk reduction and enhance the cash flow in business / market. Since in ECH, the financial instruments are not physically transited, so the chance of their misplacement, lost, snatching etc is eliminated. The evaluation of risk factors can be interpreted as: Security risk (if data in electronic form, the case of ECH) Loss risk (if data in physical form, the case of ACH) Process risk (involve in both ECH and ACH) Fraudulent risk (Fake or mutilation instruments etc) Digital signature is a powerful tool used to secure data and information with authentication at internet and e-mail systems. Only ECH has the provision of fast 56
  46. 46. funds settlement with authentication and security. In ECH, security risk can be minimized or almost eliminated by using digital signatures (SSL certificates). As far concern ACH, there may always be probability of loss of financial instrument during logistic transition. Similarly process risks may comprise wrong coding or machine reader error which causes the wrong delivery of instrument. Hence the risk factors are only minimized in ECH. The compile results are mentioned in Table 4.7. The probability level of increase in cash flow is 74% whereas the 84% respondents agree that the services by ECH have reduction of risk than ACH with 16% significance level (see Table 4.6 and 4.7). The processing of more instruments in clearing house relates the rise in cash flow. The probability of errors in manual processing (coding, encoding and amount entry etc) is much higher than the electronically processing. The risk factors in conjunction of more cash flow may only be controlled in ECH rather ACH. To prevent from fraudulent cases, only ECH provides the feature of on-line cheque validity. 57
  47. 47. As the name shows on-line that means the facility only possible in ECH. The customers of clearinghouse (banks and branches) may have been provided the provision to cheque the status of their presented financial instruments. On-line tracking means to see the update status of the financial instruments launched by bank / branch in ECH. The confidence level of on-line tracking facility provided by ECH is 0.98 with 2% significance level (see Table 4.8). 59
  48. 48. customers may be credited at real time as the instrument realized. 60
  49. 49. This case describes the competitive advantages to banks and their customers. In question 6 of questionnaire some advantages, provided by ECH, were asked to respondents. The Mode for this question is 4. Total experience, clearing experience and coding result of question 6 have been manipulated in Graph C-7. Infect there are variety of ECH benefits and some were mentioned in questionnaire e.g. Strong customer relationship system Increase the customer trust More business to bank 61
  50. 50. Following bar chart showing the education wise response about e-clearing more safe: The attractions for merchants towards ECH are also emphasized in questionnaire i.e. Credit card processing Debit card processing e-cheque acceptance Track the Sales report at POS Immediate Funds Transfer Cash Risk coverage single point at the time of questionnaire coding. The Graph C-8 shows the response that majority of the respondents prefer these advantages. Regarding ECH services and benefits, the statistical evaluation shows that the Mode is 6. Total experience, clearing experience and coding result of question 14 have been manipulated in Graph C-8. 63
  51. 51. 2) A significant result of the research shows that the similar companies either small or large interested more streamline process of electronic payments due to efficient and reliable funds transferring technique. 3) The survey response indicates that still 83.5% payments are made by cheque rather electronic payment methods. However business to business payments are moving to electronic mode. 4) Due to electronic payment methods, reconciliation of bank cash management and accounting system through automation is much easier. Similarly the balancing issues have eliminated. 5) The remittance information either receiving or sending have been standardized among payee and payer in wire transferring technique. 6) 94% respondents agree that payment of remittance information through wire 7) Payment settlement having remittance information through wire is too important for bankers and 58% agree to pay $1.67 additional and other 32% are willing even more extra payment around $3.00. 8) Many lower revenue firms are ready to transform the conventional method into wire transfer payment if internal processing costs of wire be reduced because of majority business to business payments. The research shows in both the quantitative surveys and focus groups that corporate customers and business community is ready to quick implement all where the wire transfer payment due to time saving and more efficient than paper cheque payments. 65
  52. 52. Research Name: The Remaining Barriers to e-Payments and Straight-through Processing Payments transactions over internet concerning a big security risk. In banking, the payments related information is not always available on internet. Remittance information must be required with electronic clearing settlement rather got separate. Funds settlement through e-clearing necessarily required integration with accounts payable and receivable in any bank or financial institute system for improving internal work flow. Companies should have advantages of automation in accounts payable system which should be capable of initiation of electronic payments with remittance information. Likewise, accounts receivable integration is critical for automated reconciliation. At least minimum standard information should also be associated with the facility of electronic reconciliation. A significant trouble is float for several financial organizations. Still there is confusion exists about electronic funds settlement and suggestions found that more education and knowledge should be disseminated to concern market. Electronic funds transfer is associated with company size and nature of business. The basic aim of the study iClearing and Settlement (iC&S) was the evaluation and indication the barriers of electronic payments and the ways how to achieve the competitive advantages in business practices. Security risks about bank routing and account numbers in electronic transactions were also evaluated. First phase of this 66
