Check 21

1
Check 21

• FFIEC Payment Systems Risk Conference
• Arlington, Virginia
• November 2, 2004

2
Topical Agenda

• Check 21 the Act
• Check 21 the Regulations
• Minimum Requirements
• Potential Minimum Requirements

3
Status of Check 21

• Passed by U.S. House and Senate
• No opposition in House
• Unanimous consent in Senate
• President signed
• October 28, 2003
• Effective date
• October 28, 2004

4
Check 21 Challenge

• Encourage check truncation by allowing unilateral
  decisions to truncate paper checks
• Unlike current environment with requirement to
  obtain agreements from all the parties (tens of
  millions)
• BUT WITHOUT MANDATING THE RECEIPT OF ELECTRONIC
  TRANSACTIONS

5
Check 21 Solution

• Create a new federal law to replace the original
  paper check
• For those customers that have not agreed to check
  truncation and want to receive their paid checks
• For those banks that have not agreed to receive
  electronic check files
• Substitute Check becomes the legal equivalent
  of the original check

6
Original Check
VOID IRD TEST SAMPLE
7
Substitute Check/IRD
8
Substitute Check/IRD
ANSI X9.90 DSTU
9
Example - Collections
Traditional Paper Collection
Check
Check
Check
Intermediary
BOFD
Paying Bank
10
Return Processing
Traditional Paper Return
Return Check
Return Check
CUSTOMER
PAYING BANK
BOFD
RETREIVE CHECKS
11
Collections W/Image
Traditional Paper Collection
Check
Check
Check
Intermediary
BOFD
Paying Bank
12
Remote Depositing
Traditional Paper Collection
ATM
Check
Check
Transit Items
BOFD
Branch
13
Image Exchange
Pre Check 21 Image
Check
OR
Check
PAYING BANK
BOFD
IMAGE
14
Lockbox Check 21 Process
Billers Processor
ALL CHECKS
STORE CHECKS
All check payments
Captures Check Images, Stores Checks
Sends Images to Bank
IMAGES
Billers Depository Bank Clears the Images
IMAGES
Sub Ck
Intermediary Print (Reconverts) Substitute Check
Paying Bank Posts Substitute Check to Customers
Account
Customer Statements
15
Substitute Check / IRD

• Designed to be processed exactly as if it were
  the original paper check
• Substitute check is legal equivalent of original
  check for all purposes if
• Contains image of front back of check
• Conforms to industry standards
• MICR
• Physical characteristics of checks
• Suitable for automated processing
• Must accurately represent all information on
  original check
• Bears legend
• Includes all indorsements
• Includes identification of party creating it

16
Eligible Checks?

• ALL CHECKS are eligible for replacement with
  substitute checks, for example
• Retail checks
• Non retail checks
• Government warrants
• Treasury checks
• Money orders
• Controlled disbursement
• Payable through drafts
• Etc.

17
Checks Covered?

• Only checks replaced with substitute checks are
  covered by the Act
• Not all truncated or safekept checks are covered
  by the Act
• For example, original checks truncated or
  safekept under agreement are not covered by the
  Act
• Act is designed to encourage truncation and it is
  not needed if customer already agreed to not
  receive their checks back

18
Myth Reality

• Myth Check 21 validates the exchange of check
  images
• Reality
• Check 21 does not address exchanges under
  agreement such as ECP or image exchanges
• Confusion
• Check 21 is dependent on the use of image
  technology for substitute checks but
• Does not cover image exchanges between banks or
  their customers

19
Source of Confusion

• Fact - Check 21 uses check imaging
• Check 21 uses image technology to create a
  replacement paper document substitute check
• Check 21 is all about creating an alternate paper
  exchange process
• Check 21 is not about image exchange

20
Opting Out?

• Can banks opt-out of Check 21? No!
• Can bank customers opt-out? No!
• Can governmental organizations opt-out?
• No! All check eligible for replacement by
  substitute check
• Do banks have to accept substitute checks
  presented to them?
• Yes, they are the legal equivalents of the
  original checks
• Preserving the status quo is not an option
• All checks are in and all banks have impact

21
Check 21 Warranties

• Bank that creates the substitute check warrants
• Substitute check meets all requirements for legal
  equivalency
• No double debit

22
Check 21 Indemnification

• Indemnification
• Bank that creates substitute check and each
  subsequent bank indemnifies all parties for loss,
  if loss is due to receipt of substitute check
  instead of original

23
Expedited Recredit

• New Protection For Consumers
• May make claim under Act for Substitute Check
  that was not properly charged to their account or
  for a warranty claim, and
• The consumer suffered loss, and
• The original check or copy of original check is
  necessary to determine validity

