Check 21 – Check based payments in transition in the U.S.

December 2006

Mark Gazaleh

WBS / Electronic Business

Check 21 – Check based payments in transition in the U.S.

Technological advances have facilitated the rapid electronic delivery of data and as such provide an important tool for process reengineering and competitive advantage. Some of these advantages of these technologies manifest themselves through advanced electronic imaging, processing and communications technologies. This paper examines a recent legislative change to the United States (U.S.) paper cheque clearing system. Cheques,1 as negotiable instruments, were established in the 17th century in the United Kingdom. Their popularity steadily increased in the past three centuries as they provided secure disbursement of high value sums over (long) distances. With the advent of electronic payment systems and credit/debit cards, the popularity of cheques has peaked. Nevertheless, with over 40 billion cheques written every year, it remains a crucial payment solution in the U.S. economy.

The legislative change reviewed in this paper concerns the Check Clearing for the 21 st

Century Act2 (Check 21) of 28 October 2004. This Act has had a significant impact on the workings of the U.S banking sector in that it allows the conversion of paper bank cheques in and out of electronic form. By establishing the legitimacy of the converted cheques, it allows banks to transmit cheques rather that having to transport and process their paper form through the U.S. banking system.3 These changes provide a huge saving potential to the industry and clients.

This initiative was an unexpected result of the “9-11” terror attacks on the U.S. The ensuing grounding of all aircraft after the attacks led to a severe liquidity crisis in the U.S. economy. Cheque movements between banks were blocked until aircraft were allowed to fly again over U.S. airspace. The consequences were so severe that the U.S. Federal Reserve Bank had to pump $47 billion (100 times higher than normal) into the economy in order to maintain its banking sector’s liquidity.4

The consequences of the Act are likely to be considerable as the check payment market in the U.S., though in decline, remains huge. Approximately 42 billion cheques with a value of $40 trillion are written in the U.S. every year. Cheques continue to be very popular as they provide convenient and cheap documentary proof of payment. The U.S.’s extended geographical area, the large number of (15,000 local) banks, as well as a lack of a national electronic payment system5 have continued to make cheques an important mainstay of the U.S. payment system.6

Payment services can make up as much as 40% of bank revenues and 30% of costs. 7 It has been estimated that a paper cheque costs between US$ 0.07-0.17 to process.8 Electronic check clearing is expected to lower these costs by 75%.9 McKinsey & Company estimates

1 This paper will use the UK English spelling of “cheques”, and only the U.S. version of “checks” for citation purposes.2 Check Clearing for the 21st Century Act (Check 21 Act), Pub. L. No. 108-100, 117 Stat. 1177, codified at 12 U.S.C. §§ 5001-5018. The Check 21 Act was signed into law on October 28, 2003, and took effect on October 28, 20043 Tamara Holmes, “No More Postdating,” Black Enterprise, Vol.35, Issue 6, January 2005, p. 101.4 “Cheques Cancelled,” The Economist, Issue 8398, 23 October 2004, p. 74-75.5 No national payment systems such as the MasterCard and Visa branded debit cards are the fastest growing electronic payment at point of sale – posting annual growth rates of over 25%6 “Cheques Cancelled,” The Economist, Issue 8398, 23 October 2004, p. 74-75.7 Lauren Bielski, “Check 21 complications?” ABA Banking Journal, Vol. 95, Issue 1, January 2005, pp. 53-56.8 Richard Craver, “Check Clearing for the 21 Century Act will mark changes for banking customers,” Knight Ridder/Tribune Business News, 18 October 2004 (as sourced from Factiva)9 Alan Deutschman, “The Check-Clearing Quagmire,” Fast Company, October 2004, Vol. 87, p. 45.