  53. 53. research was the development of UPIC (Universal Payment Identification Code) which has the provision to get over risk factors and above mentioned barriers. UPIC is a uni confidential banking information during electronic funds settlement. The benefits of UPICs are only available to members of electronic payment network (EPN). In second phase of the iC&S - Need to expand the implementation of UPIC at targeted applications as well as niche market e.g. usage of UPIC at home banking etc. - Promote better electronic payment beginning and acknowledgment capabilities in Accounting Software and Cash Management Systems. - Describe the requirements of standardized remittance information for STP. Infect this research is based on qualitative data that have already been analyzed above. The majority of respondents liked to adopt the modern and latest clearing technique (ECH) which is substantial in terms of cost saving, reduction of time frame and more accuracy than the old techniques. Further more security, safety and authentication exist in e-clearing. Advance and growing-up countries are using the electronic clearing and various ECH have been successfully being operated. It has also been realized in the evaluation of secondary data. ECH has valuable plus points over ACH including benefits to merchants, clearinghouse member banks and concern stakeholders. In the evaluation of primary and secondary data, various aspects are reflected like: - Overall respondent trend - Knowledge and awareness of respondent about modern clearing techniques - Difference of services and facilities among ACH and ECH 67
  54. 54. - Numerous cost saving characteristics - Time saving and reduction of logistics in ECH - Risk reduction factors and - Value added services and advantages of ECH over ACH etc The transformation of ACH towards ECH is precisely the demand and desire of financial institutions and clearinghouse member banks because of competition in global dynamic marketplace and its significant features like electronic communication, on-line tracking, security and safety through digital signature, reduction of logistics etc. 68
  55. 55. Prevention of lost during transition Prevention of fake instruments by NCN (National Cheque Network) database On-line tracking is a big advantage of ECH, any time the presenting branch ensure the update status of financial instruments Risk elimination i.e. provision of Cheque conformity at point of sale without ECH may has the provision of On-line cheque validity through NCN database ACH and traditional clearinghouse may work as a part of ECH Return cheque re-presentment automatically Reduction of manpower at all entities i.e. less staffing at ECH members i.e. banks, financial institutions and itself ECH The trends in global market are dynamically shifted towards ease with safety. The future of payment settlement will be quite easy that one can even accomplish the transaction with mobile phone. The cheque can be deposited to bank account by sending the image of paper cheque through mobile phone at any time. That means no time barrier, no need to wait the opening of bank/branch etc. While only the approach of ECH is the base of all advance future payment settlements. From all indications, it is safe to say that most financial institutions in Pakistan have realized the important role of clearing house through Internet infrastructure for developing secure, fast and error free payment settlement. This is also supported by the fact of adopting the modern IT setup involving ATM machines, Intranet and Global connectivity by number of banks. The number of banks are setting up their own Web sites or even becoming true Internet banks. 70
  56. 56. The services offering by banks to their clients has become a vital in the competitive global market and the role of internet in term of service providing has been essential. All banking services are being transformed on Internet due to multiple reasons like time saving, cost effectiveness, paperless environment, and the need of current era. The electronic clearing services by ECH have also become a real need for banks and their customers. An important purpose of this research is also providing the awareness of modern techniques in payments settlement to banks and their customers because the adoption of electronic funds transfer is the survival in global market. No doubt that ACH is also progressive as compared to manual clearinghouse but ECH is most modern and efficient way than ACH. ACH can also be operated under the ECH setup with certain constraints which have been defined and accommodated. There are lot of plus points and benefits in ECH over ACH. The significant are variety of costs elimination, time saving, more accuracy, minimum chance of errors, more safe and secure etc. It has been observed that customer wants high speed payment settlement with reliability i.e. within a day or less time as possible. They have no concern whatever the methods or techniques adopted by banks and clearing houses. No one can assure the prevention from fraudulent state of affairs. Since system of ECH is based on Internet and it is the channel where robbery of data by hackers may occur. But digital signature in shape of SSL certificates authenticate and secure the web sites, data transactions and e-mail information. The clearing services by ECH are offered a great deal of attention than ACH as these are superb in-terms of secure, fast, time and cost saving prospective. The current age is rapidly switching to electronic form and almost every field of life directly or 71