24
Expedited Recredit
Consumer Statement
40 DAYS
120 DAYS
CLAIM
CLAIM

10 DAYS
10 DAYS
Check, Copy or
RECONVERTING BANK
PAYING BANK
SUBSTITUTE CHECK

• 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 gt 2,500 must be recredited to consumer
  within 45 days
• Paying bank must make claim to reconverting bank
  within 120 days of of transaction that gave rise
  to claim
• Reconverting bank must provide recredit, original
  check or copy within 10 days of paying bank claim

25
Expedited Recredit

• Additional provisions
• Bank may withhold availability in Reg CC like
  exception situations
• New accounts, excessive ODs, or cause to believe
  fraud
• Bank may withhold availability for 45 days
• Bank must notify Consumer of delay in
  availability
• Bank cannot charge OD fees for five days

26
Check 21 Regulation

• Federal Reserve may prescribe regulations to
  implement, prevent circumvention or evasion of,
  or facilitate compliance with the provisions of
  this Act
• Fed proposing new subpart D in Regulation CC

27
Final Regulation

• Selected Provisions
• Clarified - Treasury Checks U.S. Postal Money
  orders sent to the Fed for collection are deemed
  to be sent to the Treasury and Postal Service
• Provided - Banks should address the potential for
  a bank to become a reconverting bank without its
  knowledge and consent through its deposit
  agreement

28
Final Regulation

• Selected Provisions
• Substitute check is a check for purposes of Reg
  CC UCC even if it does not meet the requirement
  for legal equivalence
• Recognized X9.100-140 as standard for substitute
  checks
• Substitute check must be a piece of paper
• Eliminated purported substitute checks

29
Final Regulation

• Selected Provisions
• Elimination of use of purple ink in indorsement
  as of January 1, 2006
• Substitute check must have an image of the back
  of the original even if it is blank

30
Required Disclosures

• Check 21 Regulation CC Subpart D provide for
  many disclosures notices
• Substitute Check Policy Disclosure Substitute
  Checks and Your Rights (Consumer Awareness
  Notification)
• Expedited Recredit Claim, Valid Claim Refund
  Notice
• Expedited Recredit Claim, Provisional Refund
  Notice
• Expedited Recredit Claim, Denial Notice
• Expedited Recredit Claim, Reversal Notice
• See Reg CC Subpart D for full details

31
Minimum Requirements

• Consumer Awareness Notification
• One-time notices and
• Every-time notices
• Follow standards for substitute checks
• Modify repair process to include a 4 in
  position 44 and
• Modify return process to include in 5 in

32
Required Disclosures

• Implications of Every-time Notices
• Check 21 tenets
• Institutions that make decisions to truncate
  should bear the cost of that decision
• Other institutions not involved in that decision
  should experience minimal impact
• New requirement violates these tenets
• Adds a new daily operational requirement for
  every institution
• Adds a new daily compliance risk for every
  institution

33
Required Disclosures

• Brief Notice
• Check 21 Act provides for a brief notice
• December 2003 proposal included a 2 page notice
• Final version was only one and one half pages
• Safe Harbor
• Check 21 Act provides that the Fed may provide a
  standard awareness notice
• Banks not required to use the Feds version but
  if they do
• Deemed to be in compliance with Act

34
Substitute Check Standard
35
Standards

• ANS X9.100-140-2004
• Specifications for Image Replacement Document
• Formerly known as DSTU X9.90
• IRD is term used by standard
• Substitute check is statutory term
• Regulation CC Subpart D provides that X9.100-140
  is the standard for substitue checks
• Any document meeting X9.100-140 requirements is a
  substitute check

36
Sub. Check Creation

• MICR line of original check
• Must include all of the MICR line from the
  original check plus the encoded amount
• Including special character in position 44

37
Sub. Check Creation

• Without a 4 in 44

Original Check
38
Sub. Check Creation

• Without a 4 in 44

Substitute Check
39
Sub. Check Creation

• Without a 4 in 44

2nd Generation
40
Sub. Check Creation

• Without a 4 in 44

4th Generation
41
Endorsement Chain

• Presentation on Image and document flow overview
• Can be printed from ECCHO website by following
  these steps
• Check 21
• Implementation Aids
• Standards
• Endorsements
• Click here
• Presentation to large to e-mail

42
Mixing Check 21 Image Exchange
Things to consider
43
Check 21 Risks

• Indemnification creates risks
• Warranty Breach - Consequential damages rests
  with bank that creates substitute check
• No Warranty Breach - Bank that creates substitute
  check can limit liability, if it produces
  original check or copy of original check on
  request

44
Potential Risk to Bank

• Image risk Check 21 - collections

X9.37
and/or
Sub Ck
Sub Ck
Image
COLLECTING BANK (BOFD)
CUSTOMER
PAYING BANK
RECONVERTING BANK
45
Potential Risk to Bank

