Check 21 Processing Environment

ICBADecember 16, 2003

Phyllis MeyersonFred Herr

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Topical Agenda Applications and Operating

Scenarios Operational Considerations

– Minimum Requirements Cost Considerations

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Substitute Checks Designed to be processed exactly as if it were the

original paper check Substitute check is legal equivalent of original

check for all purposes– Contains image of front and back of check– Conforms to industry standards

MICR Physical characteristics of check

– Suitable for automated processing– Must accurately represent all information on original check– Bears legend– Includes all indorsements– Includes identification of party creating it

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Substitute CheckA

NSI

X9.

90D

STU

Front

Back

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ECP & Image Relationship

Complementary not competitive– Posting from images is a technology challenge– If images archived prior to paying bank, no

image from which to post– Requires an additional posting record– Posting record options

ACH – next day delayed posting ATM – non-standard usage and fees ECP - check transaction under check law

– No legal conflicts– Accelerated posting

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Why Substitute Checks? Key Benefits

– Primary benefit associated with Act is faster collection and return of checks

– Bank could use electronics for processing and transmitting images for printing of substitute checks closer to the receiving bank

– Banks could reduce physical sorting by sorting items electronically and printing substitute checks for return processing

– Branch and ATM deposits could be transmitted to processing centers to print substitute check and reduce or eliminate some transportation

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Collections

Intermediary

Paying Bank

BOFD

Traditional Paper Collection

Check Check Check

Intermediary

Paying Bank

BOFD

Sub Ck

Substitute Check Collection

ImageCheck

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Return Processing

CUSTOMER PAYING BANK

BOFD RETREIVE CHECKS

Traditional Paper Return

Return Check Return Check

PRINT Sub Ck

PAYING BANK

BOFD

CUSTOMER Return Sub Ck

IMAGE

Substitute Check Returns

Return Sub Ck

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Branch

Remote Depositing

BOFD

ATM

Transit Items

Traditional Paper Collection

Check Check

BOFD

ATM

Branch

Sub Ck

Transit Items

Substitute Check Collection with Branch Capture

Image

Check

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Image Exchange

PAYING BANK

BOFD IMAGE

OR Check

Check

Current Image

PAYING BANK

BOFDImage

PRINT Sub Ck

IMAGE

Sub Ck

Check

Image with Substitute Checks

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CustomerStatements

Statement

Paying Bank Posts Substitute Checks to Customer’s

Account

Sub Ck

Biller’s Depository BankCollects Substitute Checks

Biller’s Processor

All checks

Captures Check Images,Stores Checks,

Reconverts Images to Substitute Check & Sends Substitute Checks to Bank

STORE CHECKSALL CHECKS

Sub Ck

Lockbox – Check 21 Process

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STORE CHECKSALL CHECKS

IMAGES

Biller’s Processor

All checks

Captures Check Images,Stores Checks & Sends

Images to Bank

Lockbox – Check 21 Process

Paying Bank Posts Substitute Check

to Customer’s Account

IntermediaryPrint (Reconverts)Substitute Check

IMAGES

Sub Ck

Biller’s Depository BankClears the Images

CustomerStatements

Statement

Covered by Check 21

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Some of Federal Reserve’s guiding principles in drafting law included– To foster innovation in check collection

system without mandating receipt of checks in electronic format

– Bank and its customer would be in substantially equivalent legal and practical position regardless of whether or not they received the original check

– Ensure that burdens associated with law did not outweigh associated benefits for banks or customers

– Others

Operational Requirements

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Fed and Congress strived to minimize impact to institutions that choose not to participate

So what is needed to implement Check 21 and what is not needed

Operational Requirements

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Banks do not have to– Change any current relationships– Capture images– Have day two and/or back office

applications image enabled– Image enable ATMs and branches – Participate in image exchange with any

organization– Purchase expensive image hardware– Purchase expensive image software– Purchase any hardware or software– Hire consultants to develop a Check 21 plan

Not Required

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Banks may choose to do any or all of these things, but they are NOT required for implementing Check 21

Operational Requirements

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Customer Service/Training/Education– Training of bank personnel

Minimize customer concern

Consumer Awareness – As required by the Act and Fed regulation

Expedited Recredit Procedures– As required by the Act and Fed regulation

Qualified Returns of Substitute Checks– Placement of “5” for a qualified return of a

substitute check to avoid additional shrinkage

Check 21 Ops Minimum

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Check 21 Expedited Recredit

PAYING BANK

RECONVERTING BANKSub Ck

CLAIM CLAIM

40 DAYS

$$$10 DAYS

10 DAYS

ConsumerStatemen

t

1) Paying bank must provide consumer with original check, copy of original check or recredit within 10 days of claim up to $2,500 per check

2) Amounts > $2,500 must be recredited to consumer within 45 days3) Paying bank must make claim to reconverting bank within 120 days

of transaction that gave rise to claim4) Reconverting bank must provide recredit, original check or copy

within 10 days of paying bank claim

120 DAYS

Check, Copy

or $$$

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Corporate customers– Protect bank from unknown

customer deposit of substitute checks through deposit agreements Under Act only banks can make

warranties Without customer agreement, bank

assumes risk

Check 21 Ops Minimum

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Check 21 and Agreements Non-banks create risk under Check 21

Sub Ck

CUSTOMERPAYING BANK

BOFD RECONVERTI

NG BANK

NON-BANK CUSTOMER

CHECK

Sub Ck Sub Ck

Reconverting bank makes warranties & indemnifications

Warranties & Indemnifications

- not carried back to original imager of the item - Need Customer Agreement

At Risk

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Identifying Duplicate Checks– Receipt of substitute check

