BACH Operation

Kazi Mohammad Ismail Principal Officer & Incharge

IBBL Contact Center ADD, ICTW, HO

89, Mohakhali C/A, Dhaka

BACH in Definition Bangladesh Automated Clearing House

“BACH” means the overall system and facility that supports the Exchange and settlement of payment

items between Participating Banks and the Bangladesh Bank.

BACH Component

1. BACPS- Bangladesh Automated Cheque Processing System

“BACPS” means a facility that clears cheques and approved payment items for Bank companies.

2. BEFTN- Bangladesh Electronic Fund Transfer Network

The Bangladesh Electronic Funds Transfer Network (BEFTN) will operate as a processing and

delivery centre providing for the distribution and settlement of electronic credit and debit

instruments among all participating banks.

BACH Implementation History BACPS

1. Central Bank Started Project on 2008 partnership with DFID, UK

2. Payment & Settlement System Regulation issued on 2009

3. MICR Cheque issue started from 2009

4. BACPS Rules and Procedure Circular Issued on 17.01.2010

5. Live Day Simulation (LDS) started on 04.08.2010

6. BACPS go Live operation Started on 7.10.2010

BEFTN

1. BEFTN Operating Rules issued on 10.08.2010

2. BEFTN Live Operation started on 28.02.2011

* This paper is prepared as per BACPS & BEFTN rules & Procedures

BACH Infrastructure

Manual Clearing Flow

Automated Clearing Flow

Image of Cheque Scanner

Cheque Orientation:-

Put the Cheque here.

Front side of Cheque will place

at right side and back side will

place left side.

20 or 30 Cheques may

scan at a time.

Be sure no pin with the

cheque while scanning.

Introduction of MICR Cheque Front View

Instrument No. (7 digit) Routing No. (9 digit) Ins. A/c No. (13 digit) Instrument Type (2 digit)

Rear View

Payee’s A/C no. & Phone No Clearing Stamp Endorsement & Sign Endorsement line print

Manual & Automated Clearing

Manual Clearing

1. 45 clearing house in the country

2. Human required in clearing house

3. Time consuming

4. Huge collection cost from outside city

5. Time session may change by request

6. Establishment cost very poor

7. No charge from client

8. Same Day clearing for only few branch

9. Used by NIKASH or manual ledger

10. Data cannot save long time

11. Paying Bank preserve own cheques

12. Non MICR cheque can clear

13. Positive pay Instruction not mandatory

14. Paying banks responsibility is high

15. UV detector not required

16. Cheque lost incident was high

17. Physical movement was obvious need

18. Cheque mutilation possibility was high

19. No centralized system

20. Dependency on network was absent

21. High tech equipment not required

22. Physical cheques presented through BB

23. Controlled by Local Main Branches

24. Return reason were 7 to 15

25. Fraudulent attempt were frequent

Automated Clearing

1. Only one clearing house instead of 45

2. No Human required in Clearing House

3. Time reduced tremendously

4. Collection cost is same as own city

5. Time session is automated & unchangeable

6. Establishment cost is very high

7. Charges are collecting from client

8. Same Day clearing for whole country

9. Operated by Cheque Processing System

10. Data and Image have to save for 12 years

11. Presenting Bank preserve other banks cheques

12. Non MICR cheque is unacceptable

13. Positive Pay Instruction is mandatory

14. Presenting banks responsibility is high

15. UV detector is mandatory

16. Cheque lost incident is low

17. Physical movement was truncated

18. Cheque mutilation possibility is rare

19. Processed under a secured centralized system

20. Dependency on network is must

21. High tech equipment required

22. Only Data and Image presented through BB

23. Controlled by BACH Manager and Service Branch

24. Return reason are more than 29

25. Fraudulent attempt are reduced

Responsibility of Presenting Bank 1. Comply with the BACPS rules.