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that by the end of this decade 80% of these transactions will be completed electronically.10

Conservative projections show Check 21 processes could yield approximately $2 billion of savings, though requiring an investment of $10 billion over the next 5 years.11

The Check 21 Act’s potential to transform current paper-based cheque processing has been through its reduction of the legal impediments to cheque truncation. Cheque truncation provides the means by which the data of a particular cheque is carried forward in the cheque collection process while its paper carrier is eliminated from the payment process. The Check 21 Act does not mandate mandatory changes for the financial industry, but it does create a new negotiable instrument called a substitute cheque (a paper print of an electronic image) which has the same legal validity as the original cheque.12

It is important to note that Check 21 only requires banks to accept substitute cheques presented to them and it does not require them to accept cheques in electronic format or to create substitute cheques.13 The Act has an intentionally light regulatory touch in order not to swamp banks with new regulations.14 Banks unprepared for the changes involved by imaged cheque presentment would be accommodated by the fact they would not be forced to send or receive their cheques electronically. However, the Act’s eventual goal is to facilitate an industry-wide shift to electronic cheque exchange without forcing the pace on any particular player in the sector.

Prior to Check 21, a paper cheque would be first deposited at the bank of first deposit (BOFD). This bank then forwards that paper cheque through the collection process in order to receive the funds from the paying bank. The cheque is usually transported by ground and air directly to the paying bank. Check 21 does not fundamental alter this process.

The Check 21’s substitute check process relies much less heavily on the processing and transportation of the original cheque. For instance, the original cheque could again be deposited at the BOFD, where the cheque is left as is, or is converted to an electronic image. Thereafter the bank would have a choice of sending the physical original, or its substitute cheque image for presentment to the paying bank.15 Thus the transport process envisioned by Check 21, allows for considerable reduction of clearing times. It should be noted that the Act’s establishment of the legitimacy of the substitute cheque is the mean by which it was felt that the whole industry could move to full cheque image exchange. It which case most, if not all, paper cheques could be eliminated from the clearing process.16

It is important to note that the Act finds application in almost all contexts of the cheque as a negotiable instrument as many different types of cheques may be processed electronically. As such, Check 21 allows the rapid presentment and clearing of the following:

consumer, business and corporate cheques, government warrants and U.S. Treasury cheques, money orders, controlled disbursement cheques, payable through drafts

10 Stephanie Sturgis-Griffin, “Check 21 – The Future of E-Payments is Here,” Treasury & Risk Management, Vol. 14 Issue 8, September 2004, p. 40-41.11 “Cheques Cancelled,” The Economist, Issue 8398, 23 October 2004, p. 74-75.12 Balakrishnan, Vijay, “Check 21 Sparks Competition and Transformation”, Bank Technology News, Vol. 18 No. 2 , February 2005, p. 46.13 “Check 21 Act”, Financial Update, Federal Reserve Bank of Atlanta, Vol. 16, Issue 4, October-December 2003, pp. 9-11.14 “Cheques Cancelled,” The Economist, Issue 8398, 23 October 2004, p. 74-75.15 Rice, Tara, “Implementing the Check21 Act: Potential risks facing the banks” Chicago Fed Letter, Research Department of the Federal Reserve Bank of Chicago, Number 217, August 2005, pp. 1-4.16 Please refer to Annex B where a graphical representation of the Zion’s Bank check image and substitute check process has been attached.

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Traveller’s cheques.17

The advantages of Check 21

The Check 21 system offers considerable advantages to banks and their customers. By processing cheques electronically, substantial costs of handling, sorting and physically transporting cheques may be minimised. The banks’ cheque clearing process will benefit from fewer touch points18 (points of mechanical or human interaction with the cheque) which according to studies result in fewer errors, with lower labour and transport costs.19

Furthermore, a number of geographic issues (distances, terrain, road and air infrastructure) are less of a barrier as clients can connect electronically over long distances.

As the Check 21 process is completely electronic, an extended business day now becomes possible. This offers customers wider deposit windows, earlier deposit times and therefore maximized value on each cheque. Furthermore, banks can gain closer ‘client proximity’ as remote imaging equipment can be located at their client offices.20 The technology allows banks to provide their customers competitive advantage by increasing revenue value while lowering costs (transport and labour) while literally getting closer to valued clients. Remote access also increases reach as it greatly reduces the cost of maintaining and servicing unmanned bank branches. It is important to note that although banks should receive the depositors’ money faster under Check 21, they will not be required to deposit this money in their clients’ accounts any faster. Consumer protection groups have argued that the banks could gain additional interest by holding back the future deposits. However, it has been suggested that competitive forces are so fierce in the industry that banks are unlikely to delay the arrival of their clients’ deposits.

