1. MIS 3090: IT for Financial Services Check 21 5 July 2016

2. July 5, 2016 2/13 Check Facts  1979: 85% of all cashless transactions involved checks  2000: 60% of all cashless transactions were by check  2000: 50 billion checks written in the US  Average check handled 26 times; returns even more  Attempted check fraud was $4.3 billion in 2001 – actual losses were $698 million  $8 billion per year spent on check processing and transportation – problems arose following 9/11 when all planes were grounded (checks were grounded too)  Normal Federal Reserve holdover: few hundred million – Sept-11 holdover = $47 Billion …What is this?

3. July 5, 2016 3/13 Check 21 (became law 10-28-04)  The financial services industry sought law to increase the efficiency of the check processing system and reduce costs and make it less susceptible to delays  The Check Clearing for the 21st Century Act MICR Code Line

4. July 5, 2016 4/13 Original Check Grayscale Image Areas of Interest Analysis Stored Binary Image Electronic Conversion

5. July 5, 2016 5/13 Example of Substitute Check Front Back

6. July 5, 2016 6/13 The Check 21 Act -- Overview  Check 21 allows (but does not require) any party in the chain to truncate any check (business or commercial) and convert it to an image  “Truncate” means to remove an original paper check from the check collection or return process  What happens... – If the next party in the chain agrees, an image can be sent – If the next party will not accept an image, a “substitute check” is created and transmitted – this substitute is legal in every sense – Under the new federal law, party must accept this substitute

7. July 5, 2016 7/13 On Checks Customers Write…  The payer bank (the bank the check is written on): – May get the original check back; – May get a copy of an image – May get a substitute check  Whether customers can get all their original checks back is out of the paying bank’s control (the party that truncates keeps the original and can destroy it after a period of time).  The length of time the original must be kept is NOT set by law.  With a substitute check, you still have to handle paper, plus some of the security features are lost

8. July 5, 2016 8/13 Check 21  Doesn’t mandate truncation; it permits it  Doesn’t require any party in the chain to accept an image, but allows them to do so by agreement  Lays the groundwork for image presentment and exchange – and that’s where the REAL benefits will be seen for fraud prevention/reduction  If image exchange and presentment catches on, checks can move through the check collection and return system more quickly and fraud will be caught, in many instances, at an earlier point in time – hopefully before losses occur.

9. July 5, 2016 9/13

10. July 5, 2016 10/13 Impact of Check 21  If parties insist on a substitute check, the upside of the new law will be minimal – we’ll only see the downside to the greatest extent.  If parties engage in image presentment and exchange, there are some major benefits. – Paper moves slowly. Digital information moves instantly and is easier to process store, search, retrieve.  Security – Seal encoding – invisibly stores data within issuing bank’s logo or in other area. Designed for digital reading. – Digital watermarks – being explored for use by Treasury – Digital bar codes

11. July 5, 2016 11/13 Images  Checks can be truncated at the point of deposit;  Images can be transmitted immediately;  Software can be used to determine if the check has an obvious problem (nonexistent account, closed account, account under surveillance etc.)

12. July 5, 2016 12/13 Issues  What is a feasible length of time for truncating financial institutions to retain images?  What challenges do law enforcement and prosecutors see stemming from the new law?  Truncating financial institutions will need to secure the originals to keep them from being used twice  The fact that Check 21 doesn’t include standards for imaged items  The fact that some types of ink, some types of checks, don’t image well  Implementation is expected to cost $10 billion over the next 3- 5 years (big banks will jump in first)  Users will not necessarily see benefits of speed improvements

13. July 5, 2016 13/13 For Next Class…  Mr. Dan Falkenstein, CIO & VP Reliant Insurance  Read for 4/21 − Read the AMVESCAP case carefully − Questions will be on the website – be prepared to discuss the case