Introduction: Check truncation is the reduction of the number of steps involved in the processing of checks, either through the local check clearance system, or the national one. Essentially, it involves the electronic transmission of the image of the check, instead of the check in its physical form, from the point of origin to its destination.
How it Works: Consider the case of a Bank customer, Mr. Muhammad Ali, having an account with Bank A, who issues a check for USD 10,000.00, favoring Mr. Grave Thomson, a customer of Bank B, both of the Banks located in the same city.
In the normal course, Mr. Thomson would deposit this check at his Bank, and his Bank, in turn, would forward the check physically to Bank A, through the local check clearance system. Bank A, would then, honor the check; subject to it being in order, and the Drawee's account having sufficient balance to pass the check. Bank B would get the advice of realization of this check, through the normal clearance system, and then afford firm credit to Mr. Thomson's account, enabling him to withdraw the relative amount.
Now, where the check truncation practice is in vogue, in the above example, Mr. Thomson would still deposit the check of USD 10,000.00 at his Bank. However, his Banker, instead of forwarding the check to the Drawee Bank physically, would only transmit the electronic image of the check.
The Drawee Bank, in turn, would honor the check in the same fashion, as in the manual system, and the transaction comes to its logical conclusion, with the drawer's account being debited, and the beneficiary's account credited, with the proceeds of the said check.
Benefits of Check Truncation: The following are the major benefits of the check truncation system
* It is fast: An electronic image travels faster than a check in its physical form, between two Banks, and hence the processing of the check is also fast.
* It is safe: Electronic transmission of the check is safer, as there is no risk of loss or misplacement of the check.
* It is secure: The level of transaction security is enhanced in electronic transmission as the scope of malpractice with physical checks like deliberate mis-sorting, replacement, tampering with checks, etc., is either eliminated or minimized.
* It is economical: The cost of transferring checks in physical form is more expensive compared to electronic transmission.
* It is user-friendly: All parties connected with the processing of checks benefit from its user-friendly properties. For instance, reconciliation, the bane of check processing, is a breeze with electronic processing of checks.
* It is efficient: Elimination of human handling of checks also eliminates the typical human errors, associated with repetitive and tedious jobs.
* It is effective: The entire system of check clearance is streamlined in its electronic version, making it an effective way of dealing with millions of instruments on a daily basis.
* No geographical limitations: Electronic clearance systems can cover a larger geographical area with ease and convenience, whereas, physical transfer of checks can be carried out over a limited area, on account of the time and safety factors.
* Better customer service: Electronic clearance enhances customer service through faster and more efficient service.
* Eliminates manipulative practices: Electronic check processing eliminates the leverage of 'float' by the drawers' of the checks. Float is the time between the presentation of a check and its eventual payment.
As can be seen, there are several benefits of the check truncation system, both for the customers, as well as the Bankers. It is one of the areas of successful technological innovations in Banking, that has enhanced customer service, as well as contributing to the growth of Bank's business.
Article Source: http://EzineArticles.com/?expert=Muhammad_Haidar
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