The Endpoint Exchange Network Partners With The NCHA To Print IRDs For Non-Image-Exchangeable Items , July 6th, 2004

Nationwide Network Of IRD Print Centers Will Enable Members To Present All Items On The Same Day

OKLAHOMA CITY, OK - CheckClear LLC, and the National Clearing House (NCHA) announced today that the Endpoint Exchange Network will accept 100 percent of all transit items for national forward and return collection utilizing electronic delivery and a network of National Clearing House sponsored and approved print facilities for IRD (Image Replacement Document) printing.
An IRD printed as a substitute check in accordance with the requirements set forth by the Check 21 Act will be the legal equivalent of an original paper check when the Check 21 Act goes into effect this October 28th, giving a substitute check the same legal standing as the original paper check. Substitute checks may be printed at any point during the routing process. The printed substitute check contains an image of both sides of the original check and must be printed with MICR ink. Prior to the act, financial institutions were faced with various issues that forced them to transport physical documents to payor banks in most situations.
The Endpoint Exchange Network will assist in determining which check images the presenting financial institution wishes to convert to substitute checks and forward them as images and data to an NCHA sponsored and approved print facility. Whether it is a request to print an outgoing cash letter for day 1 (Forward Collection) or day 2 (Outgoing Returns), the Endpoint Exchange Network will route the request to the NCHA approved print facility closest to the paying institution for forward collection or the depository or another collecting institution for return items.
"Endpoint Exchange Network member institutions will now have the ability to exchange 100% of their transit and return check volume digitally in a secure environment, saving processing time and collection costs," said Mark Craig, General Manager of CheckClear LLC. "The geographical boundaries and limitations associated with the movement of paper disappear on October 28."
"The National Clearing House and the Endpoint Exchange Network provide an established clearing network for electronic delivery of the image or paper delivery utilizing print sites across the country to print substitute checks and accelerate the check clearing process to as quickly as the same day," said Fred Redeker, President of the National Clearing House. "The process will eliminate the need to physically courier original paper checks. Our national network of print sites will allow the Endpoint Exchange Network to deliver transit checks sooner, reducing presentment costs and maximizing cash flow."
The Endpoint Exchange Network and the National Clearing House (NCHA) will make it possible for financial institutions across the country to trade check images with other institutions, nationwide.
The Endpoint Exchange Network provides full interoperability between financial institutions utilizing standard exchange formats for the sending and receipt of electronic items and continues to capitalize on its "first mover" advantage in the check image exchange space. By the end of 2004 the Endpoint Exchange Network expects to have over 5,000 financial institution members.

FRB ANNOUNCES END TO CHECK CARRIERS FRB-MN, 5/18/04

In conjunction with the implementation of Check 21 Reserve Banks will no longer accept items in carrier documents in high speed forward and return cash letters, effective Oct. 28, 2004. This includes items containing photocopies in lieu, notices in lieu of return items and foreign or mutilated items. IN ORDER TO AVOID THIS PROBLEM IT IS RECOMMENDED THAT FINANCIAL INSTITUTIONS USE THE CHECK STRIPPING TECHNOLOGY TO REPAIR DAMAGED CHECKS. FOR MORE DETAILS ON AVAILABLE CHECK STRIPPERS CLICK THIS LINK. CHECKSTRIPPER@CHECK21SOLUTIONS.COM

Check-21 as marketing opportunity 8/20 AB

As banks begin to deal with paper-to-electronic payment processing created by the Check-21 environment, the reality of the law's impact on banks' customer relationships is setting in. Many financial institutions confront consumer concerns ranging from anxiety over no longer receiving their canceled checks to instant check processing. Though substitute checks will be made available to clarify payment discrepancies, there could still be problems getting credit in the event of a double payment, & consumers are now faced with the unrestricted costs - which will vary from bank to bank - of requesting substitute checks. With all the changes Check-21 will bring, it is no stretch to imagine that the relationship between banks & customers could deteriorate. For marketers who recognize this early on, though, the law can become a way to connect with the client. Communicating to the consumer on Check-21 can do double duty by promoting services. Some banks might use statement inserts or a letter discussing the most frequently asked questions on the law & offering complementary products. Such offers need to be precise, timely, personal & relevant. Data analysis is one way marketers can provide such offers, by tailoring them to individual customers' history. Overdraft protection is one service that can be promoted. Since Check-21 will speed up check cashing, many customers will be faced with insufficient-funds fees. Banks can offer overdraft protection service that will ensure payments are covered & that customers can avoid returned-checks fees. For those who have overdraft protection, other services can be promoted, such as online banking. Web banking lets consumers schedule payments & be sure that their accounts will cover them; it not only eliminates the need to write checks, but with Check-21 in place it will be an effective method of verifying that payments are received. Banks can mitigate the risks of Check-21 by letting consumers know about services that will help them keep control of their finances. At the same time, they have a chance to learn more about their customers & foster loyalty.

Brinks, NetDeposit & Check-21 8/17 PRNewswire

Brink's & NetDeposit agreed to bring a remote check image capture solution to the cash processing market. Brink's plans to deploy NetDeposit's Remote-For-Business system for check image capture & electronic deposit presentment throughout their nationwide network of 150 branch operations. With the implementation of Check-21, which provides for the truncation of paper checks & gives legal stature to IRD, financial institutions can partner with Brink's to remotely capture commercial check deposits at Brink's locations, decreasing commercial customer float & eliminating the need for transportation & processing of physical checks. Brink's plans to utilize the robust, scalable NetDeposit Remote-For-Business product to capture & validate electronic check deposits & the NetDeposit Decision Gateway to send image deposits directly to participating financial institutions for clearing. In production for over 2 years, NetDeposit's proven software solutions offer a consistent customer experience within highly complex, distributed environments. Banks that cannot accept an image file are not left out of the benefits equation. NetDeposit's Distributed Print Server will allow Brink's to print IRDs for non-image enabled customers, in their vault locations, at their bank customers' operation centers, or through an IRD provider. 'As an innovative cash logistics solutions provider we recognize that cash & checks are intricately tied to each other. With the use of the NetDeposit Check-21 technology, Brink's has the ability to offer customers a virtual end-to-end commercial deposit processing solution. By providing such value-added services, our customers will be able to reduce costs associated with float, transportation, paper handling & capital investment,' said Guy Weissberg, Brinks. 'NetDeposit's solution provides us with a single platform designed for the complexity of the multi-bank, multi-customer environment in which we work.' 'We're pleased to be working with the preeminent armored car carrier in the country,' said Danne Buchanan, NetDeposit. 'Cash vaults are a natural electronic check capture location for many retailers & banks. Partnering with Brink's fits well with NetDeposit's focus to push capture out to a distributed environment.' Pilots are being selected & the product offering is expected to be ready for production deployment by 10/28.