Customer service and expedited recredit

Statement Rendering– Will different size checks cause

problems in statement rendering Repair

– Bank performing full field repair on a substitute check must include EPC

– Other repair implications

Check 21 Ops Minimum

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Corporate customers– Impact on disbursement products

Code line matching requirements Font size and location requirements

Check 21 Ops Minimum

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Fraud risk– Expedited recredit– Alterations & counterfeit substitute

checks– Signature verification & physical

examination of substitute checks Security features

– Original check security features may not survive imaging

– New technology needed to develop image-survivable security features

– “Void” pantographs

Check 21 Ops Considerations

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Retention and retrieval of original item– Retention term of the original item– Ability to retrieve original as

needed Transit bulk file

Identifying duplicate checks– Creation of substitute check

Delayed processing of ATM checks Breach of warranty – consequential

damages

Check 21 Ops Considerations

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Substitute check shrinkage– Substitute check must be properly

stripped with 4 or 5 in EPC field to avoid additional shrinkage

Quality– Images– Substitute checks– Images of items in carrier

envelopes

Check 21 Ops Considerations

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Indorsements– Must carry indorsements that are both

physical and electronic– Electronic indorsements enhance

legibility– Readability of indorsements

Substitute check issues– Authentication of substitute check– Potential piggybacks/misreads/MICR

bleed through causing read exceptions– Cost of printing

Check 21 Ops Considerations

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Representments– Bank personnel recognition and

acceptance of substitute checks for redeposits/representments

Full MICR line required on substitute checks– Breach of warranty without MICR

line– Risk of consequential damages

Check 21 Ops Considerations

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Check 21 Ops Considerations Cash letter control ATM processing Others?????

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Economic Framework Check 21 does not mandate creation of

substitute checks Banks will develop programs where

creation of substitute checks will be economically beneficial

Economic framework can be used to develop each bank’s own business case for creation of substitute checks

Identify costs necessary to create substitute check and costs that will be reduced by creating substitute checks

Banks use their own costs, float and revenue to make their own case 

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Economic Framework

Identify possible scenario Document assumptions Develop template for

analysis– Additional Costs– Eliminated Costs– New Revenues 

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Economic Framework Assumptions

– Dual systems will be required for the foreseeable future

– Banks choosing to utilize image, either sending or receiving have already invested in image technology and are using it for their internal applications

– Banks are just beginning to exchange image for presentment for forward or return

Frameworks are only for creation of substitute checks– Not for minimum Check 21 requirements

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Economic Framework

Volume Assumptions– Framework should be evaluated

based on multiple volume assumptions

– Image conversion and substitute check conversion Low conversion Medium conversion High conversion

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Sample Framework

Parameter Entity Impac

ted

Cost per unit

Units Total Cost

Comments

Remote Image Capture Equipment

        One-time cost for remote location.

Ongoing Equipment Maintenance

         

Image Capture         Only at remote location

Image Formatting         Formatting can occur at remote location, BOFD or Intermediary.

Image Transmitting          

Receipt of Image Transmission

         

Additional Costs

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Sample Framework Additional CostsParameter Entity

Impacted

Cost per unit

Units Total Cost

Comments

Loading Images          

Storing Images          

Printing Substitute Checks

         

Additional Customer Service

        For customer issues regarding the non return or original checks.

Customer Service Education

         

Destruction of Original Item

        Only additional, if bank is currently not routinely destroying checks

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Sample Framework Additional Costs

Parameter Entity Impac

ted

Cost per unit

Units Total Cost

Comments

Transit Bulk File         Will be required if non-paying bank is required to hold original items for some period of time.

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Sample Framework Eliminated CostsParameter Entity

Impacted

Cost per unit

Units Total Cost

Comments

ATM/Branch courier pickup and transportation

         

Check item sorts passes Prime Rehandle Exception Return Item Fine Sort

        Depending on processes in place, some or all of check passes can be eliminated.

Value of freed up sorter pockets

        May eliminate need to purchase additional equipment

Outgoing physical handling Dispatch Cash Letter creation

         

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Sample Framework Eliminated Costs

Benefit/Cost = Additional Costs – Eliminated Costs

Parameter Entity Impact

ed

Cost per unit

Units Total Cost

Comments

Incoming physical handling Receipt

         

Clearing fees          

Physical transportation of Cash Letter

         

Physical storage of items

        Only for banks that safekeep physical checks for customers.

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Other Cost Considerations Float considerations

– There may be a positive impact on banks that use substitute check to collect checks faster

– There may be a negative impact on banks in which substitute checks are used to draw down accounts faster

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Substitute Check Costs The single most significant new unknown

cost is printing of substitute checks Substitute checks must contain MICR line

– It is assumed that complete check will be printed in MICR ink due to difficulty of two pass printing

Industry experience printing substitute checks is minimal

Paper costs may drive total costs All indications are that higher volumes will

lower costs Costs will depend on volume and

technology Current industry estimates range from

$.015 to $.20

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Need More Information Accurate and updated Check 21

Information on ECCHO Website– www.eccho.org– Implementation Aids

FAQ – Available Description and Overview -Available Minimum Compliance Requirements - Shortly Processing and Quality Standards - Available Other Implementation Considerations - Shortly Endorsement Chain - Shortly Training Resources - Shortly

Check 21 Processing Environment

ICBADecember 16, 2003

Pmeyerson@eccho.org