• Image risk Check 21 - collections

X9.37
and/or
Sub Ck
Sub Ck
Image
COLLECTING BANK (BOFD)
CUSTOMER
PAYING BANK
RECONVERTING BANK
Warranties Indemnifications
Reconverting bank makes warranties
indemnifications
46
Potential Risk to Bank

• Risk avoidance Clearinghouse Rules

X9.37
and/or
Sub Ck
Sub Ck
Image
COLLECTING BANK (BOFD)
PAYING BANK
RECONVERTING BANK
CUSTOMER

• CH rules needed to cover these relationships

47
Potential Risk to Bank

• Need both Check 21 CH Rules

X9.37
and/or
Sub Ck
Sub Ck
Image
COLLECTING BANK (BOFD)
PAYING BANK
RECONVERTING BANK
CUSTOMER
48
Potential Risk to Bank

• IRD risk Check 21 - collections

49
Additional Considerations

• Customer agreements
• Protect bank from unknown customer deposit of
  substitute check through deposit agreements
• Under Act only banks can make warranties
• Without customer agreement, bank assumes risk
• Banks may want to ID deposited substitute checks
  for special handling
• Need agreement with customer
• Reg acknowledges need for agreement
• Does not specify what constitutes an agreement

50
ECCHO Rules

• ECCHO is a national clearinghouse and it has
  adopted rules
• Image exchange rules
• Image return rules
• IRD rules
• Pre-Check 21 - Provides necessary IRD exchange
  agreements
• ECP with image replacement document (IRD)
• Warranties to parallel the Check 21 IRD
  warranties
• Post-Check 21 - Supplements Check 21 with other
  necessary agreements
• Image exchanges prior to reconverting bank
• Moves warranties and indemnifications to imaging
  bank

51
Industry Recognitions

• Best solution for rules is one set of clearing
  house rules
• Following organizations recognize support ECCHO
  as the national provider of ECP and image
  exchange rules

52
45 Supporters
53
Check 21 Minimum Requirements
54
Not Required

• Banks do not have to
• Change any current relationships
• Capture images
• Have their day two and/or back office
  applications image enabled
• Image enable their 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
• Banks may choose to do any or all of these
  things, but they are NOT Required for
  implementing Check 21

55
Minimum Requirements

• Banks must
• Accept substitute checks
• Provide consumer awareness notifications
• Implement expedited credit procedures
• Follow standards for substitute checks

56
Minimum Requirements

• Consumer Awareness
• One-time notices and
• Every-time notices
• Follow standards for substitute checks
• Modify repair process to include a 4 in
  position 44 and
• Modify return process to include in 5 in

57
A Forward Collections
Traditional Paper
Check
Check
Paper Statement
Paying Bank
BOFD
Substitute Check
Check
Sub Ck
Paper Statement
Paying Bank
BOFD
58
A Forward Collections
Minimum
Check
Sub Ck
Paper Statement
Paying Bank
BOFD

• Additional Considerations
• Capture and retain 4 from 44
• Customer service training
• Implement duplicate checking
• Mixed statement processing
• Potential impact on products e.g. payables
  through, ARP, controlled disbursements, etc.

• Minimum Requirements
• Accept substitute checks
• Provide consumer awareness notice
• Develop implement expedited recredit procedures

59
Consumer Awareness

• Act Requires that notice be provided to
• Existing customers who receive original checks or
  substitute checks with statement
• New account holders
• Consumers who request copies and receive
  substitute checks
• Notice may be provided by U.S. mail or other
  means as agreed to by consumer

60
Check 21 Expedited Recredit
Consumer Statement
40 DAYS
120 DAYS
CLAIM
CLAIM

10 DAYS
10 DAYS
Check, Copy or
Reconverting Bank
Paying Bank
Sub. Check

• 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 gt 2,500 must be recredited to consumer
  within 45 days
• Paying bank must make claim to reconverting bank
  within 120 days of of transaction that gave rise
  to claim
• Reconverting bank must provide recredit, original
  check or copy within 10 days of paying bank claim

61
Check 21 Expedited Recredit
CLAIM
CLAIM
INTERMEDIARY
RECONVERTING BANK
PAYING BANK

• Between institutions
• Claim must be made by end of 120 days of
  transaction
• Check 21 allows inter-bank claims to
• Travel back up the collection stream through bank
  that did not create substitute check, or

62
Additional Considerations

• Capturing and retaining 4 from 44
• Ensure that capture system will not reject checks
  with character in EPC
• Paying bank may want to know that it has received
  a substitute check
• Expedited recredit provisions only apply to
  substitute checks
• Check 21 warranties only apply to substitute
  checks
• Other uses for 44
• Some institutions may already use 44 for other
  uses

63
Additional Considerations

• Customer service training
• Customer receiving substitute checks may call the
  bank to inquire
• About what they are
• If they are legal
• If they can get their original checks back
• To file a claim
• To explain they are moving their business down
  the street to avoid the fake checks
• Etc.

