check 21 processing environment icba december 16, 2003 phyllis meyerson fred herr
TRANSCRIPT
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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