Electronic Check Capture at the Source

Presentation byTom KettellVice President, MarketingRDM Corporation

November 17, 2005

                                                                                        

                                                                                                                                                        

                                                         

Monumental shift in thepayments landscape

The Transformation fromPhysical to Virtual

Physical Items

Fed/Local/RegionalClearinghouse Paying Bank

Bank Lockbox

Bank Lockbox Clients

In-House Lockbox

Internal Lockboxes and Third-Party

Lockbox Providers

Bank/Regional Sites

Agent/Branch Deposits

Point-of- Payment Collections, Drop Box Payments, Low-volume Lockbox, Route Collections

ARC System Fed/EPN/Visa

Physical Items

Optimized Items, ACH (POP/ARC) or IRD/ECP

Fed/Local/RegionalClearinghouse

Paying Bank

Electronic Bank Lock Box

Customer In-House Electronic Lock Box

Bank/Regional Sites

ECP/IRDs Fed/ECCHO

The Transformation fromPhysical to Virtual

Agent/Branch Electronic Deposits

The Pricing Dynamic

Source: Federal Reserve. Compiled by NACHA The Electronic Payments Association

Check Electronification is Growing Even as Check Volume Declines

ACH e-checks continue to experience double digit growth

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

20012002

2003

2004

Source: NACHA

Growth of ACH e-Check Entries

Source: 2004 Federal Reserve Payments Study

Check 21 has fostered change and significant opportunities

Check 21 – First Nine Months

In September 2005, processed ~35 million items through Check 21 services

All were converted to substitute checks for presentment

Peak day: 2.5 million items (3% of total items processed

Worth $16 billion ($10,000/check, 16% of dollar volume)

FedReturn volume averaging 25,000 items/day

Federal Reserve Experience

Check 21 - The Lighter Side

Is Check Electronification Strategic to Your

Organization?

(Its not just for the Big Guys)

Point of PurchaseFace to face

POPSubstitute CheckImage Exchange

Walk in payments – Distributed LocationsDrop Box

ARCSubstitute CheckImage Exchange

Mail in payments – Centralized LocationsLock Box

ARCSubstitute CheckImage Exchange

Channel Proliferation

What are the Implications?

What technologies/capabilities?

Cost savings?

Customer demand?

Revenue or marketing opportunities?

Faster collections?

Breaking the bonds of “footprint”

With the implementation of Check 21 married with ACH, check conversion becomes true check electronification No exception items - All checks can be electronified (business checks, money

orders, et al) Items can be cleared through the most optimal clearing channels based on:

ACH eligibility Dollar value of the item Time required to clear the item Cost to clear the item

Check Electronification Tool Kit ARC POP WEB/TEL Substitute Check Image Exchange

What are the Implications?

Check electronification at the source will yield the best cost dividends The greater cost benefits are achieved

the earlier in the process the check is electronified

Major contributor is in the workflow

What are the Implications?

What are the Impacts of a Check Electronification Program?

Complete electronification at the source will lead to the following benefits: In-person, drop box and exception payments handled outside of a lockbox

operation environment can be electronically settled. Agent and branch offices can electronically deposit all items accepted in the branch (with

the exception of cash) This leads to the potential to eliminate significant levels of your cash

management structure, such as local depository accounts, cash concentration of funds into home office, account reconciliation of depository accounts and streamlined posting of billing data.

Lockbox operations can be re-engineered to eliminate processing passes associated with encoded and sorting checks, as all items could be deposited electronically via Image Cash Letters.

Impacts of Check Electronification

Increase funds availability, better cash forecasting Electronically deposits all checks to company’s account next business day, providing faster

collection and faster notification of returned entries Reduced number of return items

Electronic debits typically post before checks, resulting in more items clearing on first presentment

Automate and accelerate return item processing ACH provides early notification of return items, carrying deposit location identifier Immediate or delayed re-presentment of returns

Does not require consumer behavioral change Reduce or eliminate local depository accounts

Fewer accounts to reconcile, reduced bank fees, elimination of cash concentration costs Simplification of reconciliation of remaining accounts

Reduce labor and check processing costs Eliminate check deposit preparation Decrease deposit transportation charges and check float

Impacts of Check Electronification

Check Electronification: Offensive or Defensive?