Many banks have become aware of the competitive consequences of adapting to the Check 21 initiative. Banks which are unable or unwilling to accept electronic files will have to pay higher costs for substitute cheques and their associated physical transportation. Their competitive position will be further eroded as cheques numbers decline and their average cost of transportation increases.21 The non-adopters are likely to be the community banks that lack the resources and expertise to implement Check 21 methodologies. Nevertheless, these smaller players do have the option of outsourcing their requirements to third party solution providers.22

Businesses in turn gain advantages from Check 21 as the faster clearing of cheque helps optimise cash flow through faster settlement. Companies benefit through faster access to funds and account information. This offers an improvement in risk management with the earlier notification of returned (bounced) cheques. As mentioned earlier, maximum value can be gained from an extended ‘deposit window’. This is when cheques may be deposited as soon as they are available and not when the next scheduled batch is couriered to the bank. There is no need to be located near a bank branch or to incur the risks and cost of

17 Lauren Bielski, “A New Era Begins; Making the transition to a revised check processing scheme” ABA Banking Journal, June 2004, P. 51.18 There are on average 15 touch points if the check is good and more than 25 if it is rejected (as bad). 19 The banks can yield important savings as they no longer need to send couriers daily to their branches and automated tellers to pick up paper checks, or to batch checks up for air transport to paying banks. See Annex D for a graphical representation of where and the savings can be made.20 Vijay Balakrishnan, “Check 21 Sparks Competition and Transformation,” Bank Technology News, Volume 18 Number 2, p. 46.21 “Checks: A Profound, But a Slow Transformation,“ Bank Technology News, December 2004 Supplement, Vol. 17, Preceding pp. 1-6.22 “Grappling with Substitution; Just how many of those ‘substitute checks’ will there be?” ABA Banking Journal, June 2004, pp. 52-53.

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transporting the cheques to a bank teller for deposit. 23 Moreover, maximising deposit value has been so compelling for certain businesses that cheque imaging capabilities are now being installed directly at points of sale.24

Consumers will benefit from having faster access to deposited funds as well as deposit and account information. They should nevertheless remain wary that the informal “float” (the period between when the cheque is written and paid) will drop from four to two days or even in some cases even to a few hours. They will need to ensure that they have the required funds available in the account before writing a cheque.25 By comparison, overdraft protection is currently not as common in the U.S. as it is in the United Kingdom.

The Act leaves much Check 21 creation, implementation, interpretation, and up to the industry. For example, there are no predefined substitute cheque / electronic image quality requirements, no specific requirements on how substitute cheques are to be scanned or transmitted, no regulations about when and how to dispose of the original cheques, as well as no guidance on how long to retain the cheque images.26

The definition of a Substitute Cheque

The Act sets forth a statutory framework by which the substitute cheque is the legal equivalent of its original paper cheque. Section 3 of the Act states defines the substitute cheque as a paper reproduction of the original cheque if it

contains a true imaged copy of the front and back of the original cheque bears a “magnetic ink character recognition line”27 (MICR) identical to that of

the original conforms in paper stock in size and dimension to that industry standard for

substitute cheques is suitable for automatic processing just as the original cheque bears the text of “this is a legal copy of your cheque. You can use it in the same

way you would use the original cheque.”28

Section 3 also defines cheque truncation as one where the original paper cheque is removed from the cheque collection process and it is replaced by the electronic image of the cheque or its substitute cheque.29 Under prior Uniform Commercial Code30 and Federal Reserve Regulations – banks wanting to send images of cheques instead of the paper original would

