Modifications in the Banking Industry to Enhance Payments Efficiency

The Kenya Bankers Association (KBA) has completed three key projects aimed at increasing the efficiency of the Automated Clearing House (ACH), a system that commercial banks use to exchange payment files and facilitate the transfer of value between bank customers and commercial clients.

KBA has been in partnership with the Central Bank of Kenya for several years now, in efforts to modernize ACH processes so as to reduce the time it takes banks to transfer funds electronically, improving liquidity within the banking ecosystem while enhancing security

Banks have been transmitting, validating and settling cheques, carrying out direct debit instructions and electronic funds transfer payments via the ACH system that was introduced in 1997 as a collaboration between KBA and Central Bank.

As part of the new improvements to the system, banks will now centralize direct debit instructions and automate mandate applications. A direct debit is an arrangement made with a bank that allows a third party to directly debit a customer’s account on agreed dates, typically to pay bills.

With the upgrade, mandates for the entire industry will be centrally managed via the ACH, resulting in more accurate mandates, faster processing times and improved security. It is also expected that continuous integration will increase uptake from customers and service providers, including utility companies and other institutions that bill for services on a recurring basis.

Service providers looking to benefit from the new automated direct debits can apply at a bank for an originator code which customers will use to authorize the payments.

The second ACH modification made is the inclusion of remitter details on all payment files. This information is increasingly becoming important to banks as it enables banks to immediately identify the payee or remitter of a payment instrument and therefore, shortening turnaround times while mitigating disputed transactions and fraud.

The third project is the truncation of foreign currency cheque clearing. Local currency cheques clear on a T+1 cycle with value available to the payee one day after the cheque is presented by the paying bank to the ACH.

Foreign currency cheques, on the other hand, previously cleared on a seven-work day cycle, which has now been reduced by five days to T+2 or two days after the cheque is presented in the ACH.

The ACH is an important component of Kenya’s National Payments System which includes the Kenya Electronic Payment and Settlement System (KEPSS) that processes Real Time Gross Settlement (RTGS) high-value payments; East African Payment System (EAPS) that enables payments between Kenya, Rwanda, Tanzania and Uganda; and Regional Payment and Settlement System (REPSS) which facilitates payments between countries in the Common Market for Eastern and Southern Africa (COMESA) region.