Check Electronification: Offensive or Defensive?

Financial Institutions are taking one of two strategies in the beginning stages of Check Electronification

Defensive Strategy Protect current customer base

Offensive Strategy Protect current customer base Expand customer base Expand footprint

A shift in strategy occurred in 2005 from the defensive to the offensive for those early adaptors

What Markets Can BenefitFrom a Check Electronification Program at the Source?

Key Market Segments Mid to Low

Market Segment Payment Types Payment Volumes

Non-Bank Financial Institutions Branch Locations(Mortgage, Finance Companies, Investment Brokers, Financial Planners, etc.)

Payments for loans, mortgages, investments, leases, etc. Low to mid

Utility Companies Office Locations (Gas, Water, Electric) Bill Payments Low to mid

Government (Federal, State, Local)

Taxes, licenses, fines, recreation fees, etc. Low to mid

Insurance Companies Office Locations Premium Payments Low to mid

Property Management Companies Rent, Utilities, Fees Low to mid

Telecom Service Providers Office Locations (Telephone, Cell, Cable, Satellite) Bill Payments Low to mid

Health Care Office Locations (Hospitals, Doctors, Chiropractors, Psychologists, etc.)

Bill Payments, Fees, Payment for Meds Low to mid

Educational Institutions (Colleges, Universities, Private Schools) Tuition, Residence fees, Books, etc. Low to Mid

Key Market SegmentsMid to High Volume

Market Segment Payment Types Payment Volumes

Bank Financial Institutions (Mortgage, Finance Companies, Investment Brokers, Financial Planners, etc.)

Mail in payments for loans, mortgages, investments, leases, etc. Mid to high

Utility Companies Centralized Lock Box (Gas, Water, Electric) Bill Payments Mid to high

Government (Federal, State, Local)

Taxes, licenses, fines, recreation fees, etc. Mid to high

Insurance Companies Centralized lockbox Premium Payments Mid to high

Property Management Companies Rent, Utilities, Fees Mid to high

Credit Card Companies Centralized Lockbox Card Payments High

Case Study | U.S. Treasury

The U.S. Treasury’s Financial Management Services division and the Federal Reserve Bank of Cleveland needed a paper check conversion solution that could be deployed to all agencies Had to support a highly distributed network of approximately 200 agencies

ranging in size from 1 to 1000s of locations. Had to be scalable (future volumes could be large) Had to be robust (e.g. Army installations) Had to be flexible (Variety of agency specific needs) Had to be secure (Government – Army, Air Force, IRS, etc) Had to be very easy to use (remote locations, minimal training)

                                                             

              

Case Study | U.S. Treasury

United StatesPatent &Trademark OfficesIRSDECCA (Military base stores)& other agencies

Germany, Belgium,Bosnia, KosovoMilitary Bases

Qatar,KuwaitMilitary Bases

Singapore,KoreaMilitary Bases

Case Study | U.S. Treasury

FRB DallasArchivalACH ProcessingVerification Database

Local Verification UpdateFrom Main Database in Dallas

Daily https TransmissionsImages & Transaction Data

Case Study | Large University

Accepted check payments for Tuition, Residence fees, Books, etc. In addition to a centralized repository a significant volume of

walk-in payments at multiple locations Desire to improve float position Reduce or eliminate local depository accounts

Fewer accounts to reconcile, reduced bank fees, elimination of cash concentration costs

Simplification of reconciliation of remaining accounts Reduce labor and check processing costs

Eliminate check deposit preparation Decrease deposit transportation charges and check float