23 Stephanie Sturgis-Griffin, “Check 21 – The Future of E-Payments is Here,” Treasury & Risk Management, Vol. 14 Issue 8, September 2004, p. 40-4124 “New law spurs move from paper cheques to electronic payments,” Economist Intelligence Unit – Country Finance, Volume 2, 31 December 2003, p. 47.25 Holmes, Tamara, “No More Postdating,” Black Enterprise, Vol.35, Issue 6, January 2005, p. 101.26 Humberto Prospero, “Check 21 Creates Complexity and Fraud Risk,” Bank Technology News, Supplement, June 2004, pp. 1-4.27 MICR (Magnetic Ink Character Recognition) Line: Numbers printed in magnetic ink at the bottom of the check (see examples in annexed diagrams) that is automatically scanned in the pre- and post check 21 environments. The numbers identify the account, bank the cheque is drawn on, the amount as well as other information.28 “Check 21: Implementation” Handout, ECCHO, 2004, p. 1. Available on http://www.eccho.org/documents/ECCHO_Handout.pdf Accessed 10 Nov 200529 Robert Drozdowski, “Check Clearing Act for the 21st Century: Practical Considerations for Community Bankers,” Hoosier Bankers, Vol.88 Issue 4,?, p. 14.30 The U.C.C. has been defined as “a set of business-related laws dealing with the sale of goods, their transportation and delivery, financing, storage, payments, and various other commercial transactions. These model laws have been adopted, with minor modifications, by most states to provide some consistency among states' commercial laws.” This definition is available on http://www.ncbuy.com/ credit/glossary.html?action=LETTER&term=U (searched 19 Dec 2005)

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have had to agree formally to the exchange agreement. Under the Check 21 Act, these agreements will no longer be necessary.

Implementation – consumer protection

Section 4 of the Act provides guidelines regarding bank endorsements and identification of the reconverting bank, the applicability of Federal and State law, the code of federal regulations and the Uniform Commercial Code, cheque warrantees, indemnity procedures, expedited recredit for improper charges and recredit reversals.31

The consumer receives increased protection as the Act establishes expedited recredit procedures for customer accounts in the event of a substitute cheque being incorrectly charged to an account. A claim may be made for expedited re-crediting within forty days from either the post date of the statement or the date when the substitute cheque was made available, which ever is later.32 The bank then has ten business days to investigate and resolve a claim for expedited re-credit. If it cannot be done by the end of the tenth business day, then the amount of the cheque or $2,500 (which ever is less) must be re-credited to the account holder. Any outstanding amount (over the $2,500 amount and with interest) must also be settled within 45 days. 33

Warranty and indemnification provisions

Section 8 sets out procedures against an indemnifying bank for expedited recredit. It specifies exceptions allowed due to emergency conditions, a measure of damages for breach of warranty, a one year statute of limitation and consumer education regarding substitute cheques.34 The Check 21 Act establishes a warranty structure to protect depository institutions against losses associated with the use of substitute cheques. The warrantee assures recipients that the substitute cheque is as good as the original35 and no duplicate will be presented for payment or returned.36

The depository institution that creates a substitute cheque and each depository bank that subsequently handles it, whether in paper or in electronic form, provide this warrantee. Once a substitute cheque is created, these warranties flow to subsequent parties regardless of whether the substitute cheque remains in substitute cheque form or is converted back to and forth from its electronic form. In brief, any institution that creates or transfers a substitute cheque provides subsequent transferees with indemnification against any losses incurred due to the receipt of a substitute cheque rather than the original cheque.37

Customer Notice

The Act requires that depository institutions provide a specific notice about substitute cheques to consumers who may request a copy of a substitute cheque, or receive paid or unpaid substitute cheques in their monthly account statements.38 The notice must explain

31 Robert Drozdowski, “Check Clearing Act for the 21st Century: Practical Considerations for Community Bankers,” Hoosier Bankers, Vol.88 Issue 4,?, p. 14.32 In order to make a claim the consumer will need to describe the claim, estimate the loss, and provide sufficient additional information to identify the substitute check.33 Robert Drozdowski, “Check Clearing Act for the 21st Century: Practical Considerations for Community Bankers,” Hoosier Bankers, Vol.88 Issue 4,?, p. 14.34 Robert Drozdowski, “Check Clearing Act for the 21st Century: Practical Considerations for Community Bankers,” Hoosier Bankers, Vol.88 Issue 4,?, p. 14.35 Should an item be presented that does not meet this standard (blurred image or unreadable MICR), the warranties flow to the recipients of the substitute check36 Paul Carrubba, “Warranties and Indemnities to Watch Out for in Check 21”, Check 21, Bank Technology News Supplement, May 2004, p. 18.37 Robert Drozdowski, “Check Clearing Act for the 21st Century: Practical Considerations for Community Bankers,” Hoosier Bankers, Vol.88 Issue 4,?, p. 14.

