Download - Check 21 Presentation
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Check 21Version 3June, 2004
www.eccho.org
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Topical Agenda Myths and Reality Applications Warranties and Indemnification Compliance Issues
– Consumer Awareness– Expedited Recredit
Other Provisions Standards Rules Versus Act Operational Considerations
– Minimum Requirements Regulation CC to Implement Check 21 Historical Perceptive
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Quiz Question You think you know the Act???
– There is mis-information regarding the Act Multiple choice, which one(s), if
any apply Check 21
a) Mandates Check Truncationb) Mandates the destruction of the
original checkc) Grants electronic check images the
same legal status as the original checkd) Grants Substitute Checks (IRDs) the
same legal status as the original check
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Another Quiz Question Check 21
a) Allows banks to exchange checks electronically (images)
b) Allows banks to truncate an item and convert it to ACH
c) Makes substitute checks the legal equivalent of original checks
d) Excludes all government checks including Treasury checks and state warrants
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Check 21 – The Myths “It is my understanding that
this proposal would require the destruction of the physical check at the bank the check is deposited.”
“…the passage of legislation that will give electronic check images the same validity as paper checks for clearance and settlement.”
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Check 21 – The Myths “Check Clearing for the 21st Century in
the House would grant check images the same legal status as paper checks for purposes of clearing and settlement.”
“This proposed legislation will allow a collecting bank … to clear their check-based transactions through … check image exchange presentment.”
And many more examples
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Legislation Overview Origin
– Proposed by the Federal Reserve as new federal law
Fed’s Objectives– To facilitate truncation– To foster innovation in check
collection systems without mandating receipt of checks in electronic format
– To improve the overall efficiency of the nation’s payments systems
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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 checks but– Does not cover image exchanges between
banks or their customers
Myth & Reality
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Check 21 – The Reality Relationship between image
and Check 21– Check 21 is dependent on image
technology, but does not provide any legal provisions to check images or image exchange
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Check 21 – The Reality Only Applies to “Substitute
Checks”– Image reprints of original paper
checks– Use of substitute checks does not
require agreement between the parties
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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 But without mandating the receipt
of electronic transactions
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Check 21 – The Reality Included in Legislation
– Check 21 only addresses situations in which banks do not agree to truncation Creates new legal instrument - Substitute
Checks– Designed to be processed exactly as if it
were the original paper check Excluded from Legislation
– Products and services under other agreements Check safekeeping products Other truncation products ECP & image exchanges
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ALL CHECKS are eligible for replacement with substitute checks, for example: – Consumer/Retail checks– Business/Non retail checks– Government warrants– Treasury checks– Payroll checks– Money orders– Controlled disbursement– Payable through drafts– Traveler’s checks– Etc.
Eligible Checks?
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Only checks replaced with substitute checks are covered by the Act
Not all truncated or safekept checks are covered by the Act– For example, original checks truncated or
safekept under agreement are not covered by the Act
Act is designed to encourage truncation and it is not needed if customer already agreed to not receive their checks back
Checks Covered?
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Why Substitute Checks? Key Benefits
– Primary benefit associated with Act is faster collection and return of checks
– Bank could use electronics for processing and transmitting images for printing of substitute checks closer to the receiving bank
– Banks could reduce physical sorting by sorting items electronically and printing substitute checks for return processing
– Branch and ATM deposits could be transmitted to processing centers to print substitute check and reduce or eliminate some transportation
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Collections
Intermediary
Paying Bank
BOFD
Traditional Paper Collection
Check Check Check
Intermediary
Paying Bank
BOFD
Sub Ck
Substitute Check Collection
ImageCheck
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Return Processing
CUSTOMER PAYING BANK
BOFD RETREIVE CHECKS
Traditional Paper Return
Return Check Return Check
PRINT Sub Ck
PAYING BANK
BOFD
CUSTOMER Return Sub Ck
IMAGE
Substitute Check Returns
Return Sub Ck
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Branch
