Understanding New Technologies in Banking to Improve Efficiencies Presented by: Todd Sholeen, Charter One Bank Aimee Briles, Wintrust Financial Kimberly Feeney, Bank of America

2 Agenda Introduction of Presenters Check 21 Truncation vs. Conversion Streamlining Accounts Receivables Creating Efficiencies in your Payables Department

3 CHECK 21 ACT The Check Clearing for the 21st Century Act (Check 21) was signed into law on October 28, 2003 Became effective on October 28, Designed enhance innovation in the payments system and efficiencies by reducing some of the legal impediments to check truncation. The law facilitates check truncation by creating a new negotiable instrument called a substitute check, which permits banks to truncate original checks, to process check information electronically, and to deliver substitute checks to banks that want to continue receiving paper checks. A substitute check is the legal equivalent of the original check and includes all the information contained on the original check. The law does not require banks to accept checks in electronic form nor does it require banks to use the new authority granted by the Act to create substitute checks.

4 Why do banks create substitute checks? Some banks find that exchanging electronic images of checks with other banks is faster and more efficient than physically transporting paper checks. In certain circumstances, however, banks may need to use a paper check. To address this need, Check 21 allows a bank to create and send a substitute check that is made from an electronic image of the original check

5 Check Truncation versus Conversion Check Truncation Check 21 ACH Check Conversion (ARC, POP, RCK, BOC) The TransactionCreates a new substitute check or an Image Replacement Document (IRD) Creates an ACH Debit Who does it apply to?Businesses and ConsumersConsumers only until September 18 th, 2006 Your CheckRemains a Check and is governed by Check Law (Reg. CC and UCC 3 and 4) Becomes a “source document” under NACHA Rules Providing CopiesSame as under check lawMust provide a legible copy for up to 2 years Check DestructionNo requirement addressed by the ActMust destroy original check within 14 days AuthorizationsNone RequiredConsumers must be provided notification and an opportunity to “opt out” Legal FrameworkCheck Clearing for the 21st Century Act Regulation CC Regulation UCC Clearing house rules Fed Operating Circular Electronic Fund Transfer Act Regulation E NACHA Operating Rules Fed Operating Circular

6 Eligible Items for Truncation All checks, except foreign checks, are eligible to become substitute checks, including, but not limited to, the following: Consumer checks Business checks Corporate checks Government warrants U.S. Treasury checks Money orders Controlled disbursement checks Payable through drafts Traveler’s checks

7 Preserves existing Check Fraud systems for companies Creates new substitute check Preserves ability to process the Image Replacement Document (IRD) Cost Saving to the Check Clearing Process – Image Exchange Reduction/Elimination of Float Checks could erroneously or fraudulently be converted to ACH Monitor Transactions Daily Take Advantage of ACH Debit Blocks Impacts of Check 21

8 Things to Watch Out For Connecting ACH and Account Recon Check Fraud Preventions that “survive” Check 21 Seal-encoding Technology Digital watermarks Financial Services Technology Consortium (FSTC) Developing recommendations for “survivable” security features and interoperability

9 RETAIL CHECK Front

10 RETAIL CHECK Back

11 COMMERCIAL CHECK Front

12 COMMERCIAL CHECK Back

13 Streamlining Account Receivables Back Office ACH Conversion Remote Deposit Services Online Collections Internal Controls for Receivables

14 ACH Check Conversion Transaction Types: Account Receivable Entries (ARC) Check mailed to biller or deposited at a drop box for payment Point of Purchase (POP) Check voided by merchant and returned to consumer Represented Check Entries (RCK) NSF check or uncollected funds re-presented electronically Back-Office Conversion (BOC) Check accepted at the point-of-sale or at manned bill payment locations converted to ACH debits in the back-office

15 ARC/POP/BOC ACH Transactions All convert consumer checks into an ACH debit to the deposit account ARC growth is strong - 36% increase in 2006 from the previous year Little or no growth in POP

16 Back Office Conversion (BOC) Effective March 16, 2007 Allows eligible items presented in person to be converted to an ACH at the District Allows Financial Institution to convert IRD’s to ACH debits Conversion previously only allowed for POP transaction or lockbox/drop box payments (ARC)

17 How BOC Works Check is forwarded to a centralized location or “back office” Check is retained by payee Check is converted into an ACH  At District with a check scanner  Outsourced to Bank or other third party File sent to the Bank and processed through ACH network

18 NACHA Requirements of BOC Customer must be notified of possible conversion at point of transaction Must have ability to “opt out” Must provide Customer Service contact Checks must be securely stored and destroyed Only for eligible items