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that the substitute cheque is the legal equivalent of the original paper cheque and must describe the expedited recredit process.39

Other provisions

Section 14 states that any provisions regarding expedited recredit may be varied via agreement between the banks themselves. Sections 16-18 concern reports to be made to Congress regarding developments in the cheque clearing sector and costs attributed to the transport of cheques from the Federal Reserve Bank.40

Risks

The changes introduced by the Check 21 Act brings changes that are not risk free. The most likely risk is the possibility of cheque forgery and counterfeiting that remain undetectable in the new cheque-imaged environment. As mentioned earlier, the speed of Check 21 processing will no doubt assist in prevention of some fraud. Banks will know more quickly if a cheque is the result of identity theft or if it is written on a closed account.

Nevertheless, the fraud implications due the poor image quality of the substitute cheque continue to be a matter of concern.41 Much emphasis has been placed on image quality assurance (IQA). Many in the sector believe that IQA has been over engineered to the point that the issue is now a non-factor. Fraud experts remain unconvinced pointing out that even domestic laser printers may print higher definition counterfeits (for example, at 600dpi resolution) than the current generation of check scanners could recognise (at 240dpi resolution).42 Imaging cheques in grey scale or black and white will always be very different than handling its paper equivalent. Given the high volume of cheques in the U.S., increasing the image quality of substitute cheques will considerably stress bandwidth and storage resources. Furthermore, unless image-based fraud becomes a major material issue, increases in image resolution remains unlikely.

Therefore, at least for the time being, banks will no longer be able to rely on the look, feel and smell of the cheques (watermarks, encrypted keys and other cheque marks) to cheque its legitimacy. It is also notable that under the Act the banks are no longer required to keep the original document. In most cases it is destroyed as soon as it is imaged and therefore would not be available should a dispute arise. Additional concerns have been raised about the possibility of fraudsters gaining account access (including access to stored cheque images) for counterfeit purposes and the fact that banks typically only review a small subset of all cheque.43 For example, many current fraudulent items are written for small amounts as they are more likely to be overlooked by the banks.44

38 “Check 21: Implementation” Handout, ECCHO, 2004, p. 1. Available on http://www.eccho.org/documents/ECCHO_Handout.pdf Accessed 10 Nov 200539 Robert Drozdowski, “Check Clearing Act for the 21st Century: Practical Considerations for Community Bankers,” Hoosier Bankers, Vol.88 Issue 4,?, p. 14.

40 “Check Clearing for the 21st Century Act Now in Effect,” of Industry news of Mortgage Bankers News on MBN.com. Site available on http://www.mortgage bankers.org/industry/news/04/1004a.html. Accessed on 24 Nov 2005.

41 David Flaum, “Check processing gets up to speed with expanded electronic imaging,” The Commercial Appeal, Knight Ridder/Tribune Business News – KRTBN Radio, 21 October 2004 (Sourced via Factiva)42 Theresa Carey, “Experts Fear Check 21 Could lead to Mass Fraud,” eWeek.com on Ziff Davis Internet, 26 October 2004, Screens 1-2, Accessed 15 November 2004, Site available on http://www.eweek.com/article2/0,1895,1683510,00.asp

43 In the past only a small subset of checks are review due to high false positive rates.

44 Jerry Blodgett, “Fighting Fraud in the Age of Check 21; New Technology emerges to combat Ongoing Threat,” U.S. Banker volume 114, December 2004, p. 13.

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In this light, new technology is being implemented on cheques to assist cheque security. These “image survivable technologies” include encrypted machine readable barcodes, digital seals and micro printing. Other design improvements of secure cheques mainly target recognition of cheque copying and tampering. These are listed in greater detail in Annex A. There have also been announcements regarding new fraud detection technologies for the imaged cheque environment. A diagram showing the data that is verified on a cheque has been included in Annex C. Some propose a “self authenticating solution” which through data encoding and encryption technology effectively ‘reads’ the surface of the cheque and point out abnormalities (exception) items.45

These solutions use pattern matching and recognition technologies to cheque signatures, dates, common cheque stock and payees.46 Results suggest that these technologies are capable of yielding far lower false positives rates. However, it has been suggested that despite these recent technological advancements, they are still only likely to be deployed on a small subset of overall cheques passing through the system. 47

Conclusion: slow progress

Certain observers have been disappointed by current volumes of full imaged cheque exchange or substitute cheques. Many banks have expressed willingness to use the technology; however few can currently receive these cheques in electronic format. This suggests that the financial and strategic implications are larger than was first thought.