Mellon & ARC 8/19 PRNewswire

Mellon GCM completed rollout of its ARC conversion process across its 6-site nationwide retail lockbox system, & the electronic payment solution accounts for 25% of all Mellon GCM's retail lockbox payment volume. ARC's growing acceptance by Mellon GCM customers mirrors industry figures. There were 2m ARC payments in IIQ 2002 & 23m in IIQ 2003. That figure rose to 210m transactions in IIQ 2004, with Mellon GCM accounting for 10% of that volume. Analysts expect to see continuous growth through the remainder of this year, with an estimated 1b items being converted to ARC by 12/04. "Regardless of whether they process their consumer payments in-house or with a 3rd party provider, B2C companies are finding that ARC offers significant savings & are moving to adopt the service quickly," said Robert Stasik, Mellon. "We are seeing leading organizations across a variety of industries adopt this service, including automotives, cable companies, telecom firms, mortgage holders & credit card companies." Rule changes by NACHA have given billers the opportunity to convert consumer checks into electronic payments, using a signed paper check as a source document. This growing technology captures the bank account information & converts it into an automated ACH debit. The rules stipulate that billers must provide an ARC notice on their billing statement for each payment it intends to collect. Mellon's clients are finding that less than 1% of ARC participants' customers opt out of this payment method. "Such acceptance is an indication that, nationally, consumers are becoming increasingly secure with the various methods of electronic payments." Companies participating in Mellon GCM's ARC solution have experienced several benefits, including significantly fewer insufficient fund payments; quicker notification of returned payments; reduced transaction costs; & improved funds availability.

Silver Bullet image quality software 8/16 SilverBullet

Silver Bullet Technology will integrate Image Quality Assurance software into its Ranger tests have been defined to measure the quality of check images. 'Since our Ranger software serves as the check scanner interface for many applications, we are able to analyze images at the point of capture,' said Bryan Clark, Silver Bullet. 'Once you've lifted the images & destroyed the paper, there is no turning back. This is why image quality at the point of capture is so important. FSTC & ANSI standards will continue to evolve in the next year, & Silver Bullet IQA will evolve with these standards.' Ranger is an industry standard software tool which allows item processing applications to run unchanged on a wide variety of transport types. End users enjoy the freedom to mix & match software & transport types. Ranger ships with a number of check scanners & is available for virtually all check scanners & sorters. Silver Bullet IQA will be offered free of charge ($100 per copy value) to any organization using the Ranger product. Silver Bullet IQA Image Quality Test List 1. Undersize Image 2. Oversize Image 3. Below Minimum Compressed Image Size 4. Above Maximum Compressed Image Size 5. Piggyback Document 6. Excessive Document Skew 7. Image Too Light 8. Image Too Dark 9. Horizontal Streaks Present in the Image 10. Folded or Torn Document Corners 11. Folded or Torn Document Edges 12. Document Framing Error 13. Excessive Spot Noise in the Image 14. Front-Rear Image Dimension Mismatch 15. Carbon Strip Detected 16. Image Out of Focus.

How to print substitute checks 8/13 AB

At first glance, the IRDs that will be printed after Check-21 takes effect seem to represent simply an additional step in the check-processing workflow. But the IRD is an entirely new type of negotiable document that will create challenges - & opportunities - for banks. Banks now can create secured check image files easily enough, but printing & managing them along the journey to becoming IRDs is uncharted territory. How does a financial institution manage & control a simple check image file? What happens if the machine jams while printing an IRD? What if one out of 3 checks printed on a single sheet of paper contains an error? How does the printer relay that information to the financial institution so that the same file is not duplicated 2 hours later? IRDs or substitute checks, the offspring of check images, are carelessly being printed without a glimmer of concern by the bank for how the items evolve from an image file into a negotiable document. Branch item capture, high-speed imaging, image retrieval, & storing issues have been the focus of Check-21 compliance for months, but banks will begin printing IRDs in their back-office operation centers fairly soon. Adding IRDs to the overwhelming amount of traffic in these operation centers will increase exponentially the likelihood of fraud & inefficiency, especially for banks that don't secure the print delivery channel. Today banks use operations centers for processing paper checks & printing documents that do not need to be secured. Check images must use a specific file format under the Check-21 guidelines, & the progression of that image into a document creates obstacles. For example, some banks expect to distribute secure documents in a PDF format, which is not designed for secure printing. Printing substitute checks should be as easy as pointing, clicking, & producing safe, tamper-free documents; unfortunately, this process is potentially risky business. Many bankers will print unsecured check files, unaware that securing the network where negotiable instruments are transmitted is necessary to protect their core business. Securing the printing network prevents employee fraud or inadvertent costs from good old-fashioned human error. An unsecured network creates an unstable & vulnerable banking environment where fraud & accidental print replication threaten the viability of Check-21 compliance & IRD processing. The industry must consider the risks in creating IRDs & start discussing the possible solutions. The initial dialogue should center on securing data & the potential encryption of the substitute check. Identifying secure components for a hardware set-up would allow banks to know whether files need modifying when multiple printers are used, & it would help banks ensure an IRD prints where it's supposed to. & simply addressing workflow & production management issues up-front would help identify the best method for verifying a document has been successfully printed. IRDs need a safe route for their journey to becoming a secure document.

