From in line to online

Armchair banking goes a level higher with the increasing acceptance of the Electronic Clearance System in India.

By Sushmita Choudhury        Print Edition: August 9, 2007

Chaitali Murdeshwar, 27, is as lazy as they come. From remote controls for most of her home appliances to armchair banking, this Mumbaibased teacher likes life’s solutions no further than a click away. And her life is getting easier by the day. “I now pay my phone, electricity and credit card bills online too. I just gave a standing instruction to my bank and every month the various amounts due are directly debited from my account. No more hassles.”

If you are already pitying her, thinking the poor girl is setting herself up for big frauds, escalated bills and more, think again. The Electronic Clearance System (ECS), which makes such online crediting and debiting possible, is as secure as they come and it has the RBI’s seal of approval. In fact, this may soon become the norm rather than just a preference. The RBI is considering imposing a fee on paper cheque payments to encourage electronic payments.

From desk to the desktopWith over five lakh cheques flooding RBI-controlled clearing houses daily, there is a pressing need to move to an electronic platform. According to M.V. Nair, chairman and managing director, Union Bank of India, “A recent McKinsey study estimates that improving the payment systems in India, by fully moving to electronic systems, could result in an annual saving of close to $6.3 billion.”

For the uninitiated, here’s a look at what ECS is all about. It is a mode of electronic funds transfer from one bank account to another bank account using the services of a clearing house. And it is not limited to the private banks and private institutions alone.

This can be used both for making payments like the distribution of dividend, interest, salary, pension et al by institutions or for collection of payments to utility companies like telephone, electricity, or charges such as house tax and water tax, or even making philanthropic contributions.

Wonder of wonders, the government has also decided to make income tax refunds through ECS, though the facility is yet to start for individual tax payers. ECS payments can be initiated by any institution after registering themselves with an approved clearing house. So the clearing house debits the account of the ECS user through an account in a sponsor bank on the appointed day and transfers the payment to the bank account of the person or institution to whom it is due. As a customer, all you need to do is fill in a mandate form with the concerned institution.

A customer also enjoys the flexibility to set a ceiling on the amount that can be automatically debited. This could be the minimum payment due or the entire amount or even any other in-between convenient benchmark. However, it is important to understand that the ECS works just like an electronic cheque. So if there aren’t enough funds in your account to honour the mandate, resulting in a failed debit, you have to pay the penalties.

The biggest advantage of ECS is that you no longer have to remember to pay your bills or even stand in a queue. Moreover, the electronic route spells safety from both loss of your cheque and fraudulent encashment. Then there is the real time settlement of payments to consider— paper cheques clearance takes 48 hours while ECS settlement is on the same day. So where earlier you had to remember when your bonds matured and then take the certificate to the financial institution to set the ball rolling towards receiving your cheque, hopefully within seven days, now if you are logged into the ECS network you will not only learn about your bond’s maturity, you will also get your money the same day.

If your bank only assigns a fixed number of free cheque books annually and you need to make a lot of payments, that is all the more reason for you to shift to electronic payments via ECS since there are no charges on it. If all this wasn’t good enough, a number of service providers are actually rewarding you for shifting to ECS. MTNL, for one, promises a discount of 1% of the bill amount (up to a limit of Rs 250) per account per bill.

The reason RBI and a number of institutions are so aggressively out cheaper for them. The ECS user saves on administrative machinery for printing, dispatch and reconciliation. Paper handling also creates a lot of pressure on banks as they have to manage the cash, encode the instruments, present them for clearance, monitor their return and follow up with the bank concerned and customers.

In ECS banks simply get the payment particulars relating to their customers. All they need to do is to match the account particulars like name and account number to credit the proceeds. Plus the RBI charges Re 1 per instrument for inward clearing cheques while the ECS is free, at least till 31 March 2008. Little wonder then that electronic transactions in the country are set to double in the next three years, from 380 million transactions last year to over 700 million. “Growth in cheque transactions have been going down over the last three years. We want to see a negative growth happening,” says a senior RBI official in the department of payments and settlement systems.

Fuelling the ECS trend are portals like www.billjunction.com. For a charge of Rs 550, residents of 10 cities are offered a chance to pay 200 bills in two years, both online and via SMS. Of course, there are cheaper options available too, like Rs 225 for the gold package where you get to pay 30 bills in a year and get an insurance cover worth Rs 75,000 to boot. On registering online you are sent the welcome kit which contains a pre-filled bank mandate form. This is then sent to your bank for signature verification and within three weeks your account is activated. You also have the option of paying different bills from different bank accounts. More interestingly, every time you pay your bills through the portal, you earn reward points.

Given all the advantages, why is the growth in the volume of ECS transactions still relatively slow— 14% last year? According to Sandeep Das, head, wealth management, Standard Chartered Bank, “The main issue is that there is a feeling that a service provider can claim amounts actually not due from customers. For such a customer a disputed transaction becomes a postpayment follow-up issue.” But given that all bills will be sent to you before your account is debited automatically, thus giving you time to stop payment if everything is not in order, this issue is being addressed.

Looking into the future, Das says, “More confidence building measures are needed from service providers to build accuracy in bill generation and ensure a quick redressal mechanism in case of disputed transactions”. However, as the recent spurt in the value of ECS transaction proves, this trend is unstoppable.

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