Check Clearing for the 21 st Century Act Presented by Jennifer Ford

Introduction zWho uses Internet Banking to pay bills? zCan you see an image of the checks you wrote? zInternet Banking and Check 21 are related because many of us wouldn’t have access to images if it weren’t for Check 21

Current Banking Environment zAn estimated 42.5 billion checks are processed in the U.S. every year zBanks spend $6-8 billion per year to process checks zStrong reliance on air and ground traffic for physical transportation of millions of paper checks between banks every day zEvents of September 11th underscored the vulnerability of the current U.S. payment system ($47 billion in check float)

Shift from Paper to Electronic zPaper checks increasingly converted into electronic transactions zProcessing volume expected to decrease by more than 5% per year from (then 9% every year thereafter)

Costs due to Shift zCost of processing paper checks will rise exponentially z Less checks, higher costs per check

Processing Checks Today Intermediary Paying Bank Branch Operating Center

What is Check 21? zLegislation sponsored by the Federal Reserve Bank yFacilitate check truncation (remove original paper) yFoster innovation in the check collection system without mandating receipt of checks in electronic form yImprove the overall efficiency of the U.S. payments system zSigned into law on October 28, 2003 and will become effective on October 28, 2004 zLegislation states that an Image Replacement document (IRD) is a legal substitute document for a check

Background zIn 2000 – Fed Reserve Board Staff began investigating a concept of Default Check Truncation Rules – now Called Check 21 yEnable bank to substitute machine-readable copy of check (“substitute”) for the original ySubstitute checks would be legal and practical equivalent to original* zECCHO (Electronic Check Clearing House Org.) and other banking organizations monitored the process and provided input zAll segments of the banking industry strongly supported the act and have worked together to achieve passage

Substitute Checks / IRD zNew instrument created from electronic check image zLegal equivalent of original check zConforms to industry standards: machine readable and would bear MICR line zProcessed the same as original checks – not significantly affecting operations of bank that do not participate zMinimizes the impact of check imaging on institutions and those customers who wish to continue to receive paper

Substitute Checks / IRD Front This is a legal copy of your check. You can use it the same way you would use the original check. * * 01/04/ [ ] 01/03/ VOID – IRD TEST SAMPLE 0145 B B  Do not endorse or write below this line.  > < 01/02/ ENDORSE HERE: DO NOT SIGN / WRITE / STAMP BELOW THIS LINE FOR FINANCIAL INSTITUTION USAGE ONLY FOR DEPOSIT ONLY FIRST UNION NATIONAL BANK ACCOUNT NORTH POLE, INC. [ ] 01/03/ * * 01/04/ Back

After Check 21 Paying Bank IRD Image Intermediary Branch Operating Center Image or

What’s Wrong with Check 21? zStandards for IRD but not for actual Images zCustomer’s haven’t been informed of how it will impact them My opinion: zSmaller banks may fail if they don’t invest in technology to take advantage of Check 21

Larger Banks Have an Advantage

Conclusion zWatch for possible increased bank failures due to this new technology zBanks with image-enabled systems will lower costs and therefore have an advantage zQuestions?