Updating consumers on Check 21 8/10 AB

Though the majority of banks apparently have taken no action yet, some have begun notifying customers about changes they can expect to the handling of their checks after the Check 21. So far these efforts seem to focus on describing the substitute checks likely to appear in monthly statements this fall, & for the most part the material devotes relatively little space to subjects such as reduced float periods. As a result, even the diligent bank customers who get the notices & take the time to read them probably will not know that the shift to electronic item processing could dramatically reduce the time it takes for banks to clear their checks. & they might be in for a big surprise when checks they write that have traditionally cleared suddenly begin to bounce. Many banks still are not entirely sure what the implications of the law are or what they will do about them, so they are several steps removed from being able to inform customers. But people in the industry who have studied the law say that consumer ignorance will probably translate into a lot more bounced checks - which are bad for the consumer but good for banking companies whose profits increasingly derive from fee income. Pinnacle Strategies says that by mid-2005 consumers could be bouncing almost 7m additional checks a month. & with NSF (not sufficient funds) fees running around $25, those checks could generate almost $170m a month for banks. "The amount of time it takes for a check to clear will decrease, & people's dependence on float will have to go away," said Joe Gillen, Pinnacle's chief executive. Not so, says Heather Newcomb, Commerce Bancorp, which was among the first to initiate a Check 21 consumer education program. A June newsletter that arrived by mail in customers' statements described substitute checks - known in the industry as IRDs, for image replacement documents - but did not mention that processing checks electronically will probably allow the bank to clear the items faster. Newcomb did not know if Commerce Bank planned to mention the float issue in future informational materials, & she called it a nonissue. "With so much check clearing being done on an electronic basis," most banks have dramatically decreased the float period in recent years. "There isn't much float time left anymore." Commerce, Cherry Hill NJ, typically settles on-us items in less than a day, while interbank checks usually take up to 3 days to clear. "We wanted to make sure that our customers were aware of any changes that may result from Check 21. I don't think that our general retail customers are aware of" the law. The Commerce insert, Check 21, Here's a Quick Overview of the New Banking Legislation, says the law "will have a limited impact on most Commerce Customers." It uses a full page to describe substitute checks & explain why customers may expect to see them in their statements; the back of the insert covers Commerce's sponsorship of the Long Island Classic golf tournament. The law will allow banks to create substitute checks by printing out paper copies of digital images of original paper checks. Many industry watchers expect that to facilitate the use of only the electronic images for settling transactions. Because an image can be zapped across an electronic network instantly, checks will clear much faster than under current practices, which require banks to physically transport the items from one location to another. Gillen said that float times can vary markedly, but it is not uncommon today for a check to clear 2 or 3 days after it is written. Once banks start converting the paper into images in their back offices & exchanging them, checks might start clearing the day after they are written. Eventually, merchants & tellers could begin scanning checks at the point or sale or the teller window, which could allow them to settle the same day. Gillen said most consumers are aware of the float period built into the check processing system, & it is very common for people to write checks even if there is not enough money in their accounts to cover the check, especially if they are expecting to receive some money during the float period. SunTrust is aware of this consumer habit, & has included a reminder in its Check 21 primer. "As always, you should have sufficient funds in your account prior to writing checks," the Atlanta company told customers in a July statement stuffer. The two-page document describes substitute checks in detail, & includes ½-page about the accounts receive conversion process that allows banks to convert checks into ACH transactions at a lockbox. SunTrust does discuss the float issue - briefly - on the second page of the document. "After Check 21 becomes effective, it will take less time for a check to clear your account." Tom Bennett, SunTrust, said the flier was aimed mainly at the 1/3 of the company's retail customers who receive their cancelled checks with their monthly statements, because they are the ones who will be most aware of the shift to using substitute checks. Reduced float times got only a brief mention because SunTrust feels it should familiarize people with Check 21 gradually. "We wanted to just inform the customers that Check 21 is out there." Explaining all the implications of the law would "probably be too much information to absorb at one time." Because consumers are "likely" to be affected by reduced float periods, SunTrust will discuss the issue in future communications. "It will continue to be a core part of our education strategy." Gillen said that once checks start clearing faster, more people will learn the hard way that the rules of the float game have changed. "If you remove even a ½-day of float, it will increase the number of bounced checks." 1% of checks bounce today, but cutting out a ½-day from the float period would drive that figure up by 20%. Though consumers will eventually catch on, for at least the next year banks could enjoy a big bump in fee income. Alenka Grealish, Celent, agreed that banks stand to increase their income from bounced checks. "There will be more NSF fees earned, at first." Banks' communications with their customers have to walk a fine line. On top of the numerous regulations covering the specific language, there is the fact that banks do not know just how much shorter the float period will be, in part because it is not clear how fast the banking industry will begin implementing image exchange systems. That means Commerce & SunTrust are leaders on this front. For the most part, banks are still grappling with their own internal responses to Check 21 & will not get to their public messages for some time. "One of the things that hasn't been addressed yet is educating the consumers" about Check 21, said Norm Balthasar, Fiserv. One outstanding question is: "Is everybody going to jump on image, or is it going to be gradual? How quickly this is going to happen is really the issue."

Quality vs. deception in managing IRDs 8/10 BS&T

When it comes to preparing for Check 21, financial institutions are concerned that fraud & quality issues might cancel out the benefits of the faster clearing of checks that accompanies the use of IRDs & the exchange of these documents. Because the check process is moving slowly onto an electronic path, bank executives worry that the road ahead may lead to a digital dilemma of possible fraud losses & image-quality issues. However, if banks pay close attention to the quality of the check once it is first imaged, the issues of bad or unacceptable checks can be avoided, according to David Walker, ECCHO. Walker says that banks are dealing with the same types of fraud & quality issues being faced now with paper check processing, prior to Check 21 legislation. He points out that, regardless of whether they are involved in paper or electronic check processing, financial institutions have to be aware of check quality the same way they did before Check 21. Check 21 does not change or increase the threat of fraud, Walker stresses. “The fraudsters have the ability to make copies of checks, & they do. That problem doesn’t go away. It was there pre-Check 21. Banks have to realize when a duplicate debit goes through, no matter what form.” The good news, according to Walker, is that because Check 21 allows for faster processing of checks via electronic transmission, with the exchange of substitute checks, the chance of fraud is dramatically reduced. “The other consideration on fraud is, the longer it takes to clear the item, the longer it takes to commit fraud,” says Walker. “We anticipate there will be positive impact. By using electronics we should be able to shorten the time it takes to collect & return checks. It leaves less time for fraud to be committed.”

