Solutions for a Changing Landscape: Image Cash Letter with ACH How Tarrant County used Check 21 Technology to Their Advantage

Agenda Consumer to Business Payments Changing Payments Landscape Industry Update Solutions for the Changing Landscape Tarrant County Tax Office-Background Tarrant County Tax Office-Back Office Project Tarrant County Tax Office-What’s next? Questions

Consumer to Business Payments: New clearing options ARC (Accounts Receivable Entry) Single-entry debit initiated by an originator for the conversion of a consumer check, which is received via the U.S. mail or placed in a dropbox for the payment of goods or services. The consumer’s check, known as the source document, is used to collect the routing number, account number, check serial number, and dollar amount of the transaction. BOC (Back Office Conversion) Effective March 16, 2007, BOC enables the conversion of checks received at the point of sale from a location other than the point of purchase Check 21 The Check Clearing for the 21st Century Act, was signed into law on 10/28/2003, and took effect on October 28,2004. The purpose of the Act was to: Facilitate check truncation, foster innovation in the check payment system, and improve the payment system overall Image Cash Letter Presentment of a ANSI x9.37 formatted electronic cash letter Image Exchange The process where banks use images of checks for clearing and require no movement of physical items Image Replacement Document (IRD or Substitute Check) A paper reproduction of the original check that meets Check 21 rules The original legislation that was before Congress dealt more with Image Exchange and attempts to establish legislation that would create a mandate for all financial institutions to accept and process images in lieu of the paper checks. The legislation was difficult to move forward simply due to the complexity of the process and the reality that 14,000 financial institutions had to embrace common image technology. On September 11, the ground halt of all aviation in this country resulted in trillions of dollars of paper checks sitting in the bellies of airplanes across the country. The Federal Reserve realized that the physical transportation component of check clearing could bring significant risk to the US payment systems. Congress got behind a modified version of The Check Truncation Act and the result was Check 21 – a simplified version that essentially establishes the legal equivalence between a “substitute check” and the original check. Of course the legislation delves into the attributes of this substitute check, which we will cover in a moment, but this relatively simple approach has significant implications and opportunities to the check processing world. It fosters check truncation, without requiring that everyone accept images, allowing for the physical check to be imaged, transported electronically, and re-printed for presentation to the paying bank.

Changing Payments Landscape Although electronic payments have made in-roads in bill payment, it remains checks’ last stronghold. Consumers are expected to write checks for 35% of their recurring bill payments by 2010. By 2010 we expect automatic and on-line bill payments to account for 42% of consumer bill payments. Paper 65% Electronic 35% 22% 78% 2001 2003 Source – Dove Consulting Group, Inc., * - JPMC Projections for 2010 2010*

The Changing Payments Landscape Check payment transformation Check conversion and check truncation — partners for the future ACH: ARC/POP/RCK Conversion Image Exchange Substitute Checks Truncation Check conversion transforms a check to electronic settlement Check truncation transforms a check to an image-enabled electronic transaction for settlement

Drivers of Change The continuous decline of check volumes The number of checks written will decline from 40 billion items in 2003 to approximately 30 billion items in 2010 representing a decline of approximately 3 -5% per annum. Paper check processing costs are also increasing and are twice that of electronic payments New ACH regulations have made electronic payments even more utilizable More than 50% of all checks may now be converted; regulations already enacted enable conversion of consumer check payments, including remittances and point-of-sale payments The original legislation that was before Congress dealt more with Image Exchange and attempts to establish legislation that would create a mandate for all financial institutions to accept and process images in lieu of the paper checks. The legislation was difficult to move forward simply due to the complexity of the process and the reality that 14,000 financial institutions had to embrace common image technology. On September 11, the ground halt of all aviation in this country resulted in trillions of dollars of paper checks sitting in the bellies of airplanes across the country. The Federal Reserve realized that the physical transportation component of check clearing could bring significant risk to the US payment systems. Congress got behind a modified version of The Check Truncation Act and the result was Check 21 – a simplified version that essentially establishes the legal equivalence between a “substitute check” and the original check. Of course the legislation delves into the attributes of this substitute check, which we will cover in a moment, but this relatively simple approach has significant implications and opportunities to the check processing world. It fosters check truncation, without requiring that everyone accept images, allowing for the physical check to be imaged, transported electronically, and re-printed for presentation to the paying bank.

