Check Clearing for the 21st

Century Act

Presented by Jennifer Ford

Introduction

Who uses Internet Banking to pay bills?

Can you see an image of the checks you wrote?

Internet Banking and Check 21 are related because many of us wouldn’t have access to images if it weren’t for Check 21

Current Banking Environment

An estimated 42.5 billion checks are processed in the U.S. every year

Banks spend $6-8 billion per year to process checks

Strong reliance on air and ground traffic for physical transportation of millions of paper checks between banks every day

Events of September 11th underscored the vulnerability of the current U.S. payment system ($47 billion in check float)

Shift from Paper to Electronic

Paper checks increasingly converted into electronic transactions

Processing volume expected to decrease by more than 5% per year from 2002-2006 (then 9% every year thereafter)

Paper Checks on the Decline

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1979 1995 2000

Year

Vo

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Check

Retail ElectronicPayments

Debit Card

Costs due to Shift

Fed Check Processing Costs per check

1995 2000 2005 2010 2015

0.04

0.056448

0.079305376

0.111418343

Fed Check ProcessingCosts per check

Cost of processing paper checks will rise exponentially

Less checks, higher costs per check

Processing Checks Today

Intermediary Paying Bank

Branch

Operating Center

What is Check 21?

Legislation sponsored by the Federal Reserve Bank Facilitate check truncation (remove original paper) Foster innovation in the check collection system

without mandating receipt of checks in electronic form

Improve the overall efficiency of the U.S. payments system

Signed into law on October 28, 2003 and will become effective on October 28, 2004

Legislation states that an Image Replacement document (IRD) is a legal substitute document for a check

Background

In 2000 – Fed Reserve Board Staff began investigating a concept of Default Check Truncation Rules – now Called Check 21 Enable bank to substitute machine-readable copy of

check (“substitute”) for the original Substitute checks would be legal and practical

equivalent to original*ECCHO (Electronic Check Clearing House

Org.) and other banking organizations monitored the process and provided input

All segments of the banking industry strongly supported the act and have worked together to achieve passage

Substitute Checks / IRD

New instrument created from electronic check image

Legal equivalent of original checkConforms to industry standards: machine

readable and would bear MICR lineProcessed the same as original checks –

not significantly affecting operations of bank that do not participate

Minimizes the impact of check imaging on institutions and those customers who wish to continue to receive paper

Substitute Checks / IRD

Front

This is a legal copy of yourcheck. You can use it the same way you would usethe original check.

*123456789*01/04/2002

123456789012345

[053000183] 01/03/20021800539446

VOID – IRD TEST SAMPLE

Do not endorse or write below this line.

>031000011< 01/02/2002

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After Check 21

Paying BankIRDImage Intermediary

Branch

Operating Center

Image

Imageor

What’s Wrong with Check 21?

Standards for IRD but not for actual Images

Customer’s haven’t been informed of how it will impact them

My opinion:Smaller banks may fail if they don’t

invest in technology to take advantage of Check 21

Larger Banks Have an Advantage

Unit Cost to Process Checks

0

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0.04

0.06

0.08

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Current

Current withIRD

Day 1 with IRD

Day 1 and Day 2

Market Share in Atlanta Fed DistrictWachovia Bank National Assn.

Bank Of America NA

SunTrust Bank

Branch Banking & Trust Co(BB&T)Southtrust Bank

Regions Bank

AmSouth Bank

Washington Mutual Bank FA

National Bank Of Commerce

Branch B&T Co Of Virginia

Capital One FSB

First-Citizens Bank & Trust Co

E*Trade Bank

Capital One Bank

RBC Centura Bank

Colonial Bank

Conclusion

Watch for possible increased bank failures due to this new technology

Banks with image-enabled systems will lower costs and therefore have an advantage

Questions?