Taming the Check 21 beast 8/9 OmniSoft

Check 21 will transform the banking technology enterprise, as we know it. Financial institutions finally have the opportunity to move forward with electronic check clearing & presentment, & away from aged paper-based processes & technologies. Check 21 initiatives will deliver exceptional operations benefits, notably cost savings & greater efficiencies. The bad news is that the increasingly complex infrastructure demands brought about by Check 21 is overwhelming many institutions into a state of migration malaise. Certainly from the point of view of most technology vendors, the ramp up of bank Check 21 initiatives has been disappointing thus far. A survey this spring showed that 40% of banks polled had no Check 21 strategy in place. There are several reasons for this trend. One is a lack of understanding of Check 21 businesses processes & technologies. Another is that many of the Check 21 rules are still relatively immature. Yet another is that some banks are considering outsourcing their item processing rather than take on another system migration, particularly if they are not sold on the future economics of check processing. But the biggest reason for the Check 21 malaise at many banks is confusion & concern about the total, all-encompassing, end-to-end technology solutions being offered by most vendors. Most technology vendors are laying out very elaborate Check 21 strategies with the hope that their bank prospects will find something that addresses their needs. Most of these strategies force the user to replace many of their legacy systems & processes, & require a major capital investment & long lead-times to deployment. Some vendors clearly underestimate the value of getting existing paper paths & electronic systems to operate in sync. & savvy bankers understand the check enterprise is becoming too complex for a "one size fits all" approach. Experience demonstrates that in medium & large-volume check operations, monolithic Check 21 initiatives will be very difficult, costly, time-consuming & risky. Additionally, banks can't afford to waste their investments in legacy check processing technology (much of which were only installed in the lead-up to 2000) or risk disruptions to their check processes. Making an open-ended commitment to one Check 21 solutions provider is the high-tech equivalent of putting all of your eggs in one basket: gambling that your vendor can meet the fast-changing demands of the emerging electronic banking environment. & at this point, it is anybody's guess what a typical electronic banking & payments enterprise will look like. What's more, the 10/28 start date for Check 21, coupled with the desire of many banks to take advantage of the benefits afforded by the legislation as quickly as possibly, virtually precludes the implementation of complex Check 21 platforms. This short timeframe: forces a very conservative, narrowly defined product design strategy; almost demands that products be built from existing, tested components with a minimum of new components; & precludes any product that would make large charges in the way a financial institution does business. So banks can't do "everything," but they can't do "nothing." Adaptive component software technology could be a rallying cry for legions of financial institutions under pressure to get more bang for their IT buck, while Check 21 - not to mention resource, corporate & competitive pressures - pull them in ever more directions. The component approach provides image-based, operationally identical equivalents for each step of the paper process. Built on existing open technologies, each component starts with the minimum acceptable subset of features, & adds on only after establishing the need for each enhancement. In the emerging electronic check environment, the component approach provides a solution that seamlessly co-exists with the current paper path; utilizes the same processing logic used by the bank's current paper path; has a low implementation cost; can be deployed incrementally; & uses the same pathways as the bank's current paper process. Today, battle-tested software components are available for: image exchange, remote capture, Internet banking, electronic payments, transport independence, 3890 emulation. This component approach is solid, not sexy. But its benefits are eye-popping: from faster implementation, less risk & reduced operating costs, to improved productivity, lower capital expenditures & better use of internal resources. Best of all, a component-based Check 21 strategy ensures a very targeted approach to a bank's needs, & a seamless co-existence between paper & electronic paths - which few monolithic systems can claim. The bottom line is that it's about time for banks to start realizing the benefits of Check 21. & with the proven, scalable component technologies available on the market today, there's no reason for banks to allow themselves to be overwhelmed by monolithic IT solutions.

Check 21 & lockbox 8/6 AB

Even after Check 21 takes effect in October, the vast majority of lockbox payments will continue to start with a paper check & remittance information. Lockbox operators would be wise to heed the legislation & the new electronic mechanisms it empowers as yet another giant step away from older processing procedures that use separate systems for different payment types. A new breed of lockbox processing platform is becoming more critical, in part because of better technology. Modern lockbox processing systems incorporate image technology & virtual private networks, which produce operational savings & competitive advantages for both the bank & the corporate client. Next-generation information capture, collaboration, & data distribution tools eliminate exceptions & speed resolution. The ability to scan checks & other documents - in color - can improve customer service & present new sources of fee income. Other enhancements can be added, such as connections from the lockbox system to DDA, ACH, EDI & wire transfer. Advanced lockbox systems with integrated processing capabilities can give wholesale customers more reporting horsepower, including increased functionality & faster access to payment information. The new systems are more affordable than traditional standalone systems. This tight integration of lockbox functions & tools is helping redefine how lockbox processing fits into the enterprise. For instance, no longer is wholesale lockbox thought of only as a back-office function. The ability of lockbox providers to deliver intraday information (data & images of checks & supplement documents) via the Internet is vital to corporations in making daily business decisions that affect just-in-time delivery, inventory turns, day sales outstanding, & use of credit lines & trade credit. Marrying these sophisticated lockbox tools with emerging electronic payment & clearing mechanisms - on a single, adaptive receivables management platform - creates efficiencies all the way through the transaction cycle, from the lockbox that processes it to the corporate client for which it is posted. Corporate clients won't be forced to piece together reports for multiple payment mechanisms, from multiple sources, in order to analyze it. The consolidation can happen directly in the inner workings of the lockbox processing system. Unifying all of that functionality within a single platform will become important in the Check 21 environment. First, there still will be large volumes of checks - particularly B2B checks - for the foreseeable future, along with steadily growing volumes of electronic payment mechanisms, notably ACH. Second, corporate receivables systems are not changing as a result of Check 21, & clients' rising demands for timelier & more complete payment data surely won't subside. This means lockbox providers must provide the most complete remittance data possible, regardless of the lockbox or payment type, or whether the transaction is paper or electronic based. Third, lockbox systems now must have the flexibility & intelligence to provide feeds not only to an enterprise archive solution, but to an image exchange network, image replacement document mechanism, or check truncation system, depending on user-defined rules. Check 21 will place even greater importance on ensuring image quality & usability. With the emergence of Check 21 & electronic check clearing mechanisms, organizations no longer can afford to use different systems to manage all of the necessary paper & electronic functionalities that will be required for an efficient lockbox & receivables infrastructure. Companies that have implemented a fully integrated image & virtual private network-based lockbox-processing platform will gain an immediate competitive edge in the Check 21 environment.