Remote Depositing
BOFD
ATM
Transit Items
Traditional Paper Collection
Check Check
BOFD
ATM
Branch
Sub Ck
Transit Items
Substitute Check Collection with Branch Capture
Image
Check
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Image Exchange
PAYING BANK
BOFD IMAGE
OR Check
Check
Current Image
PAYING BANK
BOFDImage
PRINT Sub Ck
IMAGE
Sub Ck
Check
Image with Substitute Checks
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Biller’s Processor
Consumer receives
bill, writes and mails
checkConsumerBill
Non-consumer receives
bill, writes and mails
check
Check InformationCaptured, Some
Converted to ARC and Checks Stored
CHECKS STORED
ARC &CONSUMER CHECKS
ChecksBiller’s (Collecting) Bank (ODFI)Enters ARC Into ACH Network
& Clears Paper Checks
Paying Bank (RDFI)Post Dr Entry to Customer’s
Account
ACH Operator
ARCARC
Intermediary
And/or
Statement
Statement
Lockbox – ARC
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CustomerStatements
Statement
Paying Bank Posts Substitute Checks to Customer’s
Account
Sub Ck
Biller’s Depository BankCollects Substitute Checks
Biller’s Processor
All check payments
Captures Check Images,Stores Checks,
Reconverts Images to Substitute Check & Sends Substitute Checks to Bank
STORE CHECKSALL CHECKS
Sub Ck
Lockbox – Check 21 Process
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STORE CHECKSALL CHECKS
IMAGES
Biller’s Processor
All check payments
Captures Check Images,Stores Checks & Sends
Images to Bank
Lockbox – Check 21 Process
Paying Bank Posts Substitute Check
to Customer’s Account
IntermediaryPrint (Reconverts)Substitute Check
IMAGES
Sub Ck
Biller’s Depository BankClears the Images
CustomerStatements
Statement
Covered by Check 21
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Local Office Corporate Headquart
ers
Corporate Bank
Paying Bank
Check
Deposit Check
ACHACHDeposit Bank
BOFD
Deposit Reporting
Cash ConcentrationCurrent Concentration
Local Office
IMAGECorporate
Headquarters
Corporate Bank
IMAGE
Paying Bank
Intermediary
Sub Ck
IMAGE
Check
Substitute Cash Concentration
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Retail Store
BOFDCorporate Bank
ACH
Paying Bank
ACHCheck
CHECK
Current Point of Purchase
Retail Store
Image Corporate
Headquarters
Corporate Bank
Image
Paying Bank
Intermediary
Sub Ck
Image
Check
Substitute Check Point of Purchase
Point of Purchase
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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 indorsements– Includes identification of party creating it
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Substitute Check/IRD
ANSI X
9.90
DSTU
Fron
t
Back
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Check 21 Warranties Bank that creates substitute
checks warrants– Substitute check meets all
requirements for legal equivalency– No double debit
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Check 21 Indemnification Bank that creates substitute
check and each subsequent bank indemnifies all parties in the collection or return process for loss– If loss is due to receipt of substitute
check instead of original check
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Check 21 Indemnification Indemnity amount
– Breach of warranty – Amount of any loss proximately caused by the breach This includes consequential damages
– Absent breach of warranty – Amount of loss up to amount of substitute check plus interest and expense
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Check 21 Indemnification Minimizing amount of risk
– If indemnifying bank produces original check or copy sufficient to determine validity of claim It shall be liable only for losses incurred
up to time item was produced Have right to return of funds paid under
indemnity in excess of losses
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Check 21 Indemnification Other Indemnification Considerations
– Production of original check, etc. shall not absolve the bank from any liability on a warranty established under this Act or other law
– Each indemnified party shall have duty to comply with all reasonable requests in connection with claim
Comparative negligence– If loss results from negligence or failure to act
in good faith, then indemnification shall be reduced in proportion to amount of negligence or bad faith
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Compliance Issues Consumer Awareness Expedited Recredit
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Consumer Awareness Each bank shall provide to each
consumer of bank brief description– Consumer recredit rights – How substitute check is legal equivalent of
original check Notice provided to consumers who
receive original checks or substitute checks with periodic statement– Notice also provided to consumer who
requests copy and receives substitute check
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Consumer Awareness Notice must be provided to
– Existing customers– New account holders
Notice may be provided by U.S. mail or other means as agreed by consumer
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Consumer Awareness Model language
– Fed Board of Governors shall publish model forms and clauses that a bank can use
– Safe harbor Bank shall be in compliance with Act if the
notice uses the model form or clause published by the Fed– As long as it accurately describes bank’s
policies and practices– Bank is not required to use Fed’s model
language
