1. Delivering on the ARC and Check 21 Promise
Tom Kettell
Vice President, Marketing
RDM Corporation

2. Monumental shift in the payments landscape

3. The Transformation from Physical to Virtual
Bank Lockbox
Bank Lockbox Clients
In-House Lockbox
Internal Lockboxes and Third-Party Lockbox Providers
Agent/Branch Deposits
Point-of- Payment Collections, Drop Box Payments, Low-volume Lockbox, Route Collections
Bank/Regional Sites
Fed/Local/Regional
Clearinghouse
Paying Bank
Physical Items

4. The Transformation from Physical to Virtual
Agent/Branch Electronic Deposits
Electronic Bank Lock Box
Customer In-House Electronic Lock Box
ARC System
Fed/EPN/
Visa
ECP/IRDs
Fed/ECCHO
Bank/Regional Sites
Fed/Local/Regional
Clearinghouse
Paying Bank
Physical Items
Optimized Items, ACH (POP/ARC) or IRD/ECP

5. Channel Proliferation
Walk in payments –
Distributed Locations
Drop Box
ARC
Substitute Check
Image Exchange
Mail in payments –
Centralized Locations
Lock Box
ARC
Substitute Check
Image Exchange
Point of Purchase
Face to face
POP
Substitute Check
Image Exchange

6. ARC, Check 21, & Image Exchange
Permanent rules established in March 2003
Convert consumer checks received through U.S. Postal Service or drop box into ACH debit transaction
Business/Corporate checks are not eligible for conversion
Notice = Authorization
Major Adoption: 2.3 billion transactions in 2005est.
Check 21
Enacted in October 2004
New legal instrument called a substitute check
All checks (except checks drawn on foreign bank) are
eligible
Foster innovation in the check payment system without mandating receipt of checks in an electronic format
Is not image share/exchange

7. Check 21–Example le Compared to PAYING BANK INTERMEDIARY BOFD
IMAGE
INTERMEDIARY
IRD
BOFD
PAYING BANK

8. So what is a Substitute Check?

9. Image Exchange–Example le
CHECK
CHECK
CHECK
PAYING BANK
INTERMEDIARY
BOFD
Compared to
CHECK
IMAGE
IMAGE
INTERMEDIARY
BOFD
PAYING BANK

10. Benefits of Check Electronification
Faster returns processing
Fraud reduction
Faster collection
Reduction of processing costs
Possible float gains

11. The Numbers

12. FRB - Number of Checks Paid in 2000 and 2003
Source: 2004 Federal Reserve Payment Study

13. Payments Growth Continues as Check Volumes Decline
As Check Volume Declines the Number of Payments Increases
Source: 2004 Federal Reserve Payments Study

14. The Pricing Dynamic
Source: Federal Reserve. Compiled by NACHA ­The Electronic Payments Association

15. Check Electronification is Growing Even as Check Volume Declines

16. ACH e-Checks Continue to Experience Double Digit Growth
2004
2003
2002
2001
Source: NACHA

17. Growth of ACH e-Check Entries
Source: 2004 Federal Reserve Payments Study

18. Check 21 has Fostered Change
and Significant Opportunities

19. Check 21 – First Nine Months
Federal Reserve Experience
In June 2005, processed 16.7 million items through Check 21 services - 75% deposited via ICL
All were converted to substitute checks for presentment
Peak day: 1.3 million items worth $12.8 billion ($10,000/check)
FedReturn volume averaging 25,000 items/day

20. Industry Concerns Check 21
Confusion between Check21 & Image Exchange
Multiple Collection Strategies to Consider
Pricing Questions
Unproven Process
Liability for Image Quality? Where should that be placed?
Other forms of non-cash payment may be less costly
Credit/Debit Cards
Automatic Debits & ACH
Returns Process with Substitute Checks is Still Being Refined

21. Check 21 - The Lighter Side

22. How the New Check 21 Law Affects You
Suze Orman Speaks Out
How the New Check 21 Law Affects You
Check It Out: New Banking Law Soaks Consumers
Any civics teacher looking for a glaring real-life example of Congress listening to lobbyists and forgetting about we the people need look no further than the new "Check 21" law that kicked into action in late October.
In a big fat wet kiss to the banking industry, Congress has authorized electronic processing of all the personal checks you and I write, meaning banks no longer have to physically exchange checks with each other before they take the money out of our accounts. That cuts the processing time down from a few days to as little as a few hours. One industry group estimates the faster processing will save banks $2 billion a year in administrative costs. It's a lot cheaper to zap checks electronically to each other than to deliver them by train, plane, and truck.
I'm all for efficiency, but surprise, surprise, there's absolutely no provision that requires one penny of that savings to be shared with consumers in the form of lower fees. Worse, there's a good chance this new bill is going to end up costing a lot of us a bunch of money. Because our checks are clearing so much faster, consumer watchdogs predict that there is also going to be a barrage of bounced checks flying through the system, further boosting the bottom line of the banks at the expense of our wallets.”
“…banks no longer have to physically exchange checks with each other before they take the money out of our accounts.”