Still writing checks? Watch out 8/2 ChristianScienceMonitor

When Mary Corbett recently scanned her bank statement, she noticed a number of deductions from her checking account that she never authorized. It wasn't just one merchant - & it didn't happen just once. "At first, I was just curious as to why this was happening," says Corbett, journalist from Silver City NM. "But then I became angry. I see this as an invasion of my privacy & I question the legality of any creditor accessing my account electronically without my authorization." Corbett's experience is not unusual. As banks move away from paper-based transactions, their customers increasingly are bumping into the same problem. The checks they write become an electronic debit. & the practice is legal, unless accountholders object. Worse, it & other industry measures that take effect this fall could boost checking-account fraud. Even the check-processing industry now suggests you guard account numbers as closely as any sensitive personal information. & if you don't know the merchant, don't use a check, industry officials warn, because it doesn't offer the same consumer protections of a credit card. "These automatic deductions are obviously much more efficient for the bank & the creditor," says Mark Budnitz, Georgia State University. "It saves them money but it creates more opportunities for checking-account fraud." Under federal law, creditors must disclose any automatic deductions to a customer's checking account. Electronic payments can be authorized by signing a form or attaching a voided check. As Corbett learned, a creditor does not have to get written authorization from a consumer. Instead, it is up to the consumer to object (preferably in writing) to the proposed transaction. & the electronic trickle is becoming a flood. Because of the nation's wide acceptance of online banking & the huge increase in the volume of automated checking-account withdrawals & deposits, the system that processes these requests is now clearing 10b electronic transactions a year. Because of these changes, the Fed warned banks last year that "dishonest persons are using the automated clearing house to originate unauthorized debits." Consumers have some protection against checking-account fraud in EFTA & UCC. For electronic debits, provided that you notify the bank right away, the bank typically is required to "recredit" your account with the missing funds - within 10 business days while it investigates. "The law makes it necessary for consumers to check their bank statements often, so that any instance of checking-account fraud can quickly be brought to the bank's attention." While banks are supposed to refund any unauthorized checking- account withdrawals, there are fewer consumer protections than there are for fraudulent credit-card charges. If the bank decides the charge is valid, it can take the money out again. "If you are unsure about the merchant, never use a check - use a credit card instead," says George Thomas, EPN. "That way, you can avoid the possibility of checking-account fraud down the road." Consumer advocates warn that you can expect even more incidents of checking-account fraud with Check-21. The new law represents a death knell for the process of banks returning original checks to consumers with their monthly statements or even when there is a problem with a particular check. If consumers want to inspect checks for forgeries or alterations or to present a canceled check as proof of payment, they usually will have to be content with a new payment instrument called a substitute check. The main goal of Check-21 is to avoid the necessity of original paper checks being physically transported all over the country & instead to facilitate the electronic transfer of an image or other information about a check. For consumers, the major disadvantages of the new Check-21 system are twofold: First, it will become more difficult to spot & prove forgeries & check alterations & second, the speed of electronic transfers will decrease the "float" that enables consumers to keep their money in their account for a number of days until the check they have written clears. Experts say that the provisions of the act, while they provide for a type of recredit for consumers who dispute a charge, may be weak. Bankers are calling Check-21 the biggest change they have seen in 30 years & hope it goes smoothly. But even some industry leaders are concerned about its implementation. "It could lead to an increase in checking account fraud - especially with corporate accounts," says Thomas. "We've seen this occurring more frequently over the past few years. This new law could make it more of a problem." That's one reason NACHA recommends on its website that consumers protect their checking account. "It's fine to use your checking account information on the Web or over the phone to pay bills or to pay companies you know & trust," says Michael Herd, NACHA. "But you should safeguard your checking- account information, just as you would your address, phone number, Social Security number, & other account numbers." Banking industry leaders & consumer advocates agree that the days are long gone when only banks had access to account numbers. "There's no way of stopping this steamroller. There will be more efforts by the banking industry to increase this paperless society. We're always hopeful that we can roll something back."

What Check-21 means to the credit/collection department 8/1

The concept of check truncation has been around in the banking industry for decades. The reality of check fraud has been around for even longer, affecting an even greater population. While virtually everyone reading this knows about check fraud, a smaller portion of our audience understands truncation. This is all about to change with the enactment of Check-21. It becomes effective 10/28, so everyone associated with the credit & collection functions needs to become familiar with these concepts-quickly. One of the aspects of the check-clearing function that makes counterfeiting checks easier for thieves is the time the original check takes to speed through the banking system. While this time frame has been considerably shortened, there is still a window of opportunity for the crooks. Check-21 takes direct aim at this problem. It permits, but does not require, the depository bank to truncate the original check. Truncate simply means the check stops moving. If the bank chooses to truncate the check, it then converts the item to an electronic image that becomes the legal equivalent of the original check as long as it meets the criteria set out in the legislation. Truncating the item will permit the banks to pass it through the system much faster than if it were a paper item. Gone are the delays attributable to weather, air travel, etc. Not only does this act take aim at check forgers, but it helps the banks reduce their processing costs. Smaller banks can save thousands of dollars in transportation costs. Larger banks will rack up even larger numbers. Thus, most, if not all, banks are expected to jump on the Check-21 bandwagon, some stopping the checks as early as the tellers' lines. Hypothetically, these lower costs should result in reduced banking & lockbox fees. Whether that happens remains to be seen. The act authorizes a new negotiable instrument called a substitute check to replace the paper item. It should be noted that the existing presentment & endorsement warranties have not been replaced. The only change to the check issuer is that the original will not be returned. If an original check is needed, the substitute check is legally valid. As part of an IOMA audio conference on payment fraud, BofA's Barbara Weiss explained that substitute checks generated from check images have the same legal equivalency as the original check. Weiss believes that in the future, major banks will swap image files & that the true benefits of Check-21 will only be realized after there is industrywide adoption. She noted that check truncation & conversion are often confused. The formal definition of check truncation is the transformation of a check to an image-enabled electronic or image-enabled paper settlement. Check conversion transforms the paper check mid-life cycle to an electronic settlement. Readers may hear about ECP. Today this occurs when the Fed & banks exchange electronic check information instead of physically posting checks, often with the physical checks following later in the day. She sees this changing in the future, with ECP simply being the image exchange with the elimination of sending paper afterward. Faster processing should translate into improved notification of NSF checks. This will help those selling to marginal customers because they may be able to stop shipments to customers who gave bad checks. Not only will companies be notified more quickly, they should have access to their funds on an expedited schedule. There have been rumblings of new bank services designed to take advantage of the law. PNC Bank will offer its clients a service that allows them to deposit their checks remotely. This will operate much like the swiping of credit cards at the point of deposit. It is expected that some banks will scan not only the checks, but the remittance advices that accompany the payments. This should greatly improve the cash application process. What is becoming obvious is that regardless of whether companies wish to convert their payments to an electronic version or not, their banks will do it for them. It's simply good economic sense. Check-21 brings home the point that the payment environment is continually evolving & that to keep up to date, credit & collection professionals everywhere need to be on their toes. The organization summarizes the impact as follows: "As important as saving money is saving time. Instead of having checks clear in days, they could clear in hours." Deposit deadlines will be extended & float slashed. It believes that the banks' cash management services should improve dramatically. Criminal fraudsters will have their prospects limited, but not eliminated. MCRC will continue to bring the latest banking updates to its readers-especially those that affect the collection process.