64
Additional Considerations

• Identifying duplicate checks
• Check 21 warranty
• Customers will not be double debited
• Greater likelihood of multiple substitute checks
  for same original being presented
• Other reasons to enhance duplicate checking
• Cross application logic to determine double
  debits for checks converted to ACH
• Double debits from ECP and/or image files and
  original paper

65
Additional Considerations

• Mixed statements
• For customers receiving paper checks in their
  statements
• Will receive both original checks and substitute
  checks
• Consumers will receive checks of two different
  sizes in their statements
• Normal retail checks
• Substitute check
• Cost of mailing increases with larger checks
• Potential impact on bank process

66
Additional Considerations

• Corporate customers
• Impact on disbursement products
• Code line matching requirements will be impacted
  by position 44
• ARP
• Positive Pay
• Font size and location requirements

67
A1 Repair
Minimum
Sub Ck
Paying Bank
Reject Repair
Post Return

• Additional Considerations
• Train repair staff to encode substitute checks

• Minimum Requirements
• Allows for traditional reject repair

68
Check 21 Ops Minimum

• Repair
• Final Reg CC Subpart D allows for traditional
  MICR line repair
• Rejected substitute checks may be repaired with a
  full MICR line
• Must also include a 4 in 44
• Rejected substitute checks may be repaired with a
  partial MICR line e.g. amount and R/T number
• May but not required to have a 4 in 44

69
A2 Statement Rendering
Minimum
Check
Sub Ck
Image Statement
Paying Bank
BOFD

• Additional Considerations
• Customer agreement to truncate paper
• Consider format of retail image statements with
  mixed image sizes
• IRD larger than retail check
• Legibility of reduced image
• Cost of additional statement pages

• Minimum Requirements
• None under Check 21

70
Additional Considerations

• Image statements
• Does Check 21 allow institutions to provide image
  statements to their customers without agreements?
• No
• Mixture of images of original checks substitute
  checks
• For consumers, difference in size of checks and
  substitute checks
• Normalize image sizes?
• Can images of substitute checks be reduced as
  much as original checks and remain eligible?
• Clipping image from substitute check to put on
  statement

71
Check 21 Minimum Requirements
Returns
72
B - Returns
Traditional Paper
Check
Check
Return Decision
BOFD
Consumer Depositor
Paying Bank
Substitute Check
Sub Check
Sub Check
Return Decision
BOFD
Consumer Depositor
Paying Bank
73
B - Returns
Minimum
Sub Check
Sub Check
Return Decision
Depositary Bank
Consumer Depositor
Paying Bank

• DB Minimum Requirements
• Accept substitute check
• Consumer awareness notification
• Develop implement expedited recredit procedures
  for depositor
• Train customer service staff

• PB Minimum Requirements
• Re-strip - qualified return - 5 in 44
• Train return staff about sub check
• Placement of indorsement

Note DB depositary bank PB paying
bank

• Additional Considerations
• Capture and retain 5 from 44
• Consider returned check envelop size postage

74
B Returns Ops Minimum

• Paying bank
• Qualified returns of substitute checks
• 5 in 44 for a qualified substitute return
• Avoids additional shrinkage
• Must continue to have a 4 in 44
• 4 on substitute check MICR line and
• A 5 on the strip to ID qualified return

75
Check 21 Minimum Requirements
Representments
76
C - Representments
Traditional Paper
Check
Check
Paper Statement
Paying Bank
BOFD
Substitute Check
Sub Ck
Sub Ck
Paper Statement
Paying Bank
BOFD
77
C - Representments
Minimum
Sub Ck
Sub Ck
Paper Statement
Depositary Bank
Paying Bank

• DB Requirements
• Accept deposited substitute checks

• PB Requirements
• Same as forward collection

• Additional Considerations
• Train tellers about sub. checks
• Modify software to ID deposited substitute checks

• Additional Considerations
• None beyond forward collection

78
Additional Considerations

• Train tellers
• Train to recognize accept substitute checks
• Avoid non-acceptance of valid items
• Avoid acceptance of invalid items
• Train them in new consumer rights
• Expedited recredit and claim process

79
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 - Available
• Processing and Quality Standards - Available
• Other Implementation Considerations - Shortly
• Endorsement Chain - Available

80
Check 21

• FFIEC Payment Systems Risk Conference
• Arlington, Virginia
• November 2, 2004