  57. 57. indirectly transforming into electronic mode either it is related to medical, education, sports, banking, textiles, transportation and various other manufacturing areas. e- clearing, e-coins, e-money, e-banking, e-ticketing, e-mails, plastic money, etc. are gradually involving in routine matters. Nonetheless the increase of cash flow, fast significant. Now business can grow if better services offered. Competition has come in every aspect of life, new products, services and value addition in them attracts to customer and the satisfaction of customer affect the boosting the business. Internet, Enterprise Resource Planning (ERP), strong IT infrastructure is essential for any bank in local or global market place. To manage the complex and diverse banking operations, banks at Pakistan need to have strategic planning for better services to their target customers. On-line banking services and e-clearing through ECH have become essential due to consistently changing in marketplace. The attractive features of e-clearing like low cost, time saving (fast funds settlement), transportation risk free, free of errors due to minimum human resources involvement etc. ECH may present a real challenge to traditional payment settlements. ECH services provide the real benefits to all involved entities i.e. the banks, the banks customers, ECH service provider and SBP-BSC. Clients are becoming more and more demanding and assuming higher levels of service from their bank. Whereas, ECH offering ease of use, ease of access, they add depth and breadth of functionality to meet the expanding needs of their diverse customer base. The ECH services increase the loyalty of financial institutions that will ultimately cause the increase of their The competition across the different banks has been intensified and the growth of on- line banking services seems to continue for the following years. Although it is difficult to forecast future of payment settlement in such a volatile economy and environment, soon or later ACH services will have to switch, completely or partially, into ECH services. To conclude, this thesis has shown that the ECH is a unique opportunity and an advance, cheap and secure channel for payments settlement in 72
  58. 58. conjunction with financial institutions. The deployment of ECH would be vital to attain the loyalty of global target market of e-banking. It is an ultimate culmination that ECH has variety of competitive advantages over ACH but its implementation is not an easy job due to diverse economy and weak IT infrastructure at Pakistan. Further study may be advised to get more focus on: 1. How to improve Technology and IT Infrastructure regarding the implementation of ECH at Pakistan? 2. What are the barriers in ECH implementation? i.e. legitimacy aspects? Technology and IT infrastructure issues? 3. 4. How to implement ECH in Pakistan implementation? 73
  59. 59. Why is it Important to Influence the Migration to Wire Systems? Most corporate check payments are likely to move to ACH. However, some high-value items could benefit from moving to wire because of the speed and security of the systems, which uniquely feature advanced risk controls and real-time processing with finality. Due to the relative efficiency advantages that already exist for ACH versus wire, a portion of high-value checks may migrate to ACH even if ACH does not meet all the needs of companies or financial institutions. Financial institutions and other systems providers could enhance wire systems to make the process more uniform, streamlined and cost effective, so that more payments that could benefit from the characteristics of wire will not be lost to ACH and other payment methods. In the focus groups, corporations agreed that if the process were more simple and efficient than it is today, wire transfer payments would be a more attractive method of payment. Additional statistical analysis of the survey data from the study reveals that respondents who say they do overall convenience of wires, it is likely that firms would use wires more and that more firms would become regular users of wire transfer services. (Real time wire, 2009). Wire Transfer Payments - An Important Payment Channel with Unique Benefits Despite a lack of progress in migrating business to business (B2B) payments from checks to electronic transactions, the research confirms that the wire payments systems operated by The Clearing House (CHIPS®) and the Federal Reserve (Fedwire® Funds Service) remain important payment channels. Many businesses prefer wire transfer payments because the payment is made the same day, the recipient/vendor asks for the payment to be made by wire and because wires are perceived to be a safe way to send and receive large dollar value payments with no risk of return. Respondents indicated, on average, that they send and receive approximately 75percent of wire transfer payments within the United States (rather than internationally); this percentage is consistent across revenue categories. (Financial Services, 2009). The additional statistical analysis of survey data also demonstrates that both domestic and from checks and purchase cards, which do not increase proportionately with revenues of the firms. For ACH, while larger firms make somewhat more transfers than smaller firms, the relationship is small and statistically weak. This analysis supports the conclusion that there are more barriers to the use of wires than to the use of other payments alternatives. It can be reasoned that larger firms are more able to overcome the inefficiencies in the wire transfer payment process by adding resources or investing in automation, and can spread the related costs over more payments. They are therefore more likely to use wires for a larger portion of payments. Smaller firms generally do not have this flexibility and therefore may choose more convenient options, such as check, even when the circumstances otherwise make wire the best choice for making a payment. 74