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Check 21 Expedited Recredit Expedited recredit for
consumers– Consumer may make claim under Act
for substitute check that was not properly charged or for warranty claim
– Consumer suffered loss– Original check or copy of original check
necessary to determine validity
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Check 21 Expedited Recredit Procedures for claim
– Consumer must provide to bank Description of claim Statement that consumer suffered loss Reason why production of item is
necessary Sufficient information to identify
substitute check– Bank may in its discretion require
claim in writing
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Check 21 Expedited Recredit Expedited recredit for consumers
– Bank may withhold availability in Reg CC like exception situations New accounts, excessive ODs or cause to believe
fraud Bank may withhold availability for 45 days If bank delays availability it cannot charge OD fees
for five days after notice of delay to consumer Bank may reverse recredit if
– Determines substitute check which was recredited was properly charged
– Notifies consumer
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Check 21 Expedited Recredit Notice to consumer is required
– If consumer claim not valid– Notice of recredit under Act– Notice of reversal of recredit
Notice shall be delivered by U.S. mail or other means agreed by consumer
Providing recredit does not absolve bank from liability for claim made under any other law
Expedited recredit procedure between banks
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Check 21 Expedited Recredit
PAYING BANK
RECONVERTING BANK
Sub Ck
CLAIM CLAIM
40 DAYS
$$$10 DAYS
10 DAYS
ConsumerStatemen
t
1) Paying bank must provide consumer with original check, copy of original check or recredit within 10 days of claim up to $2,500 per check
2) Amounts > $2,500 must be recredited to consumer within 45 days3) Paying bank must make claim to reconverting bank within 120 days
of of transaction that gave rise to claim4) Reconverting bank must provide recredit, original check or copy
within 10 days of paying bank claim
120 DAYS
Check, Copyor $$$
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Federal Reserve Regulation
Act states that the Federal Reserve may prescribe regulations to implement, prevent circumvention or evasion of, or facilitate compliance with the provisions of this Act
Fed developed modification to Regulation CC as Subpart D to implement act and provide safe harbor consumer awareness language
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Other Provisions Effective Date
– 12 months after enactment October 28, 2004
Treasury Checks– Congress excluded any special
provisions for Treasury Checks
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Check 21 Status Fed sent CTA to congress 12/2001 House bill Check Clearing for the 21th Century or
Check 21 passed 405 to 0 on June 5 Senate bill Check Truncation Act of 2003 passed
Senate by unanimous consent on June 27 Compromise report as of October 1
– Differences in bills resolved Passed in House without opposition on October 8 Passed in Senate by unanimous consent on October 15 Signed by President on October 28, 2003 RFC for enabling regulation issued December 22 with
comments due March 12 Safe harbor language must be available July 28, 2004
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Standards OrganizationsAccredited Standards Committee
(ASC) X9, Inc. - www.X9.org
Mission: Develop, establish, publish, maintain, and promote standards for the Financial Services Industry in order to facilitate delivery of financial products and services.– X9B: Check related transactions
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DSTU X9.37 - Specifications for Electronic Exchange of Check and Image Data (2003)
DSTU X9.90 - Specifications for an image Replacement Document – IRD (new)
DSTU X9.81 - Specifications for Media-Based Bulk Image and Data Delivery (new)
ANS TG-15 - Technical Guidelines: To Aid in Understanding and Implementation of Check Electronification (new)
StandardsCheck Electronification
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DSTU X9.37Work Group Chair:
Phyllis [email protected]
Purpose:Standard Supports Electronic Check Exchange (ECE) with or without images in a cash letter structure for forward check presentment, return item notification, and return processing.
Specifications for Electronic Exchange of Check and Image Data
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DSTU X9.37Status: • Standard for Electronic Exchange Originally Issue
1994.• Gained active use in 1999 with SVPCo mandate for
use by members.• Recent five-year review completed and re-issued
2001.• Workgroup actively updating standard to support
Check 21, image exchange, and electronic image returns.
• Approved and released March 2003 as DSTU.
Specifications for Electronic Exchange of Check and Image Data
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DSTU X9.37
Highlights:– Minimize changes to records currently in use.– Supports multiple processing models (image cash letter;
image and/or paper to follow, and electronic transaction only).
– Accommodates endorsement chains and substitute checks in support of the Check 21.
– Accommodates special use for Federal Reserve (account totals, Fed documentation and work type).
– Improved returns processing (supports return reasons).
