Check 21 and Image Exchange President Bush signed Check 21 into law on October 28, 2003, after several years of discussion between the Federal Reserve, banks and consumer groups and, of course, the U.S. Congress.

Check 21 and Image Exchange Agenda Payments System Check 21 What the Check 21 Does Not Cover Implementation of the Check 21 11/19/03

Check 21 and Image Exchange Check Payment System Today Branches Paying Bank Depository Bank USPS Issues Today check are physically move from branches to operations centers Then are sent to the paying bank through clearing houses, FED or correspondent banks. The infrastructure is expensive, requires a lot of labor and subject to natural disasters, weather delays etc. Expensive Labor Intensive Inefficient Unreliable 11/19/03

Check 21 and Image Exchange Potential Impact of Check 21 Remote Branches Branches WEB Depository Bank Paying Bank Remote Tellers Statement Image Archive Processing Centers ATMs Image Statement The solution to the problems associated with having to move the physical checks is to image the check at the earliest point and send images of the check, this is call check truncation. With check truncation, checks are deposited and processed at the Depository Bank. Images and data (such as the MICR line) are captured and stored/archived at the Depository Bank. The paper check is eventually destroyed. Images and electronic data are exchanged for presentment and posting at the Paying Bank. This exchange can be executed following different models. Image Archives can be in-house or provided by third parties. Paying Bank can deliver images to their customers using different mechanisms (e.g. image statements, CD-ROM, web access) and when necessary a substitute check can be give to the customer. Exchange Data and Images Image Archive Substitute Checks If necessary! Lockbox 11/19/03

Check 21/ Check Clearing for the for the 21st Century Act Check 21 and Image Exchange Check 21/ Check Clearing for the for the 21st Century Act I would like to cover some of the points about the Check Truncation Act for the 21st Century. Catalyst for Change

Federal Reserve’s Objectives Check 21 and Image Exchange Federal Reserve’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 The Fed wanted to meet these objective with out mandating any different operation than is used today. 11/19/03

Check 21 and Image Exchange Legislation Encourages check truncation by allowing unilateral decisions to truncate checks Unlike current environment with requirement to obtain agreements from all the parties Creates a new legal instrument - Substitute Check - that replaces the original paper check For those customers that have not agreed to check truncation For those banks that have not agreed to receive electronic files Use and Acceptance Use of substitute checks does not require an agreement between any of the parties The substitute check must be accepted by any party This includes forward collection and returns processes Today to exchange check images banks need to have an agreement and the bank needs an agreement with it customer not to get their check back in a statement. Check 21 creates what is called substitute checks, that have the same legal status as the original check. No separate agreement is needed for using a substitute check and must be accepted by all, including the IRS. 11/19/03

Check 21 and Image Exchange Legislation Check 21 only applies to “Substitute Checks” Image reprints of original paper checks Use of substitute checks does not require agreement between the parties  Excluded from the Check 21 are: Check safekeeping products Other check truncation or conversion products ECP & image exchanges         The relationship with consumers only changes if a bank is returning checks. Products and services under other agreements 11/19/03

Check 21 and Image Exchange Substitute Checks Substitute Check is legal equivalent of original check for all purposes, if: 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 endorsements Includes identification of party creating it This is a legal copy of your check. You can use it the same way you would use the original check. For a substitute check to be the legal equivalent of the original check it must met these requirements. 11/19/03

Check 21 and Image Exchange Substitute Check Front substitute checks are the size of a business check. The image of a personal check is about 80% the size of the original check. The image of a business check is about 65% the size of the original check. All indorsement are shown The bank that created the substitute check is shown on the front. Back 11/19/03 Source: Accredited Standards Committee X9, Inc

Expedited Recredit Consumer Check 21 and Image Exchange Expedited Recredit Consumer Consumers that receive a substitute check, may make a claim under the Act that the substitute check was not properly charged or for warranty claim If a consumer has: Suffered loss that they would not have suffered if they had received the original check or The original check or a better copy is necessary to determine validity of the check The Bank must: The Bank has 10 day to determine the validity of the claim or Recredit up to $2,500 per check The remainder by the 45th calendar day This part of the law only applies to Consumers that receive a substitute check (paper document) The industry does not believe that this will happen very often. Check charged to the wrong account, for the wrong dollar amount or duplicate charges are taken care of today. 11/19/03

Expedited Recredit Consumer Check 21 and Image Exchange Expedited Recredit Consumer Bank may withhold availability for exception situations (similar to Reg. CC) New accounts Excessive ODs Cause to believe fraud Emergency conditions Bank may withhold availability for 45 days Bank must notify consumer of delay in availability Bank can not charge overdraft fees for 5 days The law contains protection for the bank 11/19/03

Check 21 Expedited Recredit - Banks Check 21 and Image Exchange Check 21 Expedited Recredit - Banks Banks may make claims When consumer makes claim or bank makes warranty claim Bank has suffered a loss Original check or substitute check necessary to determine validity of charge A claim must be made within 120 days of transaction As a paying bank, we have recourse back to the bank that created the substitute check. 11/19/03