A great deal of preparation is required to implement change in this sector. 48 The interoperability of internal legacy systems with any new Check 21 business flow may require the complete (US$ 5-100M) re-engineering of a Bank’s back-office systems.49 Some have suggested that the critical mass for substitute cheques will only start to develop in 2007.

In a number of the very large banks changes have already taken place. For example Bank of America (BofA), which clears 8 billion cheques per annum, has been using imaging processes internally for some time.50 The challenge is how to connect their internal systems with the rest of the financial community. BofA may find the process a great deal simpler than small community banks that are starting from scratch and lacks requisite resources, expertise or experience. Nevertheless despite BofA advantages, the business risks associated with the huge volumes of cheques being processes will require sizeable investment and preparation.

Although the impact of the Act is already being felt, it is worth recalling that the Act does not really mandate anything more than the legal recognition of ‘cheque truncation’ and the substitute cheque. This is an important intermediate step for the U.S. banking sector, one known for typically being risk-adverse. The ultimate aim of the Act is to prompt business reengineering by allowing those that want to move forward to go ahead and those without the will or resource to retain existing processes. The laggards are expected to join-in eventually because of competitive and costs pressures.

The popularity of Check 21 Act has been helped precisely because it does not mandate change to existing processes. It is efficient is that as a federal law, it avoids the requirement

45 Lauren Bielski, “The check 21 priority,” ABA Banking Journal, December 2004, p. 10.46“Positive Pay” is another common method for fraud deterrence. It entails the daily reconciliation of a company’s issued checks to checks presented for payment. Those that fail to match are rejected or placed on a suspect list – to be approved before they are paid by the bank.47 Jerry Blodgett, “Fighting Fraud in the Age of Check 21; New Technology emerges to combat Ongoing Threat,” U.S. Banker, Volume 114, December 2004, p. 13.48 “Next stop: image exchange?” ABA Banking Journal, Volume 95 Issue 11, pp. 10-12.49 Lauren Bielski, “Check 21 complications?”, ABA Banking Journal, Volume 95 Issue 1, Jan 2005, pp. 53-56.50 "US Law speeds up Cheque processing." Electronic Payments International, 30 November 2003, p. 1. (sourced from Factiva)

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that more than 19,000 institutions to sign bilateral imaging agreements (i.e. millions of new contracts being drawn up) and the ten year delay of enacting fifty unequal State laws. 51 The Act lets banks take advantage of image technologies and electronic transport while not being dependant on other banks being ready to settle transactions with images instead of paper.

51 “Check 21: Implementation” Handout, ECCHO, 2004, p. 1. Available on http://www.eccho.org/documents/ECCHO_Handout.pdf Accessed 10 Nov 2005

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Annex A - Check security measures

Toner Grip - A unique surface treatment applied during the manufacturing process, yields greater adhesion of TruPrint MICR Toner on surface of document. By fusing toner to paper fibers, any alteration attempts (usually by cellophane tape lifting printed image) become clearly detectable.

Void Pantograph - Background designs or screens that expose a hidden VOID pattern when scanned or copied.

Fluorescent Fibers - Invisible unless exposed under ultraviolet (black) light where fibers appear as bright glowing yellow threads. Copiers cannot reproduce.

Microprinting - Miniature print that appears as screened line or border. Verified with magnifying glass. Copied or scanned attempts appear plugged and/or unreadable.

Warning Borders - A notice or warning designed to advise document handlers and potential fraud artists of specific overt and covert safeguards present. Printed in reverse type on face of document.

Black and Blue Dye(s) - Dyes react to a wide variety of chemical solvents used to remove information from documents. Black or blue stain clearly visible upon placement of alteration solvents.