2. Certifies that presented Item is a copy of the original instrument.

3. Prima facie genuineness of the cheque be verified with

i) Due diligence and ordinary care.

ii) Genuineness of the cheque leaf,

iii) Material alteration of payee name, amount or date.

iv) Verification by UV detector

4. Instruments, Image & data preserve for 6 years.

5. Original cheque available for inspection within 7 calendar days.

6. If failed, it will result in non-payment of the instrument.

7. Credit to customer A/C on settlement date or internal rules of the bank.

8. Central Bank holding the Bank’s Settlement A/C to credit on house date.

9. Indemnify the BB processing/settling for the item for any loss or expense.

10. Reconciliation.

Presenting Banks Due Diligence As settlement will be done on the basis of image and data, conducting due diligence is the responsibility

of the presenting bank

1. Verify the prima facie genuineness of the cheque

2. To be truncated

3. Attempt to detect any fraud, forgery or tampering

4. Enforce KYC norms in letter and spirit.

5. Observe all precautions which a prudent banker takes,

6. To check the apparent tenor of the instrument,

7. Physical feel of the instrument,

8. Tampering visible to the naked eye with reasonable care, etc.

For enhanced attention banks may employ suitable risk management techniques like

1. Scrutiny of high value transactions,

2. Limit based checking by officials,

3. New accounts alerts, etc.

Operational Due Diligence 1. Sorting of Instruments

2. Stamping

3. Capture of images and data

4. Reject repair and balancing

5. DIN (document identification no) endorsement

6. Re presented cheques

7. Validation

8. Master table synchronization

9. Image quality checking

10. Handling IQA failure

11. Frequency of submission

12. Submitting electronic data and images

13. Alternative delivery media

14. Submitting items to The Bureau Service

15. Electronic File Acceptance or not Acceptance

16. Internal Control

Responsibility of Paying Bank A Paying Bank, by maintaining or using an Account with the Bangladesh Bank for settlement of items or

by accepting an item from the Bangladesh Bank:

1. Comply with the applicable BACPS rules

2. Agrees to process the item in accordance with these Rules.

3. Authorizes the Bangladesh Bank to charge the amount of a payment item to the Paying Bank’s

Settlement Account on the Settlement Date

4. Indemnify the Bangladesh Bank for any loss or expense incurred as a result of a breach of the

foregoing agreements or of any action taken by the Bangladesh.

5. The agreements, authorization and indemnity do not limit any other agreement, authorization or

indemnity not inconsistent with these Rules.

6. Return an approved payment item to the Bangladesh Bank by the deadline in the BACPS schedule.

7. Taking Positive Pay Instruction from cheque issuer.

Paying Bank’s Due Diligence 1. Transmission of Posting File

2. Digital Certificate Verification of CHM

3. Payment Processing

i) Signature verification

ii) Account balance verification

iii) Verification of endorsement

iv) Positive Pay instruction

v) Restriction to account by customer or other legal authority

vi) Stop payment verification

vii) Verification of date

viii) Matching amount and figure

ix) verification of data entry error

x) vii) Other prudent practice

4. Returned Cheque

5. Request for Paper

6. Internal Control

7. Reconciliation of Clearing Differences

Abbreviation 1. MICR: Magnetic Ink Character Recognition

2. CPS : Cheque Processing System

3. CBS : Core Banking System

4. CH : Clearing House

5. CHM: Clearing House Module

6. PBM: Participant Banks Module

7. OCE: Outward Cheque Envelope

8. ORE: Outward Return Envelope

9. ICE : Inward Cheque Envelope

10. IRE : Inward Return Envelope

11. IQA : Image Quality Analysis

Processing at PBM PBM:- Participating Bank Module

The BACPS Participating Bank Module (PBM) provides cheque envelope validation and provides an

interface for sending and receiving cheque envelopes from and to BACPS.