Specifications for Electronic Exchange of Check and Image Data
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File Header
(01)
File Control
(99)
Cash Letter Header (10)
Cash Letter Control
(90)
M M
M MForward
PresentmentBundle
ReturnBundle
Cash Letter
Routing Number
Summary (85)
C
One record for each payor bank routing number
in the Cash Letter
Forward presentment bundles and/or return bundles
See Figure 1a for Forward Presentment Bundle detail
See Figure 1b for Return Bundle detail Mandatory
Record
Conditional Record
Multiple Logical Entities
Multiple Conditional Records
C
M
C
LEGEND
Mandatory Record
Conditional Record
Multiple Logical Entities
Multiple Conditional Records
C
M
C
LEGEND
X9.37 Forward and ReturnCash Letter Hierarchy
Diagram
*NOTE: The above hierarchy diagram is from DSTU X9.37-2003 Specifications for Electronic Exchange of Check and Image Data
DSTU X9.37Specifications for Electronic Exchange of Check and Image Data
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Mandatory Record
Conditional Record
Multiple Logical Entities
Multiple Conditional Records
C
M
C
LEGEND Logical Entity
Mandatory Record
Conditional Record
Multiple Logical Entities
Multiple Conditional Records
C
M
C
LEGEND Logical Entity
X9.37 Forward Presentment
Bundle Hierarchy Diagram
Check Detail (25)
One record for each box of
bundles
C
M C
Image View Detail (50)
C C
M
M
Item
ImageView
BOFD
C
Record Types 50 and 52 shall occur together for each Image View.
C C
One recordfor each
subsequent endorsing bank
Image View
Data (52)Image View
Analysis(54)
Check Detail
Add A (26)
Check Detail
Add B (27)
Check Detail
Add C (28)
Bundle Header
(20)
Bundle Control
(70)
Box Summary
(75)
Forward Presentment
Bundle
*NOTE: The above hierarchy diagram is from DSTU X9.37-2003 Specifications for Electronic Exchange of Check and Image Data
DSTU X9.37Specifications for Electronic Exchange of Check and Image Data
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Mandatory Record
Conditional Record
Multiple Logical Entities
Multiple Conditional Records
C
M
C
LEGEND Logical Entity
Mandatory Record
Conditional Record
Multiple Logical Entities
Multiple Conditional Records
C
M
C
LEGEND Logical Entity
X9.37 Return Bundle
Hierarchy DiagramBundle Header
(20)
Bundle Control
(70)
C
M
M
M
ReturnItem
ImageView
BOFDCReturnAdd. D
(35)
CC
One record foreach subsequent endorsing bank.
Return Bundle
Detail(50)
C
Analysis(54)
C
Data(52)
C
Record Types 50 and 52 shall occur together for each Image View
ImageViewDetail(50)
C C C
Record Types 50 and 52 shall occur together for each Image View.
ImageViewData(52)
ImageView
Analysis(54)
ReturnAdd. C
(34)
ReturnAdd. B
(33)ReturnAdd. A
(32)
ReturnRecord
(31)
*NOTE: The above hierarchy diagram is from DSTU X9.37-2003 Specifications for Electronic Exchange of Check and Image Data
DSTU X9.37Specifications for Electronic Exchange of Check and Image Data
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Implementation Considerations:• Ability to store and access incoming ECE data.
• Processing information (truncator, IRD creator, etc.).• Endorsement chain.• Return processing information.• Location of original image/physical item.
• Creation of unique item/image keys.• Ability to provide full MICR line.• Accommodation of variable length records (type 27, 34, 52).
• Changed from fixed length record to variable length• Ability to execute multiple sends to the same institution.
DSTU X9.37X9.37Specifications for Electronic Exchange of Check and Image Data
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Issues & Concerns:• Major effort to prepare standard for ballot
process.• Approved and released March 2003 as
DSTU (Draft Standard for Trial Use)• To become final in 18 months.• Allows time for additional feedback.
DSTU X9.37Specifications for Electronic Exchange of Check and Image Data
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DSTU X9.90
Work Group Chairman:Andy GarnerWachovia [email protected]
Purpose:A specification for an IRD that provides for a machine-readable substitute document created from the image that is made from the front and back of the original check or a previous IRD.
Specifications for an Image Replacement Document – IRD
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Status: •New standard development.•Approved and released March 2003 as DSTU.