19 Items Ineligible for BOC Checks greater than $25,000 Check with auxiliary “on-us” fields Credit card checks Home Equity checks Official checks - including Cashier Checks, Traveler Checks

20 Remote Deposit Services Capture images at your desktop PC, Scanner and Internet Connection Checks sent electronically to the bank and processed as IRD’s Can convert eligible (consumer) items to an ARC ACH

21 How It Works Checks Scanned & Truncated Secure Submission Print/Process Substitute Checks Any type of Check Payments Accepted By Business Internet ARC

22 Benefits of BOC and Remote Deposit Services Accelerates funds availability Accelerates returned items & increases ability of collection Reduces handling and transaction costs Delays deposit cut-off time Eliminates need for branch proximity Reduces risk of accounting errors

23 BOC & Remote Deposit Cost Considerations Cost savings from accelerated collection time & improved collection rate Cost of services  Software / Imaging technology  Monthly maintenance - what’s included?  Per item costs Storage and destruction of checks

24 Electronic Payment Collection Services Functions as an electronic internet lockbox service Enables District residents to pay registration, lunch fees, etc. through the District’s web site Payments can be made via electronic check (ACH), credit or debit card through a secure gateway

25 Electronic Payment Collections District receives a daily electronic file of payments File downloadable into the District’s A/R system Multiple “real time” reporting options

26 Electronic Payment Collections Ability to customize secure payment site with District logo, terms and conditions Option to charge a convenience fee to offset District costs Administration function allows District to enable / disable registered users District system users can process telephone payments

27 GFOA Recommended Internal Control Procedures for Receivables Segregation of duties  Authorization, recording and custodian functions Timely reconciliation of accounts  UCC requires within 30 days Automated systems to aid in reconcilement and fraud detection  Bank Reconciliation files & Positive Pay

28 Internal Controls Procedures (cont.) Notification of suspected fraud  Management  Bank  Auditor Procedures should be clearly documented and standardized

29 Agenda What are the Benefits? What are my Options?  Payroll – increase Direct Deposit  Automated Clearing House  Card Solutions Best Business Practices  Fraud Prevention  Internal Controls

30 What are the Benefits….. What are the Benefits?  Reduced Costs Straight-thru processing Minimizes redundant data entry  Increases Data Accuracy Access to data Information Sharing  Creates stronger partner relationships  Frees up Resources

31 Direct Deposit: Ways to Boost Enrollment Create a plan of action  Human Resource and Payroll Departments are key Educate employees on the benefits of Direct Deposit Create a “campaign-style” atmosphere for a day or week  Take advantage of the National Marketing effort this month  Sponsor a contest  Decorate lunchroom or common area for Direct Deposit Month Invite your local financial institution to set up an information booth Use eye-catching Direct Deposit inserts to anyone receiving a paper check Keep authorization forms within easy reach Make direct deposit the preferred payment method

32 Card-based solutions enable School Districts to offer electronic payments to part-time or unbankable employees  Payroll cards are reloadable and can be transmitted to bank in same file as direct deposits  Widely acceptable usage- like any other credit card and at POS and ATMs  Cards can have custom logos Partner with your local Bank  Offer checking accounts to employees  Demonstrates your commitment to your employees  Increased employee satisfaction – which leads to greater productivity  Excellent Employee Benefits: free checking, free online banking, special discounts on mortgages, interest paid checking accounts Direct Deposit Alternatives

33 Automated Clearing House (ACH) Credits Electronic funds movement Increased  Flexibility  Productivity  Fraud protection Accommodates vendor invoices data Better control Easier reconcilement & cash forecasting Electronic Advices Flexible initiation methods  Data file delivery  Online Cost effective

34 Automated Clearing House (ACH) District’s Bank’s ACH system ACH NETWORK Your Vendor’s Bank Account District’s Vendor Your District’s accounts payable system (1)The District creates an ACH file for processing (2)The District’s Bank’s ACH system processes and delivers the ACH transactions to the ACH Network. (3)ACH Network delivers ACH payments to your vendor’s bank. (4)Vendor’s bank posts ACH payments on the settlement date. (5)The District’s Bank’s ACH system reports ACH processing confirmation to the District. (2) (1)(5) (3) (4) ACH Transactions Confirmations

35 How a Card Solution adds Value  Replace checks and petty cash  Make indirect supply purchases quickly  Access reporting that details purchases made with purchasing cards  Help protect against employee misuse  Pay vendors within two business days  Update your District’s accounting system in an automated manner  Electronically allocate purchases to the appropriate expense types, replacing manual review and allocation routines  Monitor spend against encumbered funds (grant or project fund management)  Access merchant data and 1099/socioeconomic reporting used for tax purposes  Maintain card accounts in real time

