1. Check 21 and Image Exchange
President Bush signed Check 21 into law on October 28, 2003, after several years of discussion between the Federal Reserve, banks and consumer groups and, of course, the U.S. Congress.

2. Check 21 and Image Exchange
Agenda
Payments System
Check 21
What the Check 21 Does Not Cover
Implementation of the Check 21
11/19/03

3. Check 21 and Image Exchange
Check Payment System Today
Branches
Paying Bank
Depository Bank
USPS
Issues
Today check are physically move from branches to operations centers
Then are sent to the paying bank through clearing houses, FED or correspondent banks.
The infrastructure is expensive, requires a lot of labor and subject to natural disasters, weather delays etc.
Expensive
Labor Intensive
Inefficient
Unreliable
11/19/03

4. Check 21 and Image Exchange
Potential Impact of Check 21
Remote Branches
Branches
WEB
Depository Bank
Paying Bank
Remote Tellers
Statement
Image Archive
Processing
Centers
ATMs
Image Statement
The solution to the problems associated with having to move the physical checks is to image the check at the earliest point and send images of the check, this is call check truncation.
With check truncation, checks are deposited and processed at the Depository Bank. Images and data (such as the MICR line) are captured and stored/archived at the Depository Bank. The paper check is eventually destroyed.
Images and electronic data are exchanged for presentment and posting at the Paying Bank. This exchange can be executed following different models. Image Archives can be in-house or provided by third parties.
Paying Bank can deliver images to their customers using different mechanisms (e.g. image statements, CD-ROM, web access) and when necessary a substitute check can be give to the customer.
Exchange Data and Images
Image Archive
Substitute Checks
If necessary!
Lockbox
11/19/03

5. Check 21/ Check Clearing for the for the 21st Century Act
Check 21 and Image Exchange
Check 21/ Check Clearing for the for the 21st Century Act
I would like to cover some of the points about the Check Truncation Act for the 21st Century.
Catalyst for Change

6. Federal Reserve’s Objectives
Check 21 and Image Exchange
Federal Reserve’s Objectives
To facilitate truncation
To foster innovation in check collection systems without mandating receipt of checks in electronic format
To improve the overall efficiency of the nation’s payments systems
The Fed wanted to meet these objective with out mandating any different operation than is used today.
11/19/03

7. Check 21 and Image Exchange
Legislation
Encourages check truncation by allowing unilateral decisions to truncate checks
Unlike current environment with requirement to obtain agreements from all the parties
Creates a new legal instrument - Substitute Check - that replaces the original paper check
For those customers that have not agreed to check truncation
For those banks that have not agreed to receive electronic files
Use and Acceptance
Use of substitute checks does not require an agreement between any of the parties
The substitute check must be accepted by any party
This includes forward collection and returns processes
Today to exchange check images banks need to have an agreement and the bank needs an agreement with it customer not to get their check back in a statement.
Check 21 creates what is called substitute checks, that have the same legal status as the original check.
No separate agreement is needed for using a substitute check and must be accepted by all, including the IRS.
11/19/03

8. Check 21 and Image Exchange
Legislation
Check 21 only applies to “Substitute Checks”
Image reprints of original paper checks
Use of substitute checks does not require agreement between the parties 
Excluded from the Check 21 are:
Check safekeeping products
Other check truncation or conversion products
ECP & image exchanges        
The relationship with consumers only changes if a bank is returning checks.
Products and services under other agreements
11/19/03

9. Check 21 and Image Exchange
Substitute Checks
Substitute Check is legal equivalent of original check for all purposes, if:
Contains image of front and back of check
Conforms to industry standards
MICR
Physical characteristics of check
Suitable for automated processing
Must accurately represent all information on original check
Bears legend -
Includes all endorsements
Includes identification of party creating it
This is a legal copy of your check. You can use it the
same way you would use the original check.
For a substitute check to be the legal equivalent of the original check it must met these requirements.
11/19/03

10. Check 21 and Image Exchange
Substitute Check
Front
substitute checks are the size of a business check.
The image of a personal check is about 80% the size of the original check.
The image of a business check is about 65% the size of the original check.
All indorsement are shown
The bank that created the substitute check is shown on the front.
Back
11/19/03
Source: Accredited Standards Committee X9, Inc

11. Expedited Recredit Consumer
Check 21 and Image Exchange
Expedited Recredit Consumer
Consumers that receive a substitute check, may make a claim under the Act that the substitute check was not properly charged or for warranty claim
If a consumer has:
Suffered loss that they would not have suffered if they had received the original check or
The original check or a better copy is necessary to determine validity of the check
The Bank must:
The Bank has 10 day to determine the validity of the claim or
Recredit up to $2,500 per check
The remainder by the 45th calendar day
This part of the law only applies to Consumers that receive a substitute check (paper document)
The industry does not believe that this will happen very often.
Check charged to the wrong account, for the wrong dollar amount or duplicate charges are taken care of today.
11/19/03

12. Expedited Recredit Consumer
Check 21 and Image Exchange
Expedited Recredit Consumer
Bank may withhold availability for
exception situations (similar to Reg. CC)
New accounts
Excessive ODs
Cause to believe fraud
Emergency conditions
Bank may withhold availability for 45 days
Bank must notify consumer of delay in availability
Bank can not charge overdraft fees for 5 days
The law contains protection for the bank
11/19/03

