Rapid Changes in the U.S. Payment System

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• Rapid Changes in the U.S. Payment System
• Preparing Your Organization to Respond

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• The Check Clearing for the 21st Century Act

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The Check Clearing for the 21st Century Act
For Immediate ReleaseOffice of the Press
SecretaryOctober 28, 2003 Statement on H.R.
1474 Statement by the President Today I have
signed into law H.R. 1474, the "Check Clearing
for the 21st Century Act." This Act is intended
to update and modernize the Nation's check
payment and collection systems. Section 16(b) of
the Act purports to require executive branch
officials to submit to the Congress
recommendations for legislative action. The
executive branch shall construe section 16(b) in
a manner consistent with the President's
authority under the Recommendations Clause of the
Constitution to submit for the consideration of
the Congress such measures as the President shall
judge necessary or expedient. GEORGE W. BUSH
THE WHITE HOUSE, October 28, 2003.
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The Check Clearing for the 21st Century Act

• Legislations Origin
• Proposed by the Federal Reserve as new federal
  law
• Feds Objectives
• To facilitate check truncation (the practice of
  holding a paper check at the bank of first
  deposit or at an intermediary bank and
  electronically forwarding the essential
  information on the check to the bank on which it
  was written. A truncated check is not returned to
  the writer).
• To foster innovation in check collection systems
  without mandating receipt of checks in electronic
  format
• To improve the overall efficiency of the nations
  payments systems

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The Check Clearing for the 21st Century Act

• What Does Check 21 Really Do?
• Creates a new negotiable instrument called a
  Substitute Check document
• Substitute check documents facilitate full check
  truncation throughout the U.S.
• Prior to Check 21, only original checks could be
  presented for settlement to paying banks

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Check Collection
Traditional Paper Collection
Check
Check
Check
Intermediary
BOFD
Paying Bank
Substitute Check Collection
Substitute Check or Image
Intermediary
Check
Image
BOFD
Paying Bank
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Return Item Processing
Traditional Paper Return
Return Check
Return Check
RETREIVE CHECKS
PAYING BANK
BOFD
CUSTOMER
Substitute Check Returns
IMAGE
CUSTOMER
Return Substitute Check or Image
Return Substitute Check or Image
PAYING BANK
BOFD
PRINT Sub Ck
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Remote Depositing
Traditional Paper Collection
ATM
Check
Check
Transit Items
BOFD
Branch
Substitute Check Collection with Branch Capture
ATM
Substitute Check or Image
Check
Transit Items
BOFD
Image
Branch
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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 endorsements
• Includes identification of party creating it

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Sample Substitute Check
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Eligibility

• 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.

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Check 21 Myths

• 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 Check Documents but
  does not cover image exchanges between banks or
  their customers

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Check 21 The Reality

• Designed to encourage check truncation by
  removing key barrier to truncation
• Allows unilateral decisions to truncate checks
• Unlike current environment with requirement to
  obtain agreements from all the parties
• Provides for the replacement of a paper check
  with a substitute paper check
• For those customers that have not agreed to check
  truncation or electronic check files
• Does not mandate the receipt of electronic
  transactions

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Check 21 Considerations

• Banks can no longer guarantee check writers will
  receive their original paper checks back,
  substitute checks will be provided where the
  original check was truncated at another Bank
  through the clearing process
• Checks will likely clear faster, raising the risk
  that more checks will be returned
• Standard paper check stock security features may
  be rendered ineffective as checks are imaged and
  substitute checks created
• If a check is truncated, only a substitute check
  will be the legal equivalent of the original
  check to prove payment - not a photocopy

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Check 21 Considerations

• Cash Management Services Affected by Check 21
• On-line check image viewing (truncated business
  check will be reduced to 67 of its original
  size on the substitute check)
• Controlled disbursement and check clearing
  patterns will change as banks move toward
  clearing checks via image exchange and electronic
  settlement
• With end-to-end electronic image check clearing
  and settlement, checks could clear on a same-day
  basis in the future
• Payee positive pay services (payee name will not
  be located in same position on substitute check
  as the original)

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Check 21 Considerations

• Customer Impact on 10/28/2004
• Original checks may not be returned
• Online images may include substitute checks
• Float may decrease because checks may clear
  faster
• Customer Impact When Bank is Image Enabled
• Original checks most likely will not be returned
• Online images will include substitute checks
• Float will decrease because checks will clear
  faster
• Remote Image Deposit will be available

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Sample Substitute Check
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Payment System Fraud
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Payment System Fraud

• Check Fraud
• 1.2 million in fraudulent checks enter the
  payment system everyday
• Annual check fraud losses according to the
  Nielson Report
• 20 billion in 2003
• 12 billion in 1996
• 5 billion in 1993
• The American Bankers Association reports fraud
  losses are increasing 25 per year
• Recent Uniform Commercial Code changes now have
  banks and their customers sharing responsibility
  for losses

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Payment System Fraud

• Check Fraud Loss Prevention Strategies
• Understand your liability
• Read your bank contracts
• Use Positive Pay services
• Use ACH and paper filter/block services
• Utilize paper check stock rich with security
  features (8 or more) - avoid using blank laser
  check stock
• Make large dollar payments electronically with
  trading partners

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Payment System Fraud

• Check Fraud Loss Prevention Strategies
• Migrate as many payments from paper check to ACH,
  Wires and Cards as appropriate
• Utilize online banking services to review account
  activity daily
• Reconcile accounts promptly
• Secure and control your check stock
• Avoid including corporate officers signatures on
  annual reports and other public documents
• Dont disclose your account number(s) on credit
  applications - provide your bank account
  officers contact information

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Where Can Your Organization Find Help?

• UMB Bank www.umb.com
• The Mid-America Payment Exchange
  www.mpx.org
• Electronic Checks (ACH) www.electronic-check.o
  rg
• Check 21 www.eccho.org
• www.epaynews.com
• Fraud www.FraudTips.net
• www.safechecks.com/bulletin.pdf

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• QUESTIONS?

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• THANK YOU