For Outward Clearing 1. Duplication Checking

i) Destination Routing Number

ii) Origin Routing Number

iii) File Creation Date

iv) File Creation Time

v) File ID Modifier

2. Receiving Outward Presentment

3. Image Quality Analysis and Failure Handling

4. Item Processing

5. Session Attachment

6. Use of PKI

7. Reconciliation of Outward Presentment

For Inward Clearing

1. Receipt of Inward Data/Images

2. Validation, Authentication and Acknowledgement

3. Control Mechanism

4. Generation of Posting File

Eligible Instruments for BACPS Following MICR encoded payment Items and instruments are eligible for BACPS

No. Type of Instruments MICR CODE No. Type of Instruments MICR CODE

1 Savings Bank Account Cheque 10 2 Current Account Cheque 11

3 Refund Warrant 18 4 Banker’s Cheque 12

5 Pay Order 19 6 Cash Credit Account Cheque 13

7 Govt. Cheque 31, 32 8 Dividend Warrant 14

9 Credit Card Cheque 20 10 Demand Draft 15

11 Foreign Taka Demand Draft 23 12 Gift Cheque 16

13 Fractional Dividend Warrant 15 14 Interest Warrant 17

BACPS Threats The whole system is highly secured but some fraudulent attempts have found misusing the BACPS

system:

What they did -

1) Material alternation in amount both numeric and word figure

2) Material alternation in instrument no.

3) Material alternation in MICR encoded line

4) Material alternation in MICR line

5) Duplicate print

Protection way -

1) Verifying by UV detector before present

2) Instrument print with erasable UV ink

3) Positive pay Instruction

4) New account alert

5) KYC update and monitoring

Example

Bangladesh Electronic Funds Transfer Network (BEFTN)

Kazi Mohammad Ismail Principal Officer & Incharge

IBBL Contact Center, ADD, ICTW, HO 89, Mohakhali C/A, Dhaka

The Bangladesh Electronic Funds Transfer Network (BEFTN) will operate as a processing and delivery

centre providing for the distribution and settlement of electronic credit and debit instruments among all

participating banks. This Network will operate in a real‐time batch processing mode. All payment

transactions will be calculated into a single multilateral netting figure for each individual bank. Final

settlement will take place using accounts that are maintained with Bangladesh Bank.

Participants in BEFTN The EFT Network is a multilateral electronic clearing system in which electronic payment instructions

will be exchanged among Scheduled Banks. The system involves transmitting, reconciling and calculating

the net position of each individual participant at the end of each processing cycle. The participants

involved are:

(a) Originator.

(b) Originating Bank (OB)

(c) Bangladesh Electronic Funds Transfer Network (EFT Operator)

(d) Receiving Bank (RB)

(e) Receiver

(f) Correspondent Bank

a) Originator

The Originator is the entity that agrees to initiate EFT entries into the network according to an

arrangement with a receiver. The originator is usually a company, government agency or an individual

directing a transfer of funds to or from a consumer’s or a company’s account. The originator executes an

EFT fund transfer entry through an Originating Bank (OB).

b) Originating Bank (OB)

The originating bank is the bank which receives payment instructions from its client (the originator) and

forwards the entry to the BEFTN. A bank may participate in the EFT system as a receiving bank without

acting as an originating bank; however, if a Bank chooses to originate EFT entries, it must also agree to

act as a receiving bank.

c) Bangladesh Electronic Funds Transfer Network (BEFTN)

BEFTN is the central clearing facility, operated by Bangladesh Bank that receives entries from OBs,

distributes the entries to appropriate RBs, and facilitates the settlement functions for the participating

banking institutions

d) Receiving Bank (RB)

The receiving bank is the bank that will receive EFT entries from BEFTN and post the entries to the

account of its depositors (Receivers).

e) Receiver

A receiver is a person/organization who has authorized an Originator to transmit an EFT entry to the

account of the receiver maintained with the Receiving Bank (RB).

f) Correspondent Bank

In some cases an Originator, Originating Bank or Receiving Bank may choose to use the services of a

Correspondent Bank for all or part of the process of handling EFT entries. A Correspondent Bank’s

function can include, but is not limited to, the creation of EFT files on behalf of the Originator or acting

on behalf of an OB or RB, respectively. All Correspondent Banks must be approved by Bangladesh Bank

before a bank enters into an agreement with the Correspondent Bank.

Authorization A written arrangement with the originating company signed by an employee or customer to allow

payments processed through the EFT Network to be deposited in or withdrawn from his or her account

at a bank. Authorization can also be a written agreement that defines the terms, conditions and legal

relationship between Originator and Receiver.