13. Check 21 Expedited Recredit - Banks
Check 21 and Image Exchange
Check 21 Expedited Recredit - Banks
Banks may make claims
When consumer makes claim or bank makes warranty claim
Bank has suffered a loss
Original check or substitute check necessary to determine validity of charge
A claim must be made within 120 days of transaction
As a paying bank, we have recourse back to the bank that created the substitute check.
11/19/03

14. Check 21 Expedited Recredit
Check 21 and Image Exchange
Check 21 Expedited Recredit
Consumer
Statement
40 DAYS
120 DAYS
CLAIM
CLAIM
$$$
10 DAYS
Check, Better Copy
or $$$
10 DAYS
Paying Bank
Reconverting Bank
substitute check
Paying bank must provide consumer with original check, substitute check or Re-credit within 10 days of claim up to $2,500 per check
Amounts > $2,500 must be recredited to consumer within 45 days
Paying bank must make claim to reconverting bank within 120 days of transaction that gave rise to claim
Reconverting bank must provide recredit, original check or substitute check within 10 days of paying bank claim
Graphic representation of the Expedited process.
11/19/03

15. Check 21 and Image Exchange
Notice to Consumers
Banks must notify consumers of:
Check substitution process and how it differs from original check process
Expedited recredit rights
Fed has provided “Substitute Check Policy Disclosure”
By sending our customers the Fed’s “Substitute Check Policy Disclosure” we have met the requirements of the law.
The Fed’s Disclosure covers:
What is a substitute check
Your right to file a claim for an expedited refund
Expedited refunds
How to make a claim for an expedited refund
Our Responsibilities for handling your claim
Reversal of refund
11/19/03

16. What the Check 21 Does Not Cover
Check 21 and Image Exchange
What the Check 21 Does Not Cover
Image Exchange
Lets take a look at an image exchange model

17. Check 21 and Image Exchange
Check 21 & Rules
Exchange
Network
Branch
Check Truncated
IMAGE
DP / Image Capture Site of a bank
IMAGE
Paying Bank
IMAGE
IMAGE OR
Paying Bank
In this drawing on slide 17 the check has been truncated at a branch.
On the left there are two paying banks; one that accepts images and the other does not.
IRD
Reconverting Bank
11/19/03

18. Check 21 and Image Exchange
Check 21 & Rules
Exchange
Network
Branch
Check Truncated
IMAGE
DP / Image Capture Site of a bank
IMAGE
Paying Bank
IMAGE
IMAGE OR
Check 21 covers this relationship
Paying Bank
The Check 21 Act covers the relationship between the Reconverting bank and the paying bank only.
IRD
Reconverting Bank
11/19/03

19. Check 21 and Image Exchange
Check 21 & Rules
Rules are needed for these relationships
Exchange
Network
Branch
Check Truncated
IMAGE
DP / Image Capture Site of a bank
IMAGE
Paying Bank
IMAGE
IMAGE OR
Paying Bank
How the image got to the reconverting bank is outside Check 21.
Rules, standards and contracts are needed to cover these relationships.
IRD
Reconverting Bank
11/19/03

20. Check 21 and Image Exchange
Check 21 & Rules
Image rules are needed to support the Check 21 because:
Check 21 is image based
Image exchanges are not covered by the Check 21
All depository financial institutions must have a common national set of image exchange rules for image exchange to work.
For image exchange to work on a national level there needs to be rules and standards like we have for paper check, ACH, Credit Cards and ATMs.
11/19/03

21. Implementation of the Check 21
Check 21 and Image Exchange
Implementation of the Check 21
What Banks Must Do!
Lets look at what we must do.

22. Check 21 and Image Exchange
Multiple Step Process
Prepare for Check 21 and the Substitute check
Customers
Contact Staff
Operations
Develop strategic plan for image exchange
We have to prepare our customer, our staff and our operations people have several changes to make.
We also need to look toward the future and see how image processing and image exchange fit in our bank.
11/19/03

23. Bank’s Role with Consumers
Check 21 and Image Exchange
Bank’s Role with Consumers
Customer Awareness
Advance notice to customer of substitute checks
Check 21 notice to consumers beginning
October 28, 2004
Substitute Check Policy Disclosure from Fed rules
Consumer education
Education of business customers
Training
All contact staff should be trained on substitute check and expedited recrediting
Q & A for Staff
Expedited Refund procedures
The customer awareness has three effort for consumers
Let them know it is coming
Let them know it is here
Help them understand the changes
We need to talk to our commercial customer about substitute checks.
We need to train our staff to help customers and handle substitute checks when they are processed.
11/19/03

24. Check 21 and Image Exchange
Check 21 Ops Minimum
Expedited recredit procedures
Qualified returns of substitute check – change to MICR line
Identifying duplicate checks
Determine how substitute checks look on image statements
Procedures to detect fraud with substitute checks
Deposit Agreement change to move liability to a customer that deposits a substitute check.
We need to have expedited re-credit procedures that correctly handle a request and determine if the request meets the requirements under Check 21 for special handling.
Duplicate checks will become a bigger problem because of all the ways a check written by our customers can be presented to the bank for payment. (ACH debit, substitute check, original check, POS debit)
Substitute checks will require a different approach to fraud detection
11/19/03

25. Check 21 and Image Exchange
Conclusion
Consumers have rights under bill
Bill drafted to minimize potential fraud and consumer inconvenience
Prepare customers and public
Plan for the future of check processing
In conclusion because of Check 21 there a things we have to do now, in the near future and in our planning process.
The Act holds the key for reduced costs during times of decreased check volume.
11/19/03

26. Check 21 and Image Exchange
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Questions?