Chennai (India), February 04, 2014:
At the Threshold of Change…
India is at an exciting crossroad in the world of payments and collections with the emergence of India's next generation Automated Clearing House (ACH) – The National Automated Clearing House (NACH). Since its inception 15 months ago, there has been a continuous frenzy among banks to scale up. The change driver here is not just the central bank's vision and the regulatory deadlines for adherence to the same. There is a larger rationale behind the accelerated go-to-market need for banks as most of their corporate customers see NACH as a solution to boost better working capital management and improve the supply chain management.
Unlike the Electronic Clearing Service (ECS), NACH enables pan-India processing of bulk payments and e-collections. Centralized mandate management by NACH extends to over 82000 bank branches across the country and is not limited to specific regions. NACH allows banks the freedom to tailor products according to their clientele, infusing best practices and standardization in terms of workflows, formats and added security features to combat the global menace of debit fraud.
7 Reasons Why a Corporate Will Move its e-Collections to NACH
Corporates seem to increasingly acknowledge the need to move on from the current ECS debit platform due to the following reasons:
- Delays around the collection process as mandate validation is based on physicals and is bound to have iterations leading to a somewhat unpredictable time window for fund availability.
- No single unique reference for a mandate and authorization by the payer across the sponsor, sponsor’s bank and the receiver bank.
- Physical mandate handling is a problem and often leads to multiple copies maintained with the different stakeholders. Such a system is prone to dispute and fraud.
- Unlike ECS, the new system provides the provision to quote the unique mandate reference number and it is maintained throughout the lifecycle of the transaction be it the sponsor or receiver bank’s end. This promises to reduce the number of rejects.
- There have been cases of ECS mandates taking upto 25 days whereas the NACH mandate gets registered within just 48 hours ensuring accelerated on-boarding and billing at the corporate's end.
- ECS presentation and settlement is spread over 3–4 days unlike the same day settlement in NACH. This could be the sole factor that would prompt corporates to shun ECS for the newer alternative.
- Funding of an account has to be a day earlier in ECS unlike NACH when it can be on the same day.
Overcoming the NACH Challenge Through Effective Technology Strategy
The goals behind the NACH adoption strategy are as follows.
- Compliance with RBI’s vision
- Faster go-to-market strategy with NACH products
- Innovation around NACH products and create a revenue generation stream
- Retention of existing customers on the ECS platform and effective migration on to NACH
- Implementation of goals with a TCO that ensures high ROI within a timeline of 3–5 years
However, it is interesting to see how banks strategize to meet these goals. Majority of banks are looking towards a technology upgrade as a solution and few are also approaching the problem from an operational standpoint where the entire mandate processing is outsourced.
Typically technology upgrade is being approached in two distinct ways:
- Banks address the challenge as a compliance issue. They identify a scanning solution vendor that automates the mandate management workflow. They also float change requests with the core banking vendor to ensure that incoming files from NPCI can be processed. The bank then immediately complies with the end objective of being a receiver bank and retains retail customers. However, this is prone to silos in the long run and will sooner or later succumb to the rip and replace once a transformation strategy or strategic upgrade is charted out.
- Banks see the opportunity as a revenue generation opportunity. The more strategic approach taken by banks who realize the business potential with NACH have ambitions to act as sponsor banks. These banks want to ensure that the entire mandate management, payment and debit origination and receipt are on a single platform. Alternatively, they have to effectively calculate the ROI and TCO with a five-year timeline in mind. Unlike the traditional approach of rolling out change requests and entering a long software change or upgrade cycle, these banks are opting for off-the-shelf NACH-ready payment platforms that offer end-to-end support for an upgrade in mere weeks and also adhere to the long-term vision of a centralized payment processing platform that can be future-proof, change aware and meet the bank's vision of accelerated go-to-market strategies in the near or distant future.
Most banks are currently evaluating NACH compliant software. The software should essentially meet at least one of the following functions end to end based on the bank’s strategy.
Support Mandate Management for Sponsors and Receivers
- Ability to support online and remote scanning
- Ability to orchestrate the entire mandate management workflow
- Support ISO20022 message
- Comply to the NPCI standards
Act as a Receiver Bank
- Provide ready support for incoming NACH mandates, credits and debits
- Be able to process returns and rejects
Act as a Sponsor Bank
- Act as the Sponsor bank for originating outward credits and debits
- Ability to process returns and recalls
NACH is a new clearing house. India will see a number of best practices creeping in and being enforced due to this new entrant. The technology platform should be able to easily drive change through configuration as opposed to a software development lifecycle. Grading therefore should be weighted heavily on change readiness and enabling product innovation on the platform.
The Promise of Value
The corporate customer is following the movement of these financial institutions closely to gauge a strategic banking partner in their journey as NACH is the corporate treasurer's answer to effective supply chain management. The corporate's end-state vision to have a single banking partner to originate the entire collections process is facilitated by this scheme. An average utility provider can be estimated to have an average of 2,00,000 mandates at any point in time and slated to originate the same. However, this does not end the competition. The mandate portability option will ensure that the customer has the free will to change the Sponsor bank at any point in time. Mandate number portability ensures that a continuous cycle of product innovation and improvisation will exist.
As part of the same initiative some banks seek to upgrade their customers to 24x7 seamless connectivity through Host-to-Host connectivity and upgrade their file handling capabilities or directly adopt a NACH compliant payment hub that has the inherent ability to support multiple channels and orchestrate file and transaction level instructions. The ability to ensure last mile connectivity, seamless 24x7 bi-directional conversation with the bank’s ecosystems and 360° visibility of instructions will be a key decision making factor for corporates.
To summarize, NACH has unlocked a world of numerous business potentials by unlocking receivables, giving the freedom to create new business offerings and change the face of how India transacts in the years to come. At the threshold of this great leap we all need to a moment to pause, think and measure the direction and the distance.
Are you ready?
About the Author
Shriyanka Hore is the Executive Product Manager for Payments at Polaris Financial Technology Ltd. She is one of our key experts for solution designing, consulting and business analysis in the payments domain and has been with Polaris for 9 years. She manages a global product portfolio and has an end to end understanding of the product lifecycle spanning design, delivery, presales and marketing. She is a seasoned professional commended for her product ideation and management abilities. She has worked with major Tier 1 banks in the past on consulting assignments spanning payments, anti-money laundering , KYC , data migration and process re-engineering . She holds a PGP management degree from the Indian Institute of Management, Calcutta and is a certified AML Professional from the Indian Institute of Banking and Finance.
About Polaris Financial Technology Limited
Polaris Financial Technology Limited is a global leader in Financial Technology for Banking, Insurance and other Financial Services. With over 25 years of expertise in building a comprehensive portfolio of products, smart legacy modernization services and consulting, Polaris owns the largest set of Intellectual Properties for a comprehensive product suite, Intellect® Global Universal Banking (GUB) M180. Intellect® is the world's first pure play Service Oriented Architecture (SOA) based application suite for Retail, Corporate, Investment banking and Insurance. Its acclaimed products, solutions and services enable unprecedented operational productivity for the global Financial Services Industry by Building, Maintaining, Expanding and Extending highly complex and Integrated Financial Technology Infrastructure.
This makes Polaris the chosen partner for 9 of the top 10 global banks and 7 of the top 10 global insurance companies. The company has a global presence through its 40 relationship offices across 30 countries, 6 international development centers and 8 fully owned Business Solution centers. Polaris has a talent strength of over 11,500 solution architects, domain and technology experts.
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