DSTU X9.90Specifications for an Image Replacement Document – IRD
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DSTU X9.90Specifications for an Image Replacement Document – IRDHighlights:• Front and back check image size, on original IRD, is
maintained on subsequent IRDs.• Maintains physical and electronic endorsements chain.• Identifies original check truncator and IRD creator.• Supports photocopy, notice and future Check 21 substitute
check.• Supports return information.• Supports optional data.• Uses EPC digit for identification as an IRD - (4 forward, 5
return).
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Fron
t
Back
DSTU X9.90ANSI
X9.9
0DST
U
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IRD Image and Document Flow Overview
?
Bank 1
Bank 2
Customer
Bank 3
Bank 4
[1] An original check is presented to Bank 1, the Bank of First Deposit (BOFD) and then processed.
[2] Bank 1 (Truncating Bank) creates an image from the original check and sends electronic data and the image of the check to Bank 2.[3] Bank 2 prints an original IRD from the X9.37 Data and Image received from Bank 1.
[4] Bank 3 processes the original IRD and creates an image of the IRD.
[5] Bank 3 sends electronic data and the image of the IRD to Bank 4.
[6] Bank 4 prints a 2nd (subsequent) IRD from the image of the original IRD.
[031
0000
11]
01/0
2/20
02
7815
8302
33 This is a LEGAL COPY of your
check. Y ou can use it the same way you would use the original check.
*011500120* 01/ 03/ 2002 8587408979
Check
Original IRD
Check Image
Subsequent IRD
IRD Image
DSTU X9.90
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Implementation Considerations:• Ability to retain and recreate electronic
endorsements.• Ability to detect an IRD (EPC 4 or 5).• Ability to access return reason codes.• Control of templates for different uses.• Clipping accuracy and variations.• Physical stock (preprinting, bursting,
control, security).
DSTU X9.90Specifications for an Image Replacement Document – IRD
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Issues & Concerns:• Potential to overlay endorsements and usage
text.• Location of BOFD overlay is below 3.0 inches.• Image quality and resulting usability and
legibility concerns due to rescanning.• Use of IRD’s in carrier documents.• Survivable security features.• EPC usage of digit 4 and 5, and impact to
edits.
DSTU X9.90Specifications for an Image Replacement Document – IRD
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Workgroup Chairman:Lori HoodHelena Federal [email protected]
Purpose:Establishes the data elements and data structures necessary for the bulk delivery of check transaction objects and data using a variety of media in a common digital format for any business purpose. Also supports user-defined transaction objects.
DSTU X9.81Specifications for Media-Based Bulk Image and Data Delivery
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Status: • New standard currently under development.• Has evolved from the Common Output Format (COF)
specifications used by the Federal Reserve that was first released in 1997.
• XML chosen for flexibility and ease of implementation.• Currently defining a hierarchy and overall structure that
can evolve to meet multiple business purposes• bulk delivery, lockbox, IRD data
DSTU X9.81Specifications for Media-Based Bulk Image and Data Delivery
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Purpose:Establishes the placement and location for printing MICR ink on checks, drafts and other documents intended for automated processing.
ANS X9.13Specifications for the Placement and Location of MICR Ink Printing
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Use: • Document that is to be read by magnetic ink character
recognition • Band along bottom edge reserved for magnetic encoding• Band divided into character spaces, organized into
several areas or fields• Common fields with fixed format for all users are Amount
Field, Routing Field and optional EPC field• Variable field known as On-Us Field, with format
determined by needs of issuing financial institution• On document of sufficient length another variable field
Auxiliary On-Us Field may appear at extreme left side
ANS X9.13Specifications for the Placement and Location of MICR Ink Printing
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EPC (External Processing Code): • One MICR digit which conveys special information for the
correct handling or routing of a check or check data to financial institutions or other processors
• Primarily used with value of “2” for qualified returns • This digit will be used to identify IRD and return IRD
Status: • Current standard• In process of modifying Annex on EPC codes• New Work Item to investigate standardized MICR line has
just begun
ANS X9.13Specifications for the Placement and Location of MICR Ink Printing
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Workgroup Co-Chairs:Wayne DoranNCR [email protected] [email protected]
Purpose:Provide information to aid in understanding the standards related to Check Electronification and to provide guidance for the implementation of these standards.
ANS TG-15Technical Guideline: To Aid in Understanding and Implementation of Check Electronification
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Status: •New guideline currently under
development.•Current focus is on organization of the
guide, scope, and content definition.