EFT Transaction Flow

EFT Entries

A) EFT Credits

• Inward Foreign remittances

• Domestic remittances

• Payroll private and government

• Dividends/Interest/Refunds of IPO

• Business to business payments (B2B)

• Government tax payments

• Government vendor payments

• Customer‐initiated transactions

B) EFT Debits

• Utility bill payments

• Equal Monthly Installments (EMI)

• Government tax payments

• Government license fees

• Insurance premium

• Mortgage payments

• Club/Association subscriptions

Consumer Vs. Corporate Payments EFT transactions are typically categorized as either consumer payments, Government payments or

commercial payments. These transactions are defined in accordance with the relationship of parties

involved in the transaction and the type of receiver account.

Consumer payments that could be made via the EFT network include credit applications such as payroll,

dividend, interest and annuity payments and so on. Consumer EFT debit applications include the

collection of utility bills, insurance premiums, loan installments and other recurring obligations.

Corporate EFT applications include cash collection and disbursement, corporate trade payments,

government, tax payments etc. Cash collection and disbursement allows companies to achieve efficiency

in cash management through intra‐company transfer of funds. Corporate trade payments enable

corporations to exchange both data and funds with trading partners, facilitating an automated process

of updating their accounts receivable and accounts payable systems.

Payment Application I. Consumer Applications

• CIE – Customer Initiated Entry: Customer initiated entries are limited to credit applications where the

consumer initiates the transfer of funds to a company or person for payment of funds owed to that

company or person, typical example of these entries are utility bill and other Internet banking product

payments.

• PPD – Prearranged Payment and Deposit Entry

Direct Deposit: Direct deposit is a credit application that transfers funds into a consumer’s account at

the receiving bank. The funds being deposited can represent a variety of products such as payroll,

remittances, interest, pension, dividends and/or refunds, etc.

Preauthorized Bill Payment: A preauthorized payment is a debit application. Companies with existing

relationship with the customers may participate in the EFT through the electronic transfer (direct debit)

of bill payment entries. Through standing authorizations, the consumer grants the company authority to

initiate periodic charges to his or her account as bills become due. This concept is especially applicable

in situations where the recurring bills are regular and do not vary in amount such as insurance

premiums, loan installments, etc. Standing authorization may also used for bills where the amount does

vary, such as utility payments.

II. Corporate Applications

• CCD – Corporate Credit or Debit: This application can be either a credit or a debit application where

funds are either distributed or consolidated between corporate entities or government entities. This

application can serve as a stand‐alone fund transfer between corporate or government entities, or it can

support a limited disclosure of information when the funds are being transferred between organizations

(i.e. sister concerns) under the same group.

• CTX ‐ Corporate Trade Exchange: This application supports the transfer of funds (debit or credit)

within a trading partner relationship in which business payment remittance information is sent with the

funds transfer. The payment‐related information is placed in multiple addenda records in a format

agreed to by the parties and BEFTN.

III. Other Applications

• ADV – Automated Accounting Advice: This SEC Code represents an optional service to be provided by

BEFTN that identifies automated accounting advices of EFT accounting information in machine‐readable

format to facilitate the automation of accounting information for Participating Banks.

Settlement Settlement is the actual transfer of the funds between participating banks to complete the payment

instruction of an EFT entry. The transactions processed by the BEFTN will affect the accounts of the

concerned banks maintaining accounts with BB at the end of each processing cycle.

Legal Framework 1) The EFT process operates from beginning to end through a series of legal agreements.

2) BEFTN Rules and Procedures

Other laws/regulations that have a direct bearing on EFT operation are listed as under:

• Bangladesh Bank Order, 1972 (Amended 2003)

• The Banks Companies Act, 1991

• Money Laundering Prevention Act, 2009

• Information and Communication Technology Act, 2006.

• The Bankruptcy Act, 1997

• The Foreign Exchange Guidelines, Volume 1 & 2.

• Foreign Exchange Regulation Act, 1947.

• The Bangladesh Telecommunication Act, 2001.

• Anti Terrorism Act 2009

• Combating on Financial Terrorism Act 2013

• Bangladesh Payment and Settlement Systems Regulations, 2009 (amendment 2013)