36 The Power of Purchasing Cards:  Earn rebates from issuer based on card spend.  Pay up to 25 days after statement closing date for increased float.  Leverage card-spend data to negotiate vendor discounts.  Lower transaction processing costs.  Gain hard- and soft-dollar savings when converting check payments to card.  Gain enhanced transaction data reporting and visibility.  Institute pre-purchase controls for costly or sensitive purchases.  Prevent employee misuse by blocking merchants and instituting spending limits.  Prompt payment to vendors by acquiring bank.  Use Web-based card program management and reporting tools.  Make indirect supply purchases quickly.  Update accounting system in an automated manner.  Consolidate your cardholders' purchases into a single payment to the bank. Savings Efficiency Control

37 District Employee Your School District Supplier Bank Place order Receive goods Payment Request for authorization General ledger Payment Scheduled electronic data How a Purchasing Card Works? Create entries Merchant paid within 2 days of transaction One consolidated payment to bank Post-purchase, a data transmission of transaction detail where default cost allocation is applied electronically and moved via an interface into Rotary’s AP system. 1

38 Flexible billing options – Choice of weekly, biweekly or monthly billing cycle with up to 25 grace days Billing and payment – Central bill and central pay Branding – Visa ® or MasterCard ® -branded, company-branded marks Statement delivery options – Paper statement via U.S. mail; EDI 811 via EDI mailbox; or statement billing file (SBF) Payment options – ACH debit or credit, EDI or wire Additional benefits  Liability insurance of up to $100,000  Automatic accidental death and dismemberment insurance of up to $500,000  Lost or stolen card replacement  Dedicated 24/7 customer service  Access to the largest branch and bank-owned network Key Features of a Purchase Card Program

39 Best Business Practices: Protection against Check Fraud ACH Payments  Convert Payments to ACH  ACH Blocks/ACH Filters Check Payments  Positive Pay/Reverse Positive Pay  Check Truncation – Images on CD-ROM

40 Fraud Prevention Bank Services ACH Blocks  No ACH debits allowed  Transactions rejected and returned to originating institution as unauthorized ACH Filters  Only pre-approved debits allowed  Can establish a maximum dollar amount for transaction

41 Best Business Practices: Fraud Prevention bank services Positive Pay  District issues checks  District delivers Issues file to bank  Bank warehouses data  Everyday the bank matches in-clearing or paid items against District’s Issues file  Bank delivers daily Exception report to the District  District makes Pay/No Pay decision

42 Fraud Prevention Bank Services Reverse Positive Pay  District issues checks  District receives a list of paid checks from bank every morning  District performs a daily match of paid checks to its check register  District notifies bank of decision (pay/no pay)  Bank executes decision

43 Fraud Prevention Bank Services Check Truncation and imaging of checks on CD-ROM  Image capture and destruction of the original paid check Fast and affordable Excellent research & retrieval tool Storage convenience Security Ease of access

44 Internal Controls for Cash Disbursements Monitor petty cash Limit use of manual checks Control access to check stock Use checks with security features  Tamper resistant checks  Three-dimensional holograms  Artificial watermarks  “Void” copy feature  Micro-printing  Bar codes

45 Internal Controls for Cash Disbursements (cont.) Reconcile all accounts promptly Segregate reconciliation from deposit and check writing duties Increase use of ACH disbursements Establish procedures for wire transfers

46 Internal Controls for Electronic Funds Transfer Use bank generated PIN numbers  Control access to PINs  Change PINs frequently  Require individual PINs for every employee initiating wires Electronic transfers  Institute initiation, approval and release duties with your bank

47 Internal Controls for Electronic Funds Transfer (cont.) Phone transfers  Require call back confirmation from the bank Establish dollar limits for authorized users Create repetitive templates for repeat transactions Send confirmations to different department

48 Written Procedures Describe organizational structure Include governing statutes, regulations, policies, etc. Describe organizational structure and duties of personnel Specify limitations of employee authority Detail procedures for all activities Create a flowchart of processes

49 Written Procedures (cont.) Define required documentation Describe forms and include samples Include timelines for report preparation and distribution Outline back-up and disaster recovery procedures Require regular reviews and updates

50 Implementation of Internal Controls Employees must buy into and understand the need for controls Procedures should be understandable and make sense Consequences for noncompliance or willful neglect of procedures should be established and enforced

51 Monitoring of Internal Controls Internal audits  Authorization and execution  Recording and accountability  Exception monitoring  Safeguards External audits  Routinely change external audit firms