Desire to provide better management of cash Wanted one provider to “do it all” – did not want to manage it

Case Study | Insurance Company

Significant volume of walk-in payments at multiple branch locations 16% - 17% of all payments are walk-in or mailed to the branch

location

Desire to improve the check handling efficiencies at the branch location

Desire to improve float position

Desire to reduce deposit accounts

ACH non-eligible (business checks, money orders, convenience checks) and cost structure for equipment for large number of locations caused challenges for ARC-only

DeploymentThorough planning is the key critical success factor for successful deployment

Steps in Planning

Project management

Resource allocation

Training

Investigating

Testing

Implementation

Operational ConsiderationsPlanning

Plan every installation in advance

Get IT involved early in the process Are there any restrictions on Internet use or special procedures for Internet

access? (i.e. Firewalls, Proxy Servers, etc) Do you or your customers have access rights to the workstation/network that will

allow you to load the software on the workstation? (i.e. Administrative Privileges) Are there any special security considerations regarding workstations or

networking? Identify any need of the remittance systems to interface with any other

applications and test the interfaces before installation Is any new development required on legacy systems?

Select providers that can help you integrate your program

Establish a System Administrator who will be involved in assigning duties to the personnel at each workstation

Operational Considerations Planning

Conduct a 360º site survey of the local environment prior to implementing new solutions

Create a checklist that will ensure a thorough inspection of the location Understand the work flow, identify any issues

What is the average daily transaction volume including peak times? How is work distributed for data entry (i.e. single operator or multiple)? Does the communications at the customer site provide adequate throughput

to handle the transaction volume? (i.e. Dial-up vs. high-speed Internet) Are remittance coupons submitted with payments? Conduct an end-point analysis to gage the volume of ACH vs.

IRD/Paper/Image Exchange What is the procedure for non-convertible items…IRD? Paper?

Operational ConsiderationsImplementation

Training Ensure that the all staff is well trained and understand their roles before

implementation System Administrators Operators Help Desk Internal Trainers

Pilot before you roll-out !!! Many skip this important step Helps you understand the work flow changes Gives you time to refine your procedures Controlled Environment

Operational Considerations Implementation

Have clear cut measurements to define pilot success What makes for a successful pilot? Conduct formal pilot assessment to ensure pilot success metrics are met? Investigate why certain success metrics were not met and document a plan to

address each one Are you ready to roll-out? The pilot should drive the business case

Operational ConsiderationsPitfalls

Plan for the Unexpected Endorsement Returns How are the payee financial institutions going to

react? Duplicate Items – Safeguarding from the double post

Updating procedures and best practices to reduce double postings Corporate Financial Institutions Fed

Administrative Returns Insure controls are in your process (or your vendors process) to avoid

them MICR read and verification MICR scrubbing and swapping

Plan for future business needs. Invest in technology that lays the groundwork for future innovation Image Exchange IQA

Comprehensive Check Electronification Platform

Off-Premise cash letter (customer lockbox) Distributed payment capture (drop box) Person present ASP model – faster time to market with little to no capital

investment Supports ACH, Paper Draft (traditional and substitute check), and

Image Exchange initiatives Consistent rules base across multiple touch points of presentment

Provides a consistent customer experience Basic remittance capabilities – scanning remittance coupons for

decisioning Can scan multiple coupons and multiple checks

Comprehensive CheckElectronification

ODFI

Modem Banks

Internet (ISP)https

Lockbox Retail POS locations(terminal-based)

Rules for “e-nabling” your Check Processing Environment

Don’t be seduced by new technologies for the “cool” factor

Understand the business case, and develop metrics

Keep focused on your customers

Plan for future business needs. Invest in technology that lays the groundwork for future innovation

Don’t be afraid to change old habits Ensure that your entire organization understands the reason for change and is

adapting to and promoting the new technology

Thank you!

Q&A

www.check21solution.com