Check 21 Expedited Recredit Check 21 and Image Exchange Check 21 Expedited Recredit Consumer Statement 40 DAYS 120 DAYS CLAIM CLAIM $$$ 10 DAYS Check, Better Copy or $$$ 10 DAYS Paying Bank Reconverting Bank substitute check Paying bank must provide consumer with original check, substitute check or Re-credit within 10 days of claim up to $2,500 per check Amounts > $2,500 must be recredited to consumer within 45 days Paying bank must make claim to reconverting bank within 120 days of transaction that gave rise to claim Reconverting bank must provide recredit, original check or substitute check within 10 days of paying bank claim Graphic representation of the Expedited process. 11/19/03

Check 21 and Image Exchange Notice to Consumers Banks must notify consumers of: Check substitution process and how it differs from original check process Expedited recredit rights Fed has provided “Substitute Check Policy Disclosure” By sending our customers the Fed’s “Substitute Check Policy Disclosure” we have met the requirements of the law. The Fed’s Disclosure covers: What is a substitute check Your right to file a claim for an expedited refund Expedited refunds How to make a claim for an expedited refund Our Responsibilities for handling your claim Reversal of refund 11/19/03

What the Check 21 Does Not Cover Check 21 and Image Exchange What the Check 21 Does Not Cover Image Exchange Lets take a look at an image exchange model

Check 21 and Image Exchange Check 21 & Rules Exchange Network Branch Check Truncated IMAGE DP / Image Capture Site of a bank IMAGE Paying Bank IMAGE IMAGE OR Paying Bank In this drawing on slide 17 the check has been truncated at a branch. On the left there are two paying banks; one that accepts images and the other does not. IRD Reconverting Bank 11/19/03

Check 21 and Image Exchange Check 21 & Rules Exchange Network Branch Check Truncated IMAGE DP / Image Capture Site of a bank IMAGE Paying Bank IMAGE IMAGE OR Check 21 covers this relationship Paying Bank The Check 21 Act covers the relationship between the Reconverting bank and the paying bank only. IRD Reconverting Bank 11/19/03

Check 21 and Image Exchange Check 21 & Rules Rules are needed for these relationships Exchange Network Branch Check Truncated IMAGE DP / Image Capture Site of a bank IMAGE Paying Bank IMAGE IMAGE OR Paying Bank How the image got to the reconverting bank is outside Check 21. Rules, standards and contracts are needed to cover these relationships. IRD Reconverting Bank 11/19/03

Check 21 and Image Exchange Check 21 & Rules Image rules are needed to support the Check 21 because: Check 21 is image based Image exchanges are not covered by the Check 21 All depository financial institutions must have a common national set of image exchange rules for image exchange to work. For image exchange to work on a national level there needs to be rules and standards like we have for paper check, ACH, Credit Cards and ATMs. 11/19/03

Implementation of the Check 21 Check 21 and Image Exchange Implementation of the Check 21 What Banks Must Do! Lets look at what we must do.

Check 21 and Image Exchange Multiple Step Process Prepare for Check 21 and the Substitute check Customers Contact Staff Operations Develop strategic plan for image exchange We have to prepare our customer, our staff and our operations people have several changes to make. We also need to look toward the future and see how image processing and image exchange fit in our bank. 11/19/03

Bank’s Role with Consumers Check 21 and Image Exchange Bank’s Role with Consumers Customer Awareness Advance notice to customer of substitute checks Check 21 notice to consumers beginning October 28, 2004 Substitute Check Policy Disclosure from Fed rules Consumer education Education of business customers Training All contact staff should be trained on substitute check and expedited recrediting Q & A for Staff Expedited Refund procedures The customer awareness has three effort for consumers Let them know it is coming Let them know it is here Help them understand the changes We need to talk to our commercial customer about substitute checks. We need to train our staff to help customers and handle substitute checks when they are processed. 11/19/03

Check 21 and Image Exchange Check 21 Ops Minimum Expedited recredit procedures Qualified returns of substitute check – change to MICR line Identifying duplicate checks Determine how substitute checks look on image statements Procedures to detect fraud with substitute checks Deposit Agreement change to move liability to a customer that deposits a substitute check. We need to have expedited re-credit procedures that correctly handle a request and determine if the request meets the requirements under Check 21 for special handling. Duplicate checks will become a bigger problem because of all the ways a check written by our customers can be presented to the bank for payment. (ACH debit, substitute check, original check, POS debit) Substitute checks will require a different approach to fraud detection 11/19/03

Check 21 and Image Exchange Conclusion Consumers have rights under bill Bill drafted to minimize potential fraud and consumer inconvenience Prepare customers and public Plan for the future of check processing In conclusion because of Check 21 there a things we have to do now, in the near future and in our planning process. The Act holds the key for reduced costs during times of decreased check volume. 11/19/03

Check 21 and Image Exchange ? ? ? ? ? Questions?