What Every Utility Should Know About Check 21 Presented by Jim Mills VP Business Development Utility Payment Conference

Check 21 What is Check 21? How does it work? Check 21 versus ACH Benefits of Check 21 Getting started

Consumer Payment Survey Cash is the most widely used payment method for retail transactions Checks are still the most widely used method for Bill Payments Security and Ease of Use are the most common concerns of payment types 91% of Consumers have a checking account Source: 2008 Survey of Consumer Payment Choices from the Federal Reserve Bank of Boston

Distribution for Non-Cash Payments Debit Card transactions now exceed Credit Cards In Billion checks were written & valued at $41.7 Trillion Return Checks Represent.05% 40% of Bank Clearings Occurred via Electronic Check

Aren’t Checks Going Away? “One-third of all non-cash US payments are made by paper checks.” “Checks are still the most popular form of payment used by consumers to pay bills” “Businesses pay 74% of their B2B payments by check.”

Why was Check 21 Created? –Over 30 billion checks are written per year in US –September 11, 2001 –Planes were grounded –Checks could not clear –$47B in Fed holdover To Reduce Dependency on Physical Checks

The Check-21 Act’s Purpose “Check Clearing for the 21 st Century Act” or “Check-21 Act” PUBLIC LAW 108–100—OCT. 28, STAT Public Law 108– th Congress “To facilitate check truncation by authorizing substitute checks, to foster innovation in the check collection system without mandating receipt of checks in electronic form, and to improve the overall efficiency of the Nation’s payments system, and for other purposes.”

“Old” Paper Process Business receives checks Paper checks are delivered to the bank Paying bank Collecting bank Federal Reserve Courier to FED

Check 21 Process Business scans incoming checks Check images transmitted to the bank Paying bank Collecting bank Federal Reserve Check images transmitted to bank Images transmitted to FED Substitute checks, if required

10 Check 21 Has Exploded # Items in Millions Source: Federal Reserve, Viewpointe, The Clearing House and local / regional exchanges Check Images 58 Million Check Images per Day

What is Check-21? Check-21 law Governs use of “Substitute Checks” The Check Clearing for the 21 st Century Act (Check- 21) was: –Introduced to Congress by Chairman Greenspan on December 21, 2001, and enacted on October 28, 2004 Other names that are similar but confused with the Check-21 Act: –Image Cash Letter –X.937 (ANSI X ) –Image Exchange (Image Cash Letter) –Electronic Check (e-Check) –Check Conversion –Check Image

Check-21 Enacted Substitute Check standards for legal equivalence to the Original Check Mandated that parties cannot refuse a substitute check but parties are not mandated to create a substitute check All checks are eligible except foreign checks Provided warranties and indemnifications Expedited re-credit features (External Processing Codes in position 44) –4 = substitute check –5 = qualified return substitute check

Substitute Check (Image Replacement Document) Contains an Image (Front/Back ) of Original Check Contains Original MICR Information This is a Legal Copy of your check, You can use it the same way you would use the original check. “4” in position 44 2D Barcode Optional Security Feature

Image Quality Assessment & Usability (IQUA) Too LightOversized Too DarkUndersized Torn or folded cornersHas a piggyback document Torn or folded edgesExcess spot noise Horizontal StreaksFrame error detection Blow the minimum sizeRear image mismatched Above the maximum sizeStrip Detected Excess skewUpside down

ACH TRANSACTION TYPES CCD - Cash Concentration and Distribution PPD - Prearranged Payment and Deposit ARC - Accounts Receivable Entry POP - Point of Purchase BOC - Back Office Conversion RCK - Re-presented Check Entry Tel - Telephone-Initiated Entry Web - Internet-Initiated Entry

Check Conversion and Check-21 Comparison ARCPOPBOCCheck-21 USECheck Payment by mail or lockbox In Person Payment at Point of Sale In person payment converted in back office Substitute Check permitting truncation and electronic clearing EligibilityChecks with non aux on-us All US checks Dollar Limits< $25,000 No Limit Authorization/ Notification Notification and Opt-out Option Authorization Signature at POS Notification POS sign, handout, receipt None