ANS TG-15Technical Guideline: To Aid in Understanding and Implementation of Check Electronification
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Check 21 and Rules Need for image rules beyond
Check 21– Check 21 is image based & will
encourage image exchanges, but– Electronic exchanges are not covered
by the Check 21 & require agreements – Warranties and indemnification of Act
made by reconverting bank not carried back to original imager of item
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Check 21 & Rules Risk Under Check 21 -
Collections
CUSTOMERPAYING BANK
RECONVERTING BANK
COLLECTING BANK (BOFD)
CHECKand/or
X9.37
Sub Ck Sub CkImage
1) Check 21 covers these relationships2) Warranties and indemnification are made by reconverting bank to other parties
Warranties & Indemnifications
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Check 21 & Rules Risk Under Check 21 -
Collections
CUSTOMERPAYING BANK
RECONVERTING BANK
COLLECTING BANK (BOFD)
CHECKand/or
X9.37
Sub Ck Sub CkImage At Risk
- not to original imager of the item
Reconverting bank makes warranties & indemnification
Warranties & Indemnifications
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Risk Avoidance
1) Rules covers these relationships
Check 21 & Rules
PAYING BANK
RECONVERTING BANK
COLLECTING BANK (BOFD)
CHECKand/or
X9.37
Sub Ck
CUSTOMER
Sub CkImage
2) Reconverting bank’s warranties & indemnifications ARE carried back to original imager of the item
Warranties & Indemnifications
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1) Rules covers these relationships
Check 21 & Rules Need Check 21 and Rules
PAYING BANK
RECONVERTING BANK
COLLECTING BANK (BOFD)
CHECKand/or
X9.37
Sub Ck
CUSTOMER
Sub CkImage
2) Check 21 covers these relationships•Proposed Reg acknowledges need for agreements
•Need a common, national set of image exchange rules
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ECCHO Rules ECCHO has adopted rules
– Image exchange rules– Image return rules– IRD rules
Pre-Check 21 - Provides necessary IRD exchange agreements
– ECP with image replacement document (IRD)– Warranties to parallel the Check 21 substitute check
warranties Post-Check 21 - Supplements Check 21 with other
necessary agreements– Image exchanges prior to reconverting bank– Moves warranties and indemnifications to imaging
bank– Expedited recredit for banks
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Industry Recognitions Recognize and support ECCHO as national
provider of ECP and image exchange rulesAlogentAmerica Banker AssociationAmerica’s Community BankersAutomated Financial SystemsAQUBANC, LLCAurum Technology Inc.BancTecBAIBearingPoint, Inc.BITSCarreker CorporationCheck Payments Systems AssociationComputer Services, Inc.Data Support ServicesEDS Information ServicesElectronic Clearing ServicesEmpire Corporate FCUEPSONFiservFSTCIBM
ICBA - Independent Community Bankers of AmericaIPSOMobius Management Systems, Inc.NetDeposit, Inc.NCRPayments Resource OnePuerto Rico Clearing House AssociationSouthern Financial ExchangeSmall Value Payments CompanySymcor, Inc.TAWPI Great Lakes ChapterTronitechTriSyn GroupThe Clearing HouseThillensUnisysVECTORsgiViewpointe Archive ServicesWespay
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Some of Federal Reserve’s guiding principles in drafting law included– To foster innovation in check collection system
without mandating receipt of checks in electronic format
– Bank and its customer would be in substantially equivalent legal and practical position regardless of whether or not they received the original check
– Ensure that burdens associated with law did not outweigh associated benefits for banks or customers
Fed and Congress strived to minimize impact to institutions that choose not to participate
Operational Requirements
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Banks do not have to– Change any current relationships– Capture images– Have their day two and/or back office applications
image enabled– Image enable their ATMs and branches – Participate in image exchange with any organization– Purchase expensive image hardware– Purchase expensive image software– Purchase any hardware or software– Hire consultants to develop a Check 21 plan
Banks may choose to do any or all of these things, but they are NOT Required for implementing Check 21
Not Required
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Check Capture– Ensure that capture system will not
reject checks with character in EPC Customer
Service/Training/Education– Training of bank personnel
Minimize customer concern Consumer Awareness
– As required by the Act and Fed regulation
Check 21 Ops Minimum
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Expedited Recredit Procedures for Consumers– As required by the Act and Fed
regulation Expedited Recredit Procedures
for Banks– Bank handling substitute check makes
warranties even if not reconverting bank – Claim can be made to any bank that
makes warranties
Check 21 Ops Minimum
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Returns– Outgoing qualified returns of substitute
checks must have “5” in EPC to avoid additional shrinkage
– Incoming returns sorting to identify either “2” or “5” in EPC
Corporate Customers– Protect bank from unknown customer
deposit of substitute check through deposit agreements Under Act only banks can make warranties Without customer agreement, bank assumes
risk
Check 21 Ops Minimum
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Check 21 and Agreements Non-banks create risk under Check 21