Check-21: changes accelerating 8/3 AB

As preparation for Check-21 enters its late stages, a handful of trends are becoming evident. One is that core processors are tripping over themselves to introduce image-exchange services, which will let financial institutions settle & clear check transactions electronically. Jack Henry said last week that it would phase in a service that will allow its clients to exchange images among themselves, in accordance with Check-21. As fewer checks are written, check processing is an area where banks are looking for ways to scale down rather than up. The Fed reinforced this message when they announced plans to close 9 check-clearing centers on top of the 13 whose closings were announced last year. By 2006 the number of Fed sites would fall to 23. The developments underscore how much flux the item processing industry is in, & how much uncertainty there is among bankers about what Check-21 will mean. Should they invest more in item processing, to become fully image-enabled, or should they spend their money elsewhere, secure in the knowledge that check-writing continues to wane? The vendor community is betting that banks will increasingly look to outsource this area of operations - particularly if it means they will not have to buy image-capable check sorting equipment. In May, Fiserv announced that it was developing an image-exchange service, the Fiserv Clearing Network, that will eventually offer clearing & settlement services to the company's 1,700 check-processing clients. Fiserv has signed agreements with 4 banks to settle checks on a correspondent basis, though it is not yet moving any check images through the system. Jack Henry will make its clearing service available this year to the 2,400 banks & CUs that use its software, including the 370 that outsource item processing to its network of 17 centers nationwide. Jack Henry says it will be some time before the service's volume builds up. "Our ability to aggregate the volumes will allow us to clear those transactions ourselves without having to go through an outside network," said Tony Wormington, Jack Henry. The service will allow Jack Henry to handle transactions between 2 participating banks essentially as on-us items. NCHA will handle final settlement of the payments. Jack Henry was a member of Endpoint Exchange, which is operated by CheckClear LLC, & will use that system to transmit checks outside its network. Metavante acquired CheckClear last month. Jack Henry's exchange will use the same telecom lines as the online banking service it provides to 1,000 customers. "The infrastructure exists," Wormington said. The first customer to test the clearing service will be RCB Bank of Claremore OK. Tom Bayless, $668m-asset banking unit of RCB Holding Co, said it plans to begin transmitting test files to Jack Henry this month. RCB is not yet exchanging images, & Bayless expects it to take 12 to 18 months to convert completely from its paper-based processing system to an image-based one. Initially, it will likely process some items by paper & some by image. Though Jack Henry plans to expand its item processing capacity - a Philadelphia center is to open by 11/1, & Jack Henry may open at least 3 more next year - Wormington said it does not plan to act as a clearinghouse for paper items.

Fed to close more check-processing sites 8/2 DJ

The Fed will close another 9 check-processing sites in 2005 & 2006, as paper check volumes continue to fall. The Fed had said it was shutting 13 of its 45 check-processing sites by the end of 2004. The additional shutdowns in 2005 & 2006 would reduce the total number of processing sites to 23, the Fed said in a prepared statement. "As we've been saying for some time & as the financial services industry realizes, not only are fewer checks being written, but paper checks are increasingly giving way to electronic alternatives," said Gary Stern, FRB Minneapolis. Check processing volumes fell 7% in 2003 & were down sharply this year, with declines expected to continue in coming years. Reserve Banks estimated they handled 14b checks in 2003 & 6.4b through June this year. The 9 new sites to be closed are in: Boston, Columbus; Birmingham; Nashville; Detroit; Oklahoma City; Houston; Portland; & Salt Lake City. Processing will be shifted to other regional facilities. As a result of the latest downsizing, the Fed's 12 regional banks will reduce staff by 270, 6% of current check-processing employees. The Fed expects to finish this fall a new study about check processing. It said it will continue reviewing operations annually for possible restructuring.

JPMorgan & ARC 7/19 DTN

The recent surge in transactions in the category of electronic checks called ARC comes as no surprise to the banks that are playing a major role in moving utilities, insurers, retailers, credit card companies, & other major consumer billers from paper checks to electronic transactions on ACH. JPMorganChase, one of the largest originators of ARC transactions in the country, says that its volume is increasing at a rate that is even faster than that of the industry as a whole. Alan Koenigsberg, JPMorgan Treasury Services, attributes the explosive growth in ARC to the fact that, unlike the 3 other major forms of e-check, ARC doesn't require consumer authorization with each transaction. It follows what NACHA calls a "notice equals authorization" standard whereby authorization stems from periodic notice to consumers. "This is different. The check is received at the lockbox & looked at as a payment advice. That's why you're seeing such huge growth." RCK, or electronic representment of returned checks, follows the "notice" standard but its share of all e-check volume has leveled off at only 1%. Companies using ARC get next-day funds availability & reduce the time on returned checks to 2 business days from as many as 8. ACH processing costs 2c per item, compared to the 14 - 20c it costs to process a retail check in a lockbox. Billers are responding by initiating & expanding ARC programs. One JPMorgan client is converting 160m payments annually through ARC. "When you begin to convert at that volume, it's very powerful." Helping to fuel the trend, too is that software that manages lockbox conversion is rapidly falling in price. "As the technology becomes more mature, the barriers to entry aren't there." The software cost is borne by banks & by billers that maintain their own network of lockboxes. NACHA announced the ARC e-check category had grown 10x in transaction volume from IIQ 2003 to same period this year, reaching 208.8m transactions in the April - June period. ARC accounts for 44% of electronic check transactions, more than any other form of e-check. ARC & WEB transactions account for 80% of all e-check volume. Introduced as a standard entry code by NACHA in 3/02, ARC refers to the conversion into an electronic ACH format of paper checks sent by consumers to companies' lockboxes to pay bills. A drawback to ARC is that only checks drawn on consumer DDAs are eligible under NACHA rules for conversion, ruling out corporate checks & balance-transfer & brokerage checks. Although consumer authorization is not required for ARC, billers must inform consumers each month that they are converting checks, a requirement most companies fulfill on monthly statements. Under a rule that went into effect last month, billers must allow consumers to opt out of the ARC process if they request. NACHA says most billers offered an opt out even before the rule went into effect. Koenigsberg says the rate of opt out among consumers served by his clients has run about 0.5%.