  60. 60. Addressing the Barriers to Wire Payment Growth Although B2B wire transfer payments are highly valued as a method of payment for many transactions, the potential for growth is limited at this time due to inefficiencies that are perceived among corporations. Common Standards for Remittance Information During focus group discussions, the most commonly cited suggestion for improving the wire transfer process was to implement a common standard for sending and receiving remittance information with wire transfer payments. A key finding of the research is the cor information along with wires, and the willingness to pay for this ability. remittance information with the payment. This finding was consistent across revenue categories. 58 percent of the respondents are willing to pay an additional amount for wires that include remittance information. This finding was consistent across revenue categories. On average across all respondents, there is a willingness to pay $1.67 additional for payments that include remittance information. Thirty-three percent of these respondents are willing to pay at least an additional $3.00. 75
  61. 61. Brief about ACH, ECH and e-clearing ACH (automated clearing house) ECH (electronic clearing house) Paper Cheque e-cheque (image of physical cheque or the part of e- cheque book etc) Physical movement of cheque Electronically movement using internet and e-mail Involve logistics and transportation costs Elimination of logistics and transportation costs Involve a big cost i.e. time (transportation time, processing time etc) Almost zero cost of time Automated Clearing House (ACH) is a secure payment transfer system that connects all U.S. financial institutions. The ACH network acts as the central clearing facility for all Electronic Fund Transfer (EFT) transactions that occur nationwide, representing a crucial link in the national banking system. Electronic Clearing Service (ECS) is a mode of electronic funds transfer from one bank account to another bank account using the services of an ECH (Electronic Clearing House). This can be used both for making payments like distribution of dividend, interest, salary, pension, etc. by institutions or for collection of amounts for purposes such as payments to utility companies like telephone, electricity, or charges such as house tax, water tax, etc or for loan installments of financial institutions/banks or regular investments of persons. Cheque in the Electronic Form means a cheque which contains the exact image of a paper cheque in electronic form and is generated, written and signed in a secure system ensuring minimum safety standards as may be prescribed by the State Bank of Pakistan Electronic Cheque (e-cheque) is the electronic version of a paper cheque, including date, payee name, payment amount, and signature. Such cheques bear a Digital Signature security code proving payment was authorized by the account holder. Electronic Cheque Services and ACH Services # Service Name Service Description 1 INTERNET BASED a) Secure Web API and Virtual Terminal Cheque Payments Electronic Cheques over the Internet. Verification of cheques in real time, then processes and settles them as ACH items. Provision of online support for Electronic Cheque Verification, Electronic Cheque Deposit and Electronic Cheque Credit. b) Batch ACH Service Batch Electronic Cheques over the Internet. Log on and submit a batch ACH file for processing via a secure Web connection. Can be used for recurring billing and recurring payments. c) Online and ACH Cheque Services Virtual Terminal processing electronic (ACH) cheques through your Web browser. Cheque verification included. 2 RETAIL PAYMENTS a) POS Cheque Conversion Service POS Cheque Conversion at the point of sale, for retail stores. Cheques are verified and processed as ACH Items. Scans cheques and stores images on a free Web site (imaging services optional). The Guarantee and real time Bank Authorization options can be availabe. b) Electronic Cheque Conversion Service Electronic Cheque Conversion at the point of sale, for retail stores. Cheques are verified and processed as ACH Items through NCN (National Cheque Network) database without real-time bank authorization. Scans cheques and stores images on a free Web site (imaging services optional). Guarantee option available. c) Cheque Guarantee Services Cheque Guarantee at the point of sale. Accept cheques . . . but don't accept the risk! 3 SPECIAL PURPOSE CHEQUE SERVICES a) Cheque Verification Services Cheque Verification at the point of sale for physical stores b) Cheque Recovery Services Traditional Cheque Collection Service. c) Cheque Representment Services Returned cheque electronic re-presentment for cheque collections that don't inconvenience your customers. Page 3 of 3 79
  62. 62. TableD-1(PostGraduateandGraduatehaving10+yearsbankingexperienceinterestedinECHbenefits) 80
  63. 63. TableD-2(SortdataonadvantagestoMerchantsthenBenefitstoBanks) 81
  64. 64. 82
  65. 65. TableD-3(GraduateandPostGraduateRespondents) 83
  66. 66. 84
  67. 67. 85
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