Drivers of Change: Check Transactions On October 28, 2004, the Check Clearing for the 21st Century Act, more commonly known as Check 21, became law Check 21 creates the legal equivalence of the original check and a substitute check. Substitute checks are likely to be transitory given the more favorable economics associated with image exchange. Image Exchange The process where banks use images of checks for clearing and require no movement of physical items (either original or substitute checks). Image exchange will emerge as another method for processing checks in the end state, and ACH conversion will coexist as an attractive alternative. The original legislation that was before Congress dealt more with Image Exchange and attempts to establish legislation that would create a mandate for all financial institutions to accept and process images in lieu of the paper checks. The legislation was difficult to move forward simply due to the complexity of the process and the reality that 14,000 financial institutions had to embrace common image technology. On September 11, the ground halt of all aviation in this country resulted in trillions of dollars of paper checks sitting in the bellies of airplanes across the country. The Federal Reserve realized that the physical transportation component of check clearing could bring significant risk to the US payment systems. Congress got behind a modified version of The Check Truncation Act and the result was Check 21 – a simplified version that essentially establishes the legal equivalence between a “substitute check” and the original check. Of course the legislation delves into the attributes of this substitute check, which we will cover in a moment, but this relatively simple approach has significant implications and opportunities to the check processing world. It fosters check truncation, without requiring that everyone accept images, allowing for the physical check to be imaged, transported electronically, and re-printed for presentation to the paying bank.

Industry Update: Acceptance of Image Exchange Key messages Paper checks are being transitioned to electronic images of checks at an unprecedented pace. JPMorgan Chase’s Image exchange endpoints increased 118% in 2007. We update our ICL availability quarterly. IRD volume continues to erode.

Industry Update-Image Exchange

Industry Update-Image Exchange

The Future of Check Clearing Billions ARC volume will continue to increase along with image exchange growth. As the numbers of checks written declines, ARC volumes may flatten out. ARC continues to be an attractive alternative to Check 21 clearing. ACH Back-office conversion (BOC) is introduced and emerges as an attractive alternative to Check 21 clearing, as Point of Purchase (POP) volumes continue to grow ACH Large banks are taking action to adopt image technology to capture financial benefits. The number of image-enabled banks will grow over time as more large banks implement image and more small/midsized banks decide to outsource. Image exchange IRD Image exchange IR D Image replacement documents diminish over time as financial institutions move to image exchange. Paper clearing Fewer than 20% of checks will be cleared through conventional paper processing by the end of 2012 (down from approximately 80% today). Paper clearing 20 06 20 07 20 08 20 09 20 10 20 11 20 12 Source: NACHA, Federal Reserve Bank, JPMorgan Chase

Solutions for a Changing Landscape: Image Cash Letter with ACH 11

Benefits of Image Cash Letter with ACH Cost Savings and Efficiencies – Elimination of courier costs associated with transporting checks to the bank. Elimination of risk associated with transporting original items and consumer fraud Increasing emphasis is on Straight-through-processing (STP) Eliminate pass two in processing, no check encoding Eliminates the need for ARC decision engine, MICR verification and ACH override/repair algorithms residing in house Substantially reduces file management Eliminates the need for your monitoring and managing adjustments as the NACHA and Check 21 rules change Reduction of deposit preparation costs Supports a simplified disaster recovery process

Benefits of Image Cash Letter with ACH Reduction in Bank Fees Exchange paper fees (that continue to increase as ICL erodes the paper scale) for lower image fees Reduction in MICR reject and deposit adjustment fees Eliminate the need to maintain local deposit or check clearing arrangements Aggregate your volumes for discount opportunities Optimize Availability Image Cash Letter with ACH allows for later deposit deadlines, providing an extended internal processing deadline Reduction/Elimination of holdover volumes Provides for weekend processing of ARC and check volumes

Bank provided system and tasks Client’s system and tasks How does it work? Bank provided system and tasks 1) Receive checks at your in-house processing sites via mail, drop boxes, and/or walk-in payment centers. 5) We perform OCR/MICR read on the items and flag suspect items for additional inspection prior to ACH clearing, printing substitute checks or exchanging images. 6) Our ACH-eligibility engine optimally routes items based on MICR construction, ACH-eligibility tables, ARC opt-out, and historical clearing information. ACH 4) Transmit items and OptOut to the bank via X9.37 image transmission. 7a) ARC eligible items are cleared via ACH. 2) Capture items and associate each item with either an ARC or BOC standard entry class code depending on the items’ point of origin within your organization. Identify Opt-out items using the X9.37 file format indicator. 3) Retain and then destroy items according to ACH, Check 21or company guidelines. 7b) Non-convertible items are cleared as substitute checks. 7c) Non-convertible items are cleared via image exchange. Client’s system and tasks

