Check 21 Processing Environment

1. Check 21 Processing Environment ICBA December 16, 2003

2. Topical Agenda • Applications and Operating Scenarios • Operational Considerations • Minimum Requirements • Cost Considerations

3. 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

4. Substitute Check Front ANSI X9.90 DSTU Back

5. 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

6. 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

7. Collections Traditional Paper Collection Check Check Check Intermediary BOFD Paying Bank Substitute Check Collection Sub Ck Check Intermediary Image BOFD Paying Bank

8. Return Processing Traditional Paper Return Return Check Return Check PAYING BANK BOFD RETREIVE CHECKS Substitute Check Returns IMAGE CUSTOMER Return Sub Ck Return Sub Ck PAYING BANK BOFD PRINT Sub Ck CUSTOMER

9. Remote Depositing Traditional Paper Collection ATM Check Check Transit Items BOFD Substitute Check Collection with Branch Capture ATM Sub Ck Check Image BOFD Transit Items Branch Branch

10. Image Exchange Current Image Check OR Check PAYING BANK BOFD IMAGE Image with Substitute Checks IMAGE Check PRINT Sub Ck Image BOFD PAYING BANK Sub Ck

11. Biller’s Processor ALL CHECKS STORE CHECKS Sub Ck All checks Captures Check Images, Stores Checks, Reconverts Images to Substitute Check & Sends Substitute Checks to Bank Biller’s Depository Bank Collects Substitute Checks Statement Sub Ck Customer Statements Paying Bank Posts Substitute Checks to Customer’s Account Lockbox – Check 21 Process

12. Biller’s Processor ALL CHECKS STORE CHECKS All checks Captures Check Images, Stores Checks & Sends Images to Bank IMAGES Biller’s Depository Bank Clears the Images Covered by Check 21 Statement IMAGES Sub Ck Intermediary Print (Reconverts) Substitute Check Paying Bank Posts Substitute Check to Customer’s Account Customer Statements Lockbox – Check 21 Process

13. Operational Requirements • 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

14. Operational Requirements • 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

15. Not Required • 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

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

17. Check 21 OpsMinimum • 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

18. Check 21 Expedited Recredit Consumer Statement 40 DAYS 120 DAYS CLAIM CLAIM $$$ 10 DAYS 10 DAYS Check, Copy or $$$ RECONVERTING BANK PAYING BANK Sub Ck • 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 • Amounts > $2,500 must be recredited to consumer within 45 days • Paying bank must make claim to reconverting bank within 120 daysof transaction that gave rise to claim • Reconverting bank must provide recredit, original check or copy within 10 days of paying bank claim

19. Check 21 OpsMinimum • 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

20. Check 21 and Agreements CHECK At Risk Sub Ck Sub Ck Sub Ck NON-BANK CUSTOMER BOFD RECONVERTING BANK PAYING BANK CUSTOMER Warranties & Indemnifications Reconverting bank makes warranties & indemnifications - not carried back to original imager of the item - Need Customer Agreement • Non-banks create risk under Check 21

21. Check 21 OpsMinimum • 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

22. Check 21 OpsMinimum • Corporate customers • Impact on disbursement products • Code line matching requirements • Font size and location requirements

23. Check 21 OpsConsiderations • 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

24. Check 21 OpsConsiderations • 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

25. Check 21 OpsConsiderations • 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

26. Check 21 OpsConsiderations • 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

27. Check 21 OpsConsiderations • 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

28. Check 21 Ops Considerations • Cash letter control • ATM processing • Others?????

29. 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 

30. Economic Framework • Identify possible scenario • Document assumptions • Develop template for analysis • Additional Costs • Eliminated Costs • New Revenues 

31. 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

32. 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

33. Parameter Entity Impacted Cost per unit Units Total Cost Comments Sample Framework 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

34. Parameter Entity Impacted Cost per unit Units Total Cost Comments Sample Framework 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 • Additional Costs

35. Parameter Entity Impacted Cost per unit Units Total Cost Comments Sample Framework Transit Bulk File Will be required if non-paying bank is required to hold original items for some period of time. • Additional Costs

36. Parameter Entity Impacted Cost per unit Units Total Cost Comments Sample Framework 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 • Eliminated Costs

37. Parameter Entity Impacted Cost per unit Units Total Cost Comments Sample Framework Incoming physical handling Receipt Clearing fees Physical transportation of Cash Letter Physical storage of items Only for banks that safekeep physical checks for customers. • Eliminated Costs • Benefit/Cost = Additional Costs – Eliminated Costs

38. 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

39. 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

40. 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

41. Check 21 Processing Environment ICBA December 16, 2003