Sub Ck
CUSTOMERPAYING BANK
BOFD RECONVERTI
NG BANK
NON-BANK CUSTOMER
CHECK
Sub Ck Sub Ck
Reconverting bank makes warranties & indemnifications
Warranties & Indemnifications
- not carried back to original imager of the item - Need Customer Agreement
At Risk
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Identifying Duplicate Checks– Receipt of substitute check
Customer service and expedited recredit Statement Rendering
– Will different size checks cause problems in statement rendering
Repair– Bank performing full field repair on a
substitute check must include EPC– Other repair implications
Check 21 Ops Minimum
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Corporate Customers– Impact on disbursement products
Code line matching requirements Font size and location requirements
Check 21 Ops Minimum
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Fraud risk– Expedited recredit– Alterations & counterfeit substitute
checks– Signature verification & physical
examination of substitute checks Security features
– Original check security features may not survive imaging
– New technology needed to develop image-survivable security features
– “Void” pantographs
Check 21 Ops Considerations
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Retention and retrieval of original item– Retention term of the original item– Ability to retrieve original as needed
Transit bulk file Identifying duplicate checks
– Creation of substitute check Delayed processing of ATM checks Breach of warranty – consequential
damages
Check 21 Ops Considerations
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Substitute check shrinkage– Substitute check must be properly
stripped with 4 or 5 in EPC field to avoid additional shrinkage
Quality– Images– Substitute checks– Images of items in carrier envelops
Check 21 Ops Considerations
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Indorsements– Must carry indorsements that are both
physical and electronic– Electronic indorsements enhance
legibility– Readability of indorsements
Substitute check issues– Authentication of substitute check– Potential piggybacks/misreads/MICR
bleed through causing read exceptions– Cost of printing
Check 21 Ops Considerations
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Representments– Bank personnel recognition and
acceptance of substitute checks for redeposits / representments
Full MICR line required on substitute checks– Breach of warranty without MICR
line– Risk of consequential damages
Check 21 Ops Considerations
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Check 21 Ops Considerations Cash letter control ATM processing Others?????
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Fed Issued Request for Comment on December 22, 2003– Comments due March 12, 2004– Board modified Regulation CC to address
all Check 21 provisions Reorganized and restated Check 21 Act
– Proposal consist of Section-by-section analysis Regulation Disclosures Commentary to Regulation
Fed Board’s Request
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Fed Issued Request for Comment on December 22, 2003– Fed will accept comment on
everything in its proposal Specific questions
– Other non Check 21 modifications included
Fed Board’s Request
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Issues Identified– Definition of paying bank
Inclusion of Treasury checks and Postal money orders
– Definition of transfer and consideration Paying bank to create substitute check
Fed Board’s Request
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Issues Identified– Purported substitute checks
Treatment for repair How a substitute check MICR line may
vary from the original check MICR line – A paper reproduction of an image of
something that is not a check cannot be converted into a substitute check Cannot convert source document to
substitute check (ARC and POP)
Fed Board’s Request
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Issues Identified– Reconverting bank duties
No need to obtain unapplied indorsements– Agreement between bank and customer
Bank becomes reconverting bank when customer creates and deposits substitute check
– Substitute check legal equivalence Requires“all of the information” on the front
and back of the original check A bank must make the Check 21 warranties
Fed Board’s Request
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Issues Identified– Duplicate payment warranty
Provided even if reconverting bank had no knowledge of fraud or fraudster
Seeks comment on whether duplicate debit resulting from ACH results in violation of double debit
– Breach of other warranties In addition to Check 21 also including
UCC
Fed Board’s Request
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Issues Identified– Burden of proof for indemnity
Proposal did not expressly address who has burden of proof and standard of proof for indemnity claim, but it implies that the burden of proof is on the indemnifying bank and it has a high standard to meet
– Scope of indemnify Indemnity runs to recipients of substitute
check only, this should be clearly stated– Determination of invalidity of claim
Examples only include when claim is valid
Fed Board’s Request
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Issues Identified– Definition of sufficient copy and its
application to electronic image Electronic image is not sufficient copy
until printed, but bank will never know if and when customer prints it
