Cheque Clearing Gets an Image Makeover

1
Cheque Clearing Gets an Image Makeover

• Treasury Management Association of Canada -
  Edmonton
• April 19, 2006
• Presenter Judy Hammond

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Todays Agenda

• CPA A Quick Introduction
• Cheque Clearing the Before Picture
• Why an Image Makeover?
• The CPA Plan the After Picture
• What it Will Mean to Business
• The New Cheque Specs
• Progress Report/The Road Forward
• Getting Ready Some Questions to Ask

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CPA A Quick Intro

• Established by federal legislation in 1980
• Operates national clearing and settlement systems
• Establishes clearing rules wires, cheques,
  Pre-Authorized Debits, direct deposit, bill
  payment, point-of-sale, and now online payments
• Promotes safety, soundness and efficiency of
  clearing and settlement systems

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CPA A Quick Intro

• Average of 164 billion cleared and settled
  through CPA systems each business day
• Almost 90 of value is now wire payments through
  Large Value Transfer System (LVTS) funds
  certain as soon as payment received
• All other payments cleared through Automated
  Clearing Settlement System (ACSS)

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Cheque Clearing in Canada . . .The Before
Picture

• Branches send cheques to 6 regional centres
• Negotiating FI cheques are sorted and exchanged
  up until 100 a.m.
• Delivered to Drawee FI for pay/no pay decision
• May require shipping across the country

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Cheque Clearing in Canada. . . The Before
Picture

• Dishonoured cheques retrace the journey (e.g.
  NSF, stop payment, fraudulent)
• Negotiating FI Drawee FI Microfilm Cheques
  Physical Items may be Stored, Delivered to
  Clients or Destroyed
• 12 Direct Clearers, 100 Indirect Clearers
• - 6 time zones, 10 million sq km, and average
  volume of 5,000,000 cheques daily

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Cheque Clearing Today
A cheque deposited in Whitehorse drawn on a
financial institution in St. Johns
Whitehorse
1
3
St. Johns
8
5
4
Calgary
Vancouver
Halifax
Winnipeg
Montreal
2
6
7
Toronto
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Cheque Clearing in Canada Why an Image
Makeover?

• Modernization and Innovation
• Efficiency why move all that paper?
• Image-based clearing will be faster
• Improved system resilience less susceptible to
  transportation disruption
• Streamlined processes for FIs and clients
• Keep pace with international developments

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The CPA Plan . . . The After
Picture

• No change to practice of writing or depositing
  cheques
• Cheques likely still transported to data centre
  in near term
• Images of front and back captured,along with MICR
  codeline data and transmitted to drawee FI
  overnight

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The CPA Plan . . . The After
Picture

• Images available to FIs for pay/no pay decision
  by 800 a.m. Eastern Time
• Drawee FI verifies images are good
  (software-driven)
• On-line client access to images as early as
  opening of business
• Any dishonoured items returned electronically

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Electronic Cheque Clearing
A cheque deposited in Whitehorse drawn on a
financial institution in St. Johns
Whitehorse
1
St. Johns
4
Vancouver
Halifax
3
2
Toronto
Archive
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The CPA Plan . . . How it Compares to Check 21
(U.S.)

• Canada
• CPA coordinating national approach
• Industry-wide plan FI participation mandatory
• Legislative amendments pending
• No substitute checks

• United States
• Fed and private networks no single coordinator
• Voluntary for FIs different FIs at different
  stages
• Check 21 Act in effect as of October 2004
• IRDs/substitute checks a necessary evil

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Image-Based Clearing . . . What it Means to
Business

• New image-based services (no more return of
  physical cheques)
• More timely account reconciliation
• Faster notification of returned/unpaid cheques
• Faster cheque tracing/retrieval

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Image-Based Clearing. . . What it Means to
Business

• Reduced storage needs for physical cheques
• Potential new automated approaches to countering
  fraud (e.g. bar codes and seals enhanced
  positive pay)
• Internal efficiencies
• Updates to cheque stock/formats

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The New Cheque Specs (CPA Standard 006, Part A)

• All cheques to comply by end of 2006
• All cheques will require some changes
• Consultation most estimated maximum of a year
  to make changes and use up old format cheque
  stock
• CPA communication to cheque printers, software
  developers, governments, stakeholder
  associations/organizations and media in January
  2005

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The New Cheque Specs

• Key changes
• Numeric date format, with date field indicators
  mandatory
• New specifications for cheque backgrounds (e.g.
  Print Contrast Signal)
• Mandatory serial number in MICR line
• Standardized positions for key fields

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The New Cheque Specs

• Standardized printing requirements on reverse
  (e.g. Back/Endos position of endorsement line)
• Security features cannot interfere with Areas of
  Interest
• Pantograph cannot appear on image captured from
  original cheque
• Minimum font sizes specified for certain elements

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The New Cheque Specs
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The New Cheque Specs
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The New Cheque Specs
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Cheque Imaging Progress Report

• Clearing Infrastructure
• Exchange Control System nearing completion
• Telecom network proposals being evaluated

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Cheque Imaging Progress Report

• Legal Framework
• Proposed amendments to Bills of Exchange Act
• Redefinition of cheque to include image
• Govt invited comments in spring 2005
  stakeholder responses very supportive
• White Paper anticipated this spring
• Legislative amendments targeted for October 2006

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Cheque Imaging Progress Report

• Rules and Standards
• Security framework drafted and reviewed by
  independent auditor
• Image requirements being finalized
• Clearing rules being drafted to reflect new
  processes
• Consultation re record retention framework

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Cheque Imaging The Road Ahead

• Development and inter-FI testing 2006/07
• Phased implementation of image-based clearing
  beginning in January 2008
• FIs fleshing out their plans for each phase
• FIs may offer new/enhanced image-based services
  earlier

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Getting Ready Some Questions to Ask

• How are cheques used in internal processes today?
• What opportunities are there for improved
  efficiency?
• What systems/processes will need to change?
  Budget implications?
• Who needs to be involved in the transition?

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Getting Ready Some Questions to Ask

• What image-based services would you like to
  receive?
• What aspects of the transition do you need to
  coordinate with your FI?
• Could you move to image-based services before
  your deadline?
• How long do you want images to be available to
  you? Will you access FI archive or keep your own?

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Getting Ready Some Questions to Ask

• What is the status of your transition to new
  cheque specs?
• How are cheques currently printed? Are those
  involved in the loop on changes?
• Do softwares used in cheque production need
  updates or adjustments?
• How will you keep informed of developments?

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Questions?

• www.cdnpay.ca
• Guy Legault
• President CEO
• Canadian Payments Association
• 613-238-4173 ext 3244
• rdowdall_at_cdnpay.ca
• Inquiries Service info_at_cdnpay.ca
• or 613-238-4173 ext 3269 or 3238