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Asia clearing systems need serious facelift – opinion

09 Jun 2013

Upgrading Asia’s clearing systems to interact with the ISO20022 standard is crucial for the long-term development of the region as information flows will be streamlined, recycling cash at a faster rate.

It’s time for regulators across Asia to get up to speed, notably with technology that’s available on their doorstep. This is truer than ever before given the region’s rapid pace of economic growth, predicted to be 5.7% for 2013, far better than expectations from the US, Europe, Latin America and Africa, according to the International Monetary Fund (IMF).

As a result, the sheer volume of transactions that are expected to be handled by Asia continues to grow. Unfortunately, the region’s clearing systems are out of date and not ready to handle the increasing flow of electronic payments.

So while the move from batch to real-time processing is part of a corporate Asia’s long-term strategy, businesses in the region will find it challenging to switch.

Not only is the region is plagued by archaic clearing systems that are in dire need of an upgrade, interconnectivity within countries is limited.

In the case of Thailand, for example, poor bank branch access to the nation’s clearing system is a problem. This means is that a bulk of corporate payments must be completed manually, with the salesperson physically delivering invoices, which in turn makes it hard for businesses to collect payments against the goods sold at the same time.

To make matters worse, the lack of receivables information – including invoice numbers being paid, adjustments like deductions and credit allowances that are taken as part of the trade terms agreed between buyer and seller – makes it challenging for treasurers to execute ‘collections-on-behalf’ arrangements.

There are also some instances where each state within a country has a different clearing cycle, essentially extending a corporate’s receivables cycle. This combined with systems that do not auto-translate Asian languages leads to delays in a business’ cash consolidation process – a major corporate headache.

For example, when a China-based subsidiary bills its customer in a country it’s going to be in Chinese characters. If a corporate were to centralise its collections in India, the treasurer would have to find a native Chinese speaker who will be able to interpret the information on the invoice.

As a result of Asia’s primitive clearing systems, the workload of corporate treasurers has increased dramatically, requiring the additional staff to cope with the manual consolidation process.

Ridding Asia of its stone-age systems will bring numerous benefits, including boosting efficiency and encouraging corporates to Asia in the form of investment and the setting up regional treasury hubs. One way to improve Asia’s declining systems would be to adopt Swift’s next generation ISO20022 messaging format will help improve treasury processes dramatically for corporates in the region.

Not only will it help improve issues relating to collections-on-behalf by carrying with it all the necessary information – including details of payee and the reason of payment it will also ensure that payments are executed in a timely fashion.

Most importantly, the ISO20022 format supports multiple languages and character sets.

A good example of a system that has adopted the ISO20022 standard would be India’s recently implemented National Automated Clearing House (NACH) platform which was introduced in December. The system, which is seen as a big improvement on the existing Electronic Clearing Services (ECs), enables pan-India processing of bulk payments and receipts. More than 30 banks have signed up – both international and domestic names – with more to set to follow.

Companies are able to use the centralised system to help collect all types of payments. A corporate, for example, can upload a file through one bank to debit accounts for payments at all banks and transactions will be settled the same day.

The payments industry is therefore at a tipping point. There are other emerging markets that have been improving their clearing infrastructure too.

China has adopted the ISO20022 for its national payment system, China National Advanced Payment System (CNAPS). While it is not yet clear whether the nation will support the standard in its international payment system, China International Payment System (CIPS) – that is still under development – it undoubtedly should given the advantages.

Not only will corporates be able to benefit from this, but economies in the region will be able too as cash gets recycled in financial system at a faster pace. The velocity of money – once sustained with the launch of new clearing platforms – ensures top-down benefits for the overall financial system, thereby potentially boosting domestic growth.

ISO20022’s one solution fits all approach certainly offers tempting prospects for all market participants. It’s definitely the time for Asian regulators to speak the same language as technology-savvy parties and make big bang replacements to existing systems. Adopting Swift’s new standard is the way to go.

09 Jun 2013