Image Cash Letter with ACH - Features Reduce processing steps- eliminate need for pass two in processing Reduce Programming- no in house decision process required Less Expensive – ACH clearing is more economical than traditional check processes Lower return rates - Clients who have adopted ACH conversion processes (Accounts Receivable Conversion) have experienced reductions in returned item rates by as much as 30 - 40% because electronic items are typically presented prior to paper items, and ACH rules allow an additional re-presentment of the item Faster returns’ notification – ACH returns notifications are typically received within 2 business days’ from their submission, which can be faster than a similar check’s return timeframe More electronic endpoints - ACH has over 14,000 electronic endpoints with the addition of over 13,000 Image Exchange points Check 21 the combined process reduces your cost for clearing items Potentially reduced transportation costs – Conversion and clearing of your items electronically may allow you to reduce deposit-related transportation costs

Tarrant County Tax Office: Back Office Project 16

Tarrant County Tax Office Tarrant County is an urban county located in the north central part of Texas. Fort Worth serves as the county seat to a county population of approximately 1.7 million citizens. The Tarrant County Tax Office assesses and collects 2.2 billion dollars, processes 1.4 million motor vehicle transactions, issues 4,000 liquor, beer and wine licenses and answers 2000 phone calls a day. The office has proven their commitment to providing the best in customer service through the use of best business practices and the latest technology. 17

Tarrant County eGovernment In July of 2001, Tarrant County initiated a Web Portal project called eGovernment. One of the advertised benefits of the new portal was the ability to pay taxes over the internet. eGovernment initiative was broadened to include other initiatives that improved the tax collection process by electronifying the payment process. Tarrant County Tax Assessor’s office was among the first to implement ARC. eGov has delivered tremendous results, allowing the municipality to electronically process over 35,000 property tax payments and 100,000 motor vehicle renewals during the past fiscal year. Credit card and eCheck payments for property tax made over the Web grew by 20 and 30 percent respectively last year. Implemented ACH Debit for auto dealerships In 2007, the Tax Office launched the Back Office Project and updated the Rapid Payment System (RPS) with new hardware and software to process payment for property and other taxes and fees. 18

Tarrant County eGovernment 19

Implementing the changes The updated platform was designed to take advantage JPMorgan Chase’s ICL with ACH product’s ability to take one file for all check transactions. Creating one file of all check transactions for transmission to the bank was new for everyone. Successful implementation required close coordination with several parties including: Multiple hardware and software vendors. Internal IT and operational groups. JPMorgan Chase. Started with pilot to prove process and minimize surprises. Full roll out was inclusive of property and motor vehicle taxes as well as beer and wine licensing fees 20

Back Office Project Results Virtually 100% of 1 million checks are now sent to the bank electronically including property tax, motor vehicle tax, vehicle inventory tax, beer wine and liquor fees from 8 county locations Financial Benefits 8% increase in collected and paid entities over historical averages. Collected funds balance increase by an average of $37 million per day. Reduced bank fees for clearing transactions. Improved funds availability and earnings credit Five year net benefit to Tarrant County is $600,000 Five year net benefit to all entities is over $9mm 21

Back Office Project Results 22

Back Office Project Results 23

Back Office Project Results 24

Project Results Operational Benefits Fewer payments processed manually. Less overtime required during seasonal peak periods. Databases are updated from electronic data obtained from checks & coupons. Better control of checks returned from the bank. No waiting on collected funds balances to pay entities. Significant process change resulting in faster opening of mailed payments, as well as quicker posting and routing through banking systems. Not dependent on armored car pick-up schedule 25

Future Projects Back Office Project Phase 2. Image and archive correspondence that accompanies mailed tax payments. Install new general ledger system that will allow for real-time posting of tax payments. Other Initiatives. Credit Card acceptance at point of sale for all Tax Office Payments at all locations. 26

Questions? 27 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase is licensed under U.S. Patent Numbers 5,910,988 and 6,032,137. This document contains information that is the property of JPMorgan Chase & Co. It may not be copied, published, or used in whole or in part for any purpose other than as expressly authorized by JPMorgan Chase & Co. This presentation contains projections and certain of the statements and data contained in this presentation are, by their nature, forward-looking. Past performance is not a guarantee of future results and the actual results for your organization may differ materially. Additionally, this presentation contains projections, statements and data provided by third parties, including the Federal Reserve. JPMorgan Chase does not warrant or guarantee the accuracy or completeness of such projections, statements or data. If you have any questions, please contact your customer representative. 27

Contacts Jim Nave Executive Director J. P Morgan Oil & Gas/Power John MacCallum Vice President J.P. Morgan Product Solution Specialist