Check Facts

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Check Facts

• 1979 85 of all cashless transactions involved
  checks
• 2000 60 of all cashless transactions were by
  check
• 2000 Volume is huge. 50 billion checks written
  in the United States
• 8 billion per year spent on check processing and
  transportation

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Check 21 Act Overview

• New federal law
• Takes effect 10/28/2004
• Designed to increase the efficiency of the check
  processing system and reduce costs and make it
  less susceptible to 9/11 type delays
• Will affect all financial institutions and their
  customers, as well as investigators and
  prosecutors

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The Check 21 Act -- Overview

• Check 21 allows (but does not require) any party
  in the chain to truncate any check (business or
  commercial) and convert it to an image
• Truncate means to remove an original paper
  check from the check collection or return process

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Overview

• What happens next?
• It depends . . .
• If the next party in the chain agrees, an image
  can be sent
• If the next party doesnt agree to accept an
  image, a substitute check is created and
  transmitted

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On checks customers write

• The payor bank
• May get the original check back
• May get a copy of an image
• May get a substitute check

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Substitute Check

• a paper reproduction of the original check that-
  (A) contains an image of the front and back of
  the original check (B) bears a MICR line
  containing all the information appearing on the
  MICR line of the original check. Will show the
  routing number of the truncating bank and the
  number of the bank creating the substitute check.

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Substitute Check

• A substitute check that meets all the criteria in
  the law is the legal equivalent of the original
  for all purposes under state and federal law.
• In any given case, a substitute check may be all
  thats available for investigation and
  prosecution . . .
• Under the new federal law, party must accept a
  substitute check.

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Substitute Check

• When some other party in the chain truncates a
  check a customer has written and it can be any
  bank in the chain a substitute check will be
  the only paper form of the check anyone can
  insist upon receiving.

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Net result . . .

• Whether customers can get all their original
  checks back is out of the paying banks control
  (the party that truncates keeps the original and
  can destroy it after a period of time).
• The length of time the original must be kept is
  NOT set by law. It will be set by clearinghouse
  rules and other agreements.

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If people insist on paper . . .

• If a party needs to have an image reconverted to
  a substitute check, youre back to paper
• With a substitute check, you have most of the
  inconveniences of dealing with the original, plus
  some of the security features are lost

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Check 21

• Doesnt mandate truncation it permits it
• Doesnt require any party in the chain to accept
  an image, but allows them to do so by agreement
• Lays the groundwork for image presentment and
  exchange and thats where the REAL benefits
  will be seen for fraud prevention/reduction

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Check 21

• If image exchange and presentment catches on,
  checks can move through the check collection and
  return system more quickly and fraud will be
  caught, in many instances, at an earlier point in
  time hopefully before losses occur.

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Impact of Check 21

• If parties insist on a substitute check, the
  upside of the new law will be minimal well
  only see the downside to the greatest extent.
• If parties engage in image presentment and
  exchange, there are some major benefits.
• Paper moves slowly. Digital information moves
  instantly and is easier to process store, search,
  retrieve.

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F R A U D

• Substitute checks could be altered,
  counterfeited, duplicated
• Some of the characteristics of a physical check
  that aid investigators are obviously lost when
  its converted to a copy (ability to do ink
  analysis, some aspects of handwriting analysis,
  etc.)
• Security features embedded in paper checks will
  not survive imaging (such as paper-based
  watermarks, micro-printing)

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Paper check security features

• Who looks at them?
• Who really benefits from them?
• How often are they really used?
• How often is ink analysis or handwriting
  analysis, or fingerprint retrieval from a bad
  check actually used in investigation/prosecution?

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Some security features still work

• Toner anchorage
• Chemical reactive paper
• Other measures to protect against alteration

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New security options

• Seal encoding invisibly stores data within
  issuing banks logo or in other area. Designed
  for digital reading.
• Electronic positive pay can OCR payee and check
  signature
• Digital watermarks being explored for use by
  Treasury
• Digital bar codes

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Whats the problem?

• When were processing paper checks, banks often
  dont learn whether the check is good or not
  until AFTER theyve already given funds
  availability.
• Counterfeit payroll checks
• Counterfeit cashiers checks
• Bogus checks used in connection with new account
  fraud
• Image presentment/exchange will help reduce that
  disconnect and protect customers and financial
  institutions.

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With image exchange/presentment

• Checks can be truncated at the point of deposit
• Images can be transmitted immediately
• Software can be used to determine if the check
  has an obvious problem (nonexistent account,
  closed account, etc.)

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Thumbprint signatures

• Typically not image survivable
• If on merchant checks, no control over whether
  the item will be truncated
• When cashing on-us items for noncustomers, banks
  might want to consider segregating items and
  delaying destruction

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Challenges and decisions

• Were all in this together
• The law takes effect 10/28/04, whether we like it
  or not
• Although there are issues that will arise from
  not being able to obtain original paper checks,
  there are also some aspects of fraud prevention
  that will be enhanced by use of images

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Challenges and decisions

• What is a feasible length of time for truncating
  financial institutions to retain images?
• What challenges do law enforcement and
  prosecutors see stemming from the new law?
• Truncating financial institutions will need to
  secure the originals to keep them from being used
  twice.

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Things to think about

• The fact that Check 21 doesnt include standards
  for imaged items
• The fact that some types of ink, some types of
  checks, dont image well

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How will it all shake out?

• Remains to be seen.
• Probably will be fraud schemes we havent even
  contemplated yet.
• Image presentment and exchange like the early
  days of fax machines. The more people who had
  one, the more valuable one was.
• Stay tuned . . .