Check Conversion and Check-21 Comparison ARCPOPBOCCheck-21 Original Check Requirements Mailed or Drop box Voided at POSDestroyed within 14 days None Individual Opt- out Yes- must give option None Typical Clearing Times Next Day or Same Day Typical Return Item Notification Times 2 days Dispute Timeframes 60 days 45 days from Statement

Pros’ and Con’s Check-21 vs. Paper Check Handling ProsCons Reduced Labor Cost to Process Customer Gets a Check Image Back and Not the Original Check Eliminate or Reduce Courier Fees Small Risk of Double Posting or Poor Image Quality Reduced Bank FeesThe Need for Archived Images Improved DSO - Potential For Intraday Posting Necessitates Shredding (Destroying) Checks Expedited Returns Less Capital Expense for Processing Equipment Faster, Cheaper, Better – No Brainer

Pros’ and Con’s Check-21 cont… ProsCons Check Are Widely Understood Paper Handling is Expensive Document Contains Rich Information In the Days of Float: Knowing the Funds Availability Schedules Widely AcceptedChecks re More Easily Counterfited 90% of Checks Cleared with Check-21 Variations in X.937 Interface Standards Opportunity for Same Day Settlement Check Law Requires 7 Years Image Storage No Opt-Out Requirements Unlimited Dollar Amount Depending Upon Your Bank Check-21 Can Cost Less per Transaction and Bank Fees May Be Lower

Pros’ and Con’s ACH Check Conversion ProsCons Predictable Next Day Settlement for Debits Complicated Regulations Wide Acceptance Among Financial Institutions Strict Rules and Regulations More Secure Against Fraud Than a Check ODFI Required for Origination and Detailed Contractual Agreements Low Opt-Out Rates$25,000 Limit and No Business Checks Image Retention Only 2 Years Can be Confusing for End Customers, Limited Detail on Bank Statements

Benefits of Check-21 Eliminate daily trips to the bank Faster funds availability Later cutoff times Reduce errors and deposit prep time Identify fraud sooner Eliminate accounts at multiple banks by consolidating electronically Consolidate deposits from multiple locations

Getting Started (4) Update A/R (3) Send files to bank (2) Scan using Check 21 software & scanner (1)Receive payments

Distributed Environment Central Office Deposits from multiple sites are consolidated at the Central Office A single ICL file is sent to the bank

THANK YOU

REFERENCES References Argento, M. D., Stanton, J. R., Bachelder, E. L., & Stewart, D. C. (2007, December). The 2007 Federal Reserve Payment Study. Federal Reserve Bank of Boston. Check Clearing for the 21st Century Act, Public Law Stat U.S.C. § H.R (Oct 28, 2003). The Continuous progress of Check-21-enabled Services. (2010, July). Retrieved from Federal Reserve Bank of Atlanta website: ECCHO. (n.d.). ECCHO [Substitute Checks: Development of Processing and Quality Standards]. Retrieved August 10, 2010, from Foster, K., Meijer, E., Schuh, S., & Zabek, M. (2010, January). The 2008 Survey of Consumer Payment Choices Federal Reserve Bank of Boston. Johnson, D. (2008, January). Check Conversion and Check-21 Comparison Grid. Ithaca NY: RP Solutions. Rasche, C. (2010, May). First Federal weathers CHeck-21 ripple effect on check adjustments (Federal Reserve Bank of Atlanta, Ed.). Retrieved from RP Solutions. (2009). ExpertRPS (Version 2.04) [Computer software]. Duplicate Check Detection Screenshot, IQUA Screenshot: RP Solutions. Sabasteanski, C. (2004, March). Transformation in the Check Industry. FISC Solutions Electronic Payments Review and Buyers Guide: Vols. Pages Understanding the ACH Network: An ACH Primer. (2002). (Original work published 2002)