– Treatment of generally applicable industry standards References applicable industry
standards in regulation and then refers to specific standard in commentary
Fed Board’s Request
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Issues Identified– Model consumer educational document
Long, detailed and complex Have restated provisions in Act, not typical
treatment in regulation– Timing of provision of consumer
education document for one-off notices At time of request or when provided to
customer– Other model documents
No safe harbor from Act– Inform consumer that Expedited Recredit
required in writing
Fed Board’s Request
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Issues Identified– Indorsements
Reconverting bank responsible for loss due to indorsement location “shift” caused by substitute check creation
Requiring truncating bank on substitute check as required in X9.90
– But definition of truncate differs between Fed and standard
Indorsement location of reconverting bank and truncating bank on substitute checks
Left current physical indorsements the same Eliminated requirement for bank name Eliminated purple ink
Fed Board’s Request
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ANSI X
9.90
DSTU
Fron
t
Back
Indorsement Requirements
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Issues Identified– Inclusion of provisions on remotely
created demand drafts UCC modified to include warranty for
consumer drafts Clearing Houses have adopted rule
with procedure to make claim
Fed Board’s Request
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All comments available on Fed website–Easiest way to find it is through
www.eccho.org Summary of commenters
–145 comments received About 64 from financial institutions About 32 from individuals &
Consumer’s Union About 23 from trade associations,
clearinghouses, including: About 17 from venders About 6 from attorneys, legal
professors associated with universities and UCC
3 from the Federal Reserve Banks
Comments Published
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General positions–Supportive of Check 21
Financial institutions Trade associations Venders Professors
–Opposed to Check 21 Individuals Consumer Union
Comments Published
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Coordinated an industry group that developed a joint comment letter–Approximately 60 organizations
Approximately 135 individuals Major trade associations Banks Technology providers
–Co-signers included 41 organizations
Comments Published
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America’s Community Bankers American Bankers AssociationBank of America Bank OneBB&T BITSCitigroup ComericaCredit Union National Association Deutsche BankEDS Information Services ECCHOElectronic Clearing Services Electronic Payments NetworkFiserv Fleet BankFrost Bank HSBCHuntington Bancshares ICBAJPMorgan Chase Bank KeyBankMid-America Payment Exchange NACHANational Association of Federal Credit Unions
National Clearing House Association
NCR Corporation PNC BankSouthern Financial Exchange Association of Corporate Credit UnionsThe Clearing House The Financial Services RoundtableThe National Check Exchange Puerto Rico Clearing House AssociationThe Small Value Payments Company Union Bank of Calif.USBank Wachovia CorporationWells Fargo & Company WesCorpWisconsin ACH Association
41 Co-Signers
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Need More Information Accurate and updated Check 21
Information on ECCHO Website– www.eccho.org– Implementation Aids
FAQ – Available Description and Overview -Available Minimum Compliance Requirements - Available Ways to Use Check 21 - Available Processing and Quality Standards - Available Other Implementation Considerations - Shortly Endorsement Chain - Available
– Check 21 Training Video now available– Regulation CC comments
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Historical Perspective Impact on Banking Industry
– Historically Banks could choose to ignore
check electronification without significant impact
Banks controlled their own products, processes, revenues and expenses
Banks could isolate themselves and their customers from check electronification
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Perspective Recent Impacts on Industry
– Accelerating transition to electronics Reg E interpretation – check conversion
– Notice = authorization– Bank has no input into decision– Impacts banks’ costs, revenue,
product quality, etc. In 2001, the Fed sent a proposal to the
U.S. Congress in the form of CTA– Truncation without agreements– Expected implementation in 2004
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Can banks opt-out? No! Can bank customers opt-out? No! Can governmental organizations opt-out?
– No!– All checks are eligible for substitute check
replacements Do banks have to accept substitute
checks presented to them?– Yes, they are the legal equivalents of the original
checks Preserving the status quo is not an
option– All checks are in and all banks have impact
Preserving Status Quo
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Bank Decisions Accelerating Bank Impacts
– Decisions are being made by other banks and non-banks for which the bank has no control and little-to-no recourse
No decision does not mean no impact!
Avoiding Impact is Not An Option
Be prepared! Take advantage of New Opportunities!
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Check 21June, 2004
www.eccho.org