Brasfield Technologies, Image Exchange LLC, NCHA & Check-21 7/20

Brasfield Image Exchange LLC an agreement with National Clearinghouse to obtain automated web-based national settlement services for participants of the company's comprehensive check image exchange network, iXchange. iXchange is designed to accommodate the electronic exchange & settlement of check images for community financial institutions throughout the US, with a focus on institutions in the Southeast. With the ease & efficiency of the NCHA National Settlement System, financial institutions will be able to take advantage of Check-21. Image Exchange LLC will have a direct interface with the NCHA's web-based National Settlement System. NCHA will take on the role of a Settlement Agent for the financial institutions & process the settlement transactions through the Fed's Multilateral Settlement services. "NCHA's national settlement capabilities & settlement experience & expertise made them a natural choice as a settlement agent for us," said David Brasfield, Image Exchange LLC. "They came highly recommended to us by financial institutions using the NCHA settlement system to settle paper check exchanges. Their focus on Industry wide initiatives for financial institutions of all sizes supports our focus on services to community banks." "This action supports the Industry's goal of having a common settlement platform deemed to be an element of the goal of network interoperability (one network "talking" to another)," said Fred Redeker, NCHA. "With the participants of different networks all using the same settlement system, the ability exists for a participant of one network to settle transactions with a participant of another network. NCHA will continue to work with the Industry to support this goal." Image Exchange LLC provides methods for electronic check clearing through its iXchange solution, which contains features for forward, return, adjustments, & settlement tracking. It is an affiliate of Brasfield Technology, LLC. Brasfield develops cutting-edge technology for the financial market. Current solutions include Internet Banking, Telephone Banking, digital surveillance, information systems security. Brasfield Data Services LLC is an affiliate of Brasfield Technology. Its goal is to provide community banks in the Southeast with quality data processing services & world-class customer service. Image Centre LLC, a Brasfield affiliate, provides a browser-based, outsourced, check & document imaging solution.

SVPCo - delay in image system 7/23 AB

A much-anticipated pilot of SVPCo image exchange network, in which 2 major banks were expected on Friday to settle their first check transactions using digital images of the items, has been postponed. BankOne & KeyCorp have been transmitting check images to each other through the system since June, but settling the transactions the traditional way, by physically moving the paper checks. The 2 said last month that they expected to begin settling some transactions with images on 7/23, but it now appears that effort will not happen until mid-August. Though the banks involved downplayed the significance of the delay, this is the second time this year that SVPCo has detailed its deployment plans & then backed away from that schedule. Since beginning the image swap test in June, BankOne was acquired by JPMorganChase. Jeffrey Lyttle, BankOne, said the BankOne check image team decided to delay the image settlement effort because of another project, an upgrade to a DDA system that was related to the 7/1 merger & set to occur over the weekend. As recently as Tuesday, it seemed all systems were go for the image settlement test. That was when NCHA announced that Key & BankOne, NCHA members, would be settling the first image transactions through the Salt Lake City Clearinghouse. Key has a processing center in Salt Lake City & is testing its image systems at the center. But on Thursday afternoon the NCHA issued a statement saying that the schedule had changed. “The dates were always intended to be preliminary, not etched in stone. It was a matter of other priorities taking precedence that were more important from a BankOne perspective. We’ve got to do one thing at a time.” The 7/23 date had been set in mid-June, before the merger of the NY & Chicago banks. “There’s a lot of moving parts going on right now with JPMorganChase & BankOne. Priorities can certainly change in a 6-week period.” SVPCo said in January that Key & WellsFargo would be the first 2 banks to begin testing the image exchange network, starting in June. They were selected for the leadoff position because of their readiness to clear with image, but since then WellsFargo has been replaced by BankOne. Wells is now slated to hook into the network in August. BofA, which was originally expected to begin testing in October, is now to begin testing its own SVPCo connection by next month. Henry Farrar, SVPCo, said the banks have been diligent about testing their individual image processing systems. “That’s why we’ve been cautious about announcing specific dates, not to disappoint people.” Farrar said the settlement test between Key & BankOne will probably take place next month, perhaps the weekend of 8/20, though he left open the possibility that the schedule could change again. “It depends where everybody is on it. This is a huge project.” All these image processing efforts coincide with banks’ preparation for Check-21, a law that takes effect 10/28. The law obliges banks to accept image replacement document - essentially printouts of check images - in place of the original checks, & many executives expect it to facilitate a transition to image clearing networks that do not use paper at all to settle checking transactions. With US consumers writing upward of 40b paper checks a year, banks expect the shift to image exchange systems to mean dramatically lower processing costs & much faster transaction settlement. Most bankers expect it to be a slow transition. BankOne’s Check-21 conversion timetable for clearing & settling solely with check images instead of paper extends through 2006. “Things will move ahead & move around a lot of times between now & the end of 2006.” Steve Ledford, Global Concepts, discounted the delay. “I’m feeling pretty darn good about the way things are going. All we’re doing right now is making sure things work well. The exact timing is probably less important than the movement toward full production.”

