Current Banking Issues The Migration from Paper to Electronics

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Current Banking IssuesThe Migration from Paper
to Electronics

• Lisa C. Miller, CTP
• Vice President
• Wachovia Treasury Services
• November 13, 2006
• Florida Government Finance Officers Association,
  2006

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Discussion Topics

• Setting the Stage
• Types of Check Electronification
• Check Electronification Trends
• In-Depth Discussion
• ACH Alternatives
• Image-Based Alternatives
• Current Market Solutions

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What Is Electronification?

• Check Truncation
• The change in form of a check to a check image
• Example Using an image at some point during the
  clearing process
• Check Conversion
• The conversion of a check to an ACH debit
• Examples Converting a paper check at the point
  of purchase (POP) or at a remittance processing
  site (ARC)
• Payment Type Transfer
• Shifting a payment method from paper to fully
  electronic
• Example Preauthorized payment plan (monthly
  debit for utility payments)

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Distribution of Non-Cash Payments
Source Federal Reserve System
Billions of Transactions
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Consumer Bill Payment Trends
Source Aite Group, 2005
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Benefits of Electronification

• Improved Cash Management
• Accelerate Funds Availability
• More Predictable Cash Flow
• Consolidate Bank Relationships
• Cost Containment
• Processing Fees
• Improved Collections/Risk Reduction
• Workflow Efficiencies
• Customer Self-Service

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Benefits of Electronification

• Satisfies Consumer Demands
• Flexibility
• Just-In-Time Payments
• Revenue Opportunity
• Cross-Sell/Up-Sell
• Convenience Fees

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Payment Type Transfer

• WEB - Internet Authorized Entry
• One-time or recurring consumer ACH debit
  authorized via the Internet
• TEL - Telephone Authorized Entry
• One-time consumer ACH debit authorized orally via
  the telephone
• Check is never submitted as payment to the payee

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Payment Type Transfer

• WEB - Internet Authorized EntriesOne-time or
  recurring ACH (consumer) debit authorized via the
  Internet
• Regulatory Framework NACHA Rules and Regulation
  E
• Notification/Authorization In writing, signed
  or similarly authenticated
• Must follow other requirements of written
  authorizations

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Payment Type Transfer

• TEL - Telephone Authorized EntriesOne-time ACH
  (consumer) debit authorized orally via the
  telephone
• Regulatory Framework NACHA Rules and Regulation
  E
• Notification/Authorization Oral authorization
  must be recorded or written confirmation mailed
• Restrictions on which party may initiate the call
  based on pre-existing relationship or lack
  thereof

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Check Conversion

• ARC - Accounts Receivable Conversion
• Conversion of eligible checks received via US
  Mail or at an unattended drop-box
• POP - Point of Purchase Conversion
• Conversion of eligible checks received at the
  point of sale
• BOC - Back Office ConversionConversion of
  eligible checks received at the point of sale
• Check is submitted as payment to the payee and is
  used as a source document to create the ACH debit

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Check Conversion

• ARC - Accounts Receivable ConversionConversion
  of eligible checks received via US Mail or at an
  unattended drop-box
• Regulatory Framework NACHA Rules and Regulation
  E
• Notification/Authorization Required with each
  payment(notification authorization)
• Consumer Right to Opt Out (must accept check
  payment)
• Ineligible Items Money Orders,checks
  containing an aux/on-us field

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Check Conversion

• POP - Point of Purchase ConversionConversion of
  eligible checks received at the point of sale
  voided check returned to the consumer
• Regulatory Framework NACHA Rules and Regulation
  E
• Notification/Authorization Required with each
  payment consumer signs separate authorization
  copy of signed authorization and disclosure
  language given to consumer
• Ineligible Items Money Orders,checks
  containing an aux/on-us field

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Check Conversion

• BOC - Back Office ConversionConversion of
  eligible checks received at the point of sale
  check retained by payee
• Effective 3/07
• Regulatory Framework NACHA Rules and Regulation
  E
• Notification/Authorization Required with each
  payment copy of disclosure language given to
  consumer
• Consumer Right to Opt Out - but payee not
  obligated to accept check
• Ineligible Items Money Orders, checks
  containing anaux/on-us field

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ACH Network Trends
Millions of Transactions (excludes on-us volume)
Source Derived from NACHA volumes
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ACH Network Trends
Millions of Transactions (excludes on-us volume)
Source Derived from NACHA volumes
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Check Truncation

• Check Clearing for the 21st Century Act (Check
  21)
• Main Objectives
• To foster innovation and improve efficiency
• Facilitate check truncation by creating a new
  negotiable instrument - substitute check
• What The Act Does Not Do
• Does not mandate image/electronic exchange
• Does not require paying banks to accept images
• Does not cover the conversion of checks to ACH
  transactions

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Check Truncation

• Using an image at some point in the check
  clearing process
• Between depositor and bank
• Between Bank of First Deposit and Paying Bank
• Return of items from Paying Bank to BOFD
• Regulatory Framework UCC and Regulation CC
• Notification/Authorization None required
• Ineligible Items None
• Right to Opt Out None

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Image Exchange Trends
Source SVPCo
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Emerging Payment Channels

• PIN-Less Debit
• Biometrics
• Fingerprints
• Retinal scans
• Contactless Cards
• RFID/NFC

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Treasury Solutions
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Image-Based Solutions

• Remote Deposit Capture
• Used for low/moderate volumes of checks
• Desktop scanner/software - Internet image
  delivery
• Ideal for remote offices, checks received outside
  of primary lockbox, and field deposits
• Image Cash Letter
• Typically used for high-volume, automated
  remittance processing environments
• Checks imaged on high-speed equipment and sent as
  a bulk file to bank for deposit

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Image-Based Solutions

• Remote Deposit Capture and Image Cash Letter
• Benefits
• Eliminates geographic barriers
• Simplifies funds concentration systems and
  reduces depository fees
• Reduces deposit transportation costs
• Accelerates funds availability
• Advantages vs. Check Conversion
• No disclosure or authorization requirements
• No opt out requirement
• Eligibility of items

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Image-Based Solutions
Substitute CheckPrinted
Check Payments
Clearing House
Image File orInternet Transmission
Desktop Scanner or High-Speed Capture
Image Exchange

• Image exchange between client (depositor) and
  bank
• using images captured during remittance
  processing
• or at a remote location using a desktop
  scanner
• Limited image exchange between banks
• Substitute checks printed from client image file

Direct Clearing
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Putting It All Together
Substitute CheckPrinted
Check Payments
Clearing House
Image File orInternet Transmission
Image Exchange
Virtual Capture
Desktop Scanner or High-Speed Capture
Direct Clearing

• Image exchange between client (depositor)
• and bank
• Image exchange between banks
• ACH clearing (ARC or BOC) for eligible items
• Substitute checks printed for all others

Check Conversion
ACH Clearing
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Payables Automation

• Allows you to initiate ACH, wire transfer, and
  check payments (and associated payment detail)
  through a single payment instructions file.
• ACH payments and Wire Transfers are created,
  formatted, and sent to the payment application
  for initiation
• Checks and associated remittance detail are
  printed and mailed directly to payees

Payment Instructions
820 or Flat File
CTX, CCD/CCD, PPD FedWire, SWIFT
Payees Bank
Corporate Payor
997/824,Flat File, or e-mail
Checks and Remittances
ElectronicRemittance Detail
Acknowledgment
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Payables Automation

• Key Benefits
• Single file delivered from Workstation or ERP
  system to initiate multiple payment types
• Can electronify payment process while still
  printing checks
• Facilitates use of Positive Pay services
• Highly secure processing environments for check
  production

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