Automation of your Receivables Valjean Sanchez Senior Vice President Union Bank of California Product Management April 27, 2006

Payer receives a bill with the disclosure: Your check will be converted to an electronic funds transfer. By sending your completed, signed check, you authorize > to copy your check and to use the account information to make a transfer from your account equal to the amount printed on the check. (Go through your legal department using Regulation E guidelines!) Payer sends a check (source document) Biller receives the check, images and processes the check turning it into an ACH-ARC. Biller sends ACH-ARC file to their Bank. Their bank processes the ACH-ARC entries and credits the Billers account with available funds next business day. Biller keeps the check no longer than 14 days, then shreds it in a secure way. What is Accounts Receivable Check Conversion? 2

Payer goes to drop a check off in a drop box with notice posted: Your check will be converted to an electronic funds transfer. By dropping your completed, signed check into the drop box, you authorize > to copy your check and to use the account information to make a transfer from your account equal to the amount printed on the check. (Go through your legal department using Regulation E guidelines!) Payer deposits the check (source document) into the drop box. Biller picks up the check, images and processes the check turning it into an ACH-ARC. Biller sends ACH-ARC file to their Bank. Their bank processes the ACH-ARC entries and credits the Billers account with available funds next business day. Biller keeps the check no longer than 14 days, then shreds it in a secure way. What is Accounts Receivable Check Conversion? 3

Payer writes a check to present over the counter. The cashier runs the check through the register (maybe imaging the check.) An authorization is printed out of the register and it reminds us of signing for a credit card purchase. The print out reads: By signing, you authorize > to use the account information on this check to make an electronic transfer from your account equal to the amount printed on the check. and probably, We will charge you a $$$ for a returned check and you authorize us to collect that fee via the ACH. (Go through your legal department!) Payer signs. Cashier returns the check stamped VOID and turns the payment into an ACH – POP. Biller sends ACH-POP file to their Bank. Their bank processes the ACH entries and credits the Billers account with available funds next business day. What is Point of Purchase Conversion? 4

What does an ARC or a POP look like? It starts looking like a check: Municipality Fifty six dollars and seventy eight cents As an ACH-ARC or POP: CHARLES CHECKWRITER |: |:155|||11111|||22222|| 2006 Water Bill

What does an ARC look like? 6 As an ACH-ARC or POP: CHARLES CHECKWRITER On Charles Checking Statement (normally under the electronic section): 1/10/06 $ Municipality Water Pymt

Check 21 HR 1474 Text Passed House Passed Senate by Unanimous Consent An Act 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, do pass with the following: 7

Check 21 makes a substitute check equal to the original check under the law. What does this not mandate but enable? Paves the way for Image Exchange: 1. Financial Institutions may reduce dependence on transportation. Ex. – West Coast Bank accepts a deposit of an East Coast check. Instead of flying the check to East Coast to clear, West Coast Bank images the check and sends it to the East Coast. West Coast agent prints the substitute check and the check is presented for payment. 2. Financial Institutions may exchange images. Ex. – West Coast Bank accepts a deposit of an East Coast Bank check. West Coast Bank images the check and transmits it to East Coast Bank for payment based on the image. 3. Financial Institutions may accept image deposits. Ex. – Your company images checks and transmits them to West Coast Bank as a deposit. What is Check 21 facilitating? 8

What can Check 21 make my checks look like? The Substitute Check ( a term used in the Check 21 Act) is operationally called an Image Replacement Document. An IRD and a Substitute Check may not always be equal. The substitute check must be machine readable (MICR friendly) just like original checks. 9

What can Check 21 make my checks look like? 10

What can Check 21 make my returns/ deposited returns look like? Original substitute check used for a return of a business sized check--- front 11

What can Check 21 make my returns/ deposited returns look like? Original Substitute Check used for a return of a business sized check--- back 12

What Do Payees Want To Do: Check 21 Act Substitute Documents/IRD ARC POP RCK Debit Cards Credit Cards ACH-Web ACH Tel ACH Recurring ACH/was check OTHER TRANSACTIONS 1.Clear payments in a less costly way 2.Collect funds quickly minimizing float. 3.Minimize returns. 4.Streamline: 1.Handling of payments 2.Posting of payments to Receivables 3.Research 5.Ensure ease of use for employees and customers encouraging acceptance 13

What can Automation do for you? 14 1.) Better Control over deposits Multiple locations deposit Trips to the bank to deposit Deadlines seem to be extended 2.) Cost savings Reduction in labor Costs for couriers Float over time will be reduced Automated upload to a Receivables System 3.) Improved handling of deposited returns

Comparisons 15 ARCPOPCheck 21 Born3/15/20029/15/200010/28/2004 Eligible1 st party consumer checks All checks drawn on US Banks in US dollars Authorization Requirements Notification prior to writing check before each payment Authorization Receipt signed at time of purchase N/A Who retains check? PayeePayerTruncating Bank

Comparisons 16 ARCPOPCheck 21 Retain check for how long? Up to 14 days; then destroy N/AUndefined Retain image for how long? 2 years held by ODFI or agent N/ACovered by UCC (typically 7 years) How can check writer obtain check? Ask their Fin Ins or Payee N/AMay receive substitute check from paying bank

Comparisons 17 ARCPOPCheck 21 Consumer Protections Right to dispute- EFT Act and Reg E Expedited Recredit- Check 21 and Reg CC, UCC Timeframe for disputes 60 days from settlement date 40 days from date the statement is mailed or substitute check is made available to consumer

Comparisons 18 ARCPOPCheck 21 Information on customer statement Date, amount, payee, check number Undefined under Check 21 Legal Framework NACHA Operating Rules Check Clearing for the 21 st Century Act Other LegalEFT Act, Regulation E, Fed Operating Circular EFT Act, Regulation E, Fed Operating Circular Reg CC, Clearing House Rules, Fed Operating Circular

19 What about: Continuing Check Functions: Receive and process checks/paper returns Continue collection process for returned items. Expected Reductions: Savings on forward presentment costs: deposit preparation, deposit fees and transportation to the bank. Reduction in customer service costs related to check payments, collection fees and check return fees. Expected increases: Increases in initial set-up, maintenance of a database, customer service training, customer service related to ARC/POP/Check 21 Image Deposit payments New costs for truncating and destroying checks and storing images.

Evaluate your receivables Who pays me? How do they pay me? With what financial instrument? What is the timing Review how you process receivables today Where are my costs today? Where can I save if I change? Internal costs Vendor costs Bank fees and float impact Exception Processing What is my volume of eligible items? How do I target my processing to ensure best collection rates? Questions to start the process: 20

How can I convert? Questions to start the process: How can I truncate and image the checks? In-house processing Outsource What about image standards? If I create an image file, what format do I use? How do I sort my ACH from my non eligible ACH? How do I address returns? NSF Administrative? How do I address adjustments? 21

What else is new? EDI made easy! New ANSI standard: EDI EPN STP 820 UPIC – Enables B2B while reducing fraud Universal Payment Identification Code 22

Valjean Sanchez Vice President Product Management QUESTIONS?