23. Check 21 - Lessons Learned
Supporting infrastructure works
Some challenges, but electronic file movement and substitute check printing has been successful
The need for substitute check printing and transportation will delay the full realization of the cost efficiencies associated with image clearing
Many financial institutions will continue to rely on paper presentments until they can reengineer back office processing
Controls in Place for Double Posting
Duplicate Items – Safeguarding from the double post
Updating procedures and best practices to reduce double postings
Corporate
Financial Institutions
Fed

24. The Future of e-Check Payments?
Image Exchange
The Future of e-Check Payments?

25. Image Share/Exchange First Comes the Plumbing Design Development
Testing
Agreements
Pilots
Operating Rules
Lessons Learned
Validate Assumptions
Vet out Risks
Modify Controls
First Comes the Plumbing

26. Image Share/Exchange Then Comes Product Product Offerings
Image Receive
Image Send
Return Integration
Exceptions Management
Controls
Settlement
Reporting
Pricing
Deadlines
Availability
Support
Then Comes Product

27. Half of Banks Choose Image Exchange Even at 10% Cost Premium
Banks Who Would Choose Image Exchange if...
Source: Global Concepts, Inc.

28. Billers Will Stay with ARC Until Image Exchange is Cheap / Available
Billers Who Would Choose Image Exchange if...
Source: Global Concepts, Inc.
Note: 34% of Billers “Don’t Know” at what point they would choose 100% image exchange. It’s still a relative unknown.

29. The Payments Convergence

30. Business Case for The Payment Convergence
Can you achieve 100% electronification
Will Image Share/Exchange ever become ubiquitous?
When will critical mass be achieved?
Payback period (in a declining check volume market)
How do you value float (Fed Funds, Prime Rate or Cost of Funds)?
Assumptions: Are they accurate? How do you validate?

31. Business Case for The Payment Convergence – cont.
Reduced banking fees, accelerate availability, and reduce operational costs
Must stage benefits according to when products evolve
Concentration of funds / process (reduced endpoints)
Returns automation/consolidation
Concentration allows you to leverage remaining volume for discounts
Substitute Checks are expensive
Are a means to an end!

32. The Future of Check Clearing
The Projection
ACH check electronification and Image Exchange will run parallel and at par in the short term
6 to 10 years from now, Image exchange will generate the most activity significantly reducing paper checks
ACH and Check 21 combined, accelerate check electronification
Source: The Forrester Group

33. Remote Capture, Electronic Deposit . . .
… going beyond an automated drop-box . . .

34. Impacts of Check Electronification
Increase funds availability, better cash forecasting
Electronically deposits all checks to company’s account next business day, providing faster collection and faster notification of returned entries
Reduced number of return items
Electronic debits typically post before checks, resulting in more items clearing on first presentment
Automate and accelerate return item processing
ACH provides early notification of return items, carrying deposit location identifier
Immediate or delayed re-presentment of returns
Does not require consumer behavioral change
Reduce or eliminate local depository accounts
Fewer accounts to reconcile, reduced bank fees, elimination of cash concentration costs
Simplification of reconciliation of remaining accounts
Reduce labor and check processing costs
Eliminate check deposit preparation
Decrease deposit transportation charges and check float

35. Case Study | U.S. Treasury
                                                                           
The U.S. Treasury’s Financial Management Services division and the Federal Reserve Bank of Cleveland needed a paper check conversion solution that could be deployed to all agencies
Had to support a highly distributed network of approximately 200 agencies ranging in size from 1 to 1000s of locations.
Had to be scalable (future volumes could be large)
Had to be robust (e.g. Army installations)
Had to be flexible (Variety of agency specific needs)
Had to be secure (Government – Army, Air Force, IRS, etc)
Had to be very easy to use (remote locations, minimal training)

36. Case Study | U.S. Treasury
Germany,
Belgium,
Bosnia,
Kosovo
Military Bases
Singapore,
Korea
Military Bases
Qatar,
Kuwait
Military Bases
United States
Patent &Trademark Offices
IRS
DECCA (Military base stores)
& other agencies

37. Case Study | U.S. Treasury
FRB Dallas
Archival
ACH Processing
Verification Database
Local Verification Update
From Main Database in Dallas
Daily https Transmissions
Images & Transaction Data

38. Case Study | Municipality
Tax payments, user fees, recreation registrations, fines, publications
Can have consistent or different rules bases across all offerings of the municipality
Benefit from later cut-off times allowing capture in evening (e.g. recreation, outdoor events)
Benefit from time savings in taking deposits to bank
Need for multiple ways to accept payments – including remote channels

39. Case Study | Insurance Company
Significant volume of walk-in payments at multiple branch locations
16% - 17% of all payments are walk-in or mailed to the branch location
Desire to improve the check handling efficiencies at the branch location
Desire to improve float position
Desire to reduce deposit accounts
ACH non-eligible (business checks, money orders, convenience checks) and cost structure for equipment for large number of locations caused challenges for ARC-only

40. Comprehensive Check Electronification Platform
Planning for the Payments Convergence
Comprehensive Check Electronification Platform
Off-Premise cash letter (customer lockbox)
Distributed payment capture (drop box)
Person present
Two models to choose from
ASP model – faster time to market with little to no capital investment
Enterprise model – longer implementation times and requires large capital investment and on-going management
Supports ACH, Paper Draft (traditional and substitute check), and Image Exchange initiatives
Consistent rules base across multiple touch points of presentment
Provides a consistent customer experience
Basic remittance capabilities – scanning remittance coupons for decisioning
Can scan multiple coupons and multiple checks

41. Retail POS locations (terminal-based)
Planning for the Payments Convergence
Internet (ISP)
https
ODFI
Lockbox
Modem Banks
Retail POS locations (terminal-based)

42. Delivering on the ARC and Check 21 Promise
Tom Kettell
Vice President, Marketing
RDM Corporation