Multi-language Brown Stain Void - Brown colored VOID appears in six languages (English, Spanish, French, German, Japanese and Chinese) signaling contact of a bleach or chlorine-based ink eradicator on document.

Watermark - Pattern printed in opaque ink on back of document. Visible when viewed at 45-degree angle. Copier and/or scanner resistant.

Special Endorsement Backer - Lists deluxe security features.

Source: Jessica Andrews, AP Technology , “The Check 21 Legislation Impact. Check Security Features and Positive Pay are Still the Strongest Methods for Preventing Check Fraud” www.ebanklink.com/banking/impact.html

13

Annex B – An example of check image routing from Zions Bank

The diagram shows the imaging, sorting, routing technology so that the check image or its substitute is either delivered to the paying bank.

14

123

6

587

10

9

11

12

4

Nationwide Image

Clearing Network •• Paying Bank, Paying Bank,

•• Clearing Entity,Clearing Entity,

oror

•• FederalFederal

ReserveReserve..

Remote Remote

Staging Staging

ServerServer

(RSS)(RSS)Electronic

Sorter

You Capture Images of Checks drawn on

US banks

Your Funds are Available in Your

Account at Zions

Images are compressed. You send images & MICR to Zions over the Internet

Our Electronic Sorter decides the fastest way to clear your check images, and sends them electronically

Source: “How Anytime Deposits Works,” Zions Bank marketing presentation, 2003

Annex C - Fraud detection items on checks

15

Verify signature against signature on

already authenticated check images.

No signature card required!

Verify logo(s) on the check image Verify logo(s) on the check image

against the logo(s) on a against the logo(s) on a

genuine check imagegenuine check image

Compare payer’s name

against account holder’s names

Match serial numbers in

MICR line and at top of check

Match fractional ABA number

in the body of the check

against the MICR RT number

Source: “How Anytime Deposits Works,” Zions Bank marketing presentation, 2003

Annex D – Savings possible through Check 21 system

This diagram illustrates where the savings can be through the use of Check 21 processing.

Source: “How Anytime Deposits Works,” Zions Bank marketing presentation, 2003 using data from Global Concepts 2003. It assumes: 1) $900 average item size, 2) 1.2 days in float saved, 3) 5.0% cost of capital, 4)

CAR/LAR implemented. Note: Remote Capture model also requires branch scanner devices cost & maintenance, software costs, increased FTE costs at point of sale.

16

3890 Processor

Paying Bank

Bank

Customer

Customer NameLicenseAddress/phone2564

777777777876 432 132 0

2564

DATE

99-

999/9999999999

9

1234567890

PAY TO THEORDER OF $Your BankHometown

Office /

P

h

. 999-999-

9999MEMO

DOLLARS$20.00

TWENTY and 00//r.

Smith

$.0238 $.0093 $.0024$.0078$.2700 $.0157

3890 Processor

Bank of First Deposit

$.0093

Bank

Customer

Customer NameLicenseAddress/phone2564

777777777876 432 132 0

2564

DATE

99-

999/9999999999

9

1234567890

PAY TO THEORDER OF $Your BankHometown

Office /

P

h

. 999-999-

9999MEMO

DOLLARS$20.00

TWENTY and 00//r.

Smith

FED

Zions

Bank

Paying

Entity

$.0238 $.0093 $.0024$.0078$.2700 $.0157

Costs per Item

+ + + + + + + $.1479

Float

Cost ------------------------------ Operations Costs -------------------------------- Clearingg

Costs

$$Clearing Fees

Cost Detail:

17

$.0070

Annex E - Anatomy of a substitute check

This diagram shows the form of the substitute check in both its grey

scale and black and white forms. As the Act required it acts as a

facsimile of its original.

Some have voiced concern that the substitute check, even it its grey

scale version, will not provide sufficient graphic data to prevent fraud.

As discussed, image survivable technologies and advanced scanning are

hoped to meet this new challenge. An example of this is the encrypted

bar code on the left front side of the substitute checks.

The diagram also shows a copy of the returned unpaid check (e.g. for

insufficient funds). The cancelled paid or returned checks are returned

to the check writer along with his monthly statement.

Source: Federal Reserve Financial Services, http://www.frbservices.org/Retail/check21About.html

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