IRDs - can industry limit volume in transition to ECP? 6/27 TowerGroup

Check-21 allows banks to convert a deposited check to a digital image for transmission to a site near the paying bank where it is reconverted to paper as a substitute check or IRD for presentment at the paying bank. The IRD was clearly designed by the Federal Reserve to reduce check transportation, float & handling costs while not forcing banks to upgrade their technology capabilities. Banks possessing image check technology argue that IRDs are costly & delay the transition to full electronic presentment. TowerGroup believes that the IRD is, in effect, a pill that has to be swallowed in order to reach the long-term goal of full electronic presentment. The challenge for the FRS & banks is to limit the usage of IRDs during the transition to electronic presentment. The FRS' announced IRD pricing ranges & incentives for banks to accept electronic presentments are positive steps to ensure that IRDs will not represent a high % of check-initiated payments. Assuming moderate short-term interest rates (3% - 4%), we believe that IRD transaction volume will represent less than 1% of total check volume. If this projection is accurate, then the cost impact of IRDs on banks should be minimal. Higher interest rates or a drawn-out transition to electronic presentment would result in higher IRD transaction volume & processing costs for banks. The Fed & its member banks have long striven to reduce check handling & float costs by use of streamlining methods such as local clearinghouse exchanges & direct presentment (bypassing the FRS by transporting checks directly from the depositary bank to the paying bank). Both the FRS & a number of banks have initiated ECP programs that typically utilize a "checks following" model to conform fully to legal requirements. Although the FRS might ideally have drafted legislation requiring banks to accept full electronic presentment, it faced the fact that compliance would force all banks either to upgrade their hardware & software or to seek the services of an outsourcer. This requirement would have been resisted by many smaller community banks & thrifts, which process relatively little check volume. Instead, the FRS created a substitute check, the IRD, which allows for the truncation of the original check without requiring paying banks to adapt image technology. The use of an IRD reduces the costs of check transportation & processing by eliminating the shipping of the physical check to the paying bank. The original check is converted to image form by the "truncating" bank, which transmits the image & related data to a site near the paying bank. The image & data are then used to reconvert the transaction to a printed form, the substitute check. These printed images are then delivered to the paying bank. Banks may present IRDs through the FRS or third-party network vendors. Non-image-enabled depositary banks can present IRDs by forwarding the paper checks & instructing the FRS, a correspondent bank, or a third-party vendor to truncate the checks & forward the images to another facility located near the paying bank. It has been estimated that if all checks were presented electronically, US FSIs would save $2.5b annually. Banks have been pursuing full electronic check presentment for more than 10 years, investing in check image capture & archive technology. Several networks have been developed to support ECP. While image-enabled banks can mutually agree to present checks electronically through these networks, the potential for maximum savings cannot be achieved if some banks continue to require paper-based presentment. Although substitution of an IRD reduces transportation costs & check float, reconverting images to printed form adds costs. An SVPCo study indicates that the costs of printing an IRD will range for $0.02 - $0.07 depending on the daily volume printed at the remote site. Because the reconversion process is subject to issues of print quality, there may be additional costs for return items. Banks are concerned about the risk of increased check fraud losses rising from the use of IRDs. The preliminary pricing ranges & availability tables published by the FRS in 5/04 should limit IRD usage. TowerGroup believes that checks drawn on 2-day availability endpoints for at least $500 are likely candidates for IRD usage, as the gains in funds availability will offset the added costs for IRD presentment. Image-enabled banks will prefer to present these checks electronically but will use IRDs if the paying bank doesn't agree to electronic presentment. The threshold amount (dollar cutoff) for IRD usage is highly influenced by interest rates, changes in which thus result in increasing or decreasing IRD volume. FRS has created an incentive for banks to receive electronic presentations; namely, the FRS will provide a credit for each item accepted by a paying bank in electronic form. The bank can apply this credit to the per-item charge for electronic presentments. This step should encourage non-image-enabled banks either to upgrade their in-house processing capabilities or to outsource their check operations to an image-enabled provider. Image-enabled banks will use IRDs for the presentment of return items to depositing banks that won't accept electronic presentment. The costs of IRD return item presentments are easily justified by the savings from avoiding paper check returns. Banks have begun to introduce products using remote check truncation technology for commercial deposits as well. Although these technologies promise significant savings to banks & commercial customers, a rapid growth in volume would drive up the use of IRDs. Ideally, the growth of remote truncation will be more than offset by growth in electronic presentment. TowerGroup believes that IRD pricing & incentives for electronic check presentment will limit IRD transaction volume. IRD volume should ramp up quickly in 2005 & peak at 300m transactions in 2006. Increasing use of electronic check presentment & declining check volume will then result in a steep decline in IRD volume. IRD volume, however, is highly subject to short-term interest rates because banks will lower the dollar threshold for IRD presentment when interest rates are high (since the increased interest income offsets the costs of IRD presentment).

Check-21: risk for bankers, opportunity for fraudsters 7/26 AB

Imagine this scenario: Your bank has just been inundated with a new breed of counterfeit check. Though check fraud is nothing new, these checks are different - high-quality, with a perfect signature. The carefully selected amounts preempt your fraud detection systems & imply intimate familiarity with each account's history. The volume indicates a coordinated, large-scale attack. The scheme is clearly the work of professionals. Such schemes underscore the risk management challenges banks face as they move to the image-enabled check processing encouraged by Check-21. Fraud, damaging to a bank's reputation, can become significantly more potent in a Check-21 world as more banks put check images & statements online - effectively linking paper-based & electronic channels. The scam starts with a massive phoney e-mail campaign known as "phishing." The e-mail urges customers to click on a conveniently provided link. Up pops a fraudulent window that appears with your bank site - the real thing - reassuringly in the background. To the unsuspecting, it seems an integrated component of your site. Through such schemes, criminals can gain access to important information: log-in credentials at a minimum, & more often, vital personal data. Right now a host of organized, high-powered criminals are phishing for identities, costing banks millions & damaging brands through lost customer trust. FTC suggests that the response rate to phishing scams could be as high as 5% - way above direct marketers' success rates. Using phished passwords, the thieves methodically raid accounts. They download & analyze bank statements, take note of recent check numbers, & review activity patterns to determine how many fraudulent checks they can direct at each account, & in what amounts, without raising suspicion. They view check images to access more details - worst of all, your customer's signature. Online statements & check images can provide everything criminals need to create perfect counterfeit checks. Vulnerability to Check-21-related phishing is an example of the challenges banks face when they fail to take an enterprise-wide view of fraud & risk management. What steps can banks take to counter such scams? Avoid viewing them solely as an e-mail problem. Doing so ignores the many ways criminals can gain access to customer information (including key-logging software, auto-dialers & compromised bank employees). Be careful what you show online. Mask sensitive areas on check images. Do your customers really want or need to see their signatures? Perhaps most would be reassured to see a signature area blacked-out with a note declaring, "Masked for your security." Look for suspicious Internet sessions. Are your bank's security measures robust enough for the new wave of threats? Numerous technologies & methods exist to evaluate suspicious sessions, involving both the connection mechanics & the user's interaction with the site. Such tools can alert your bank to the first indication of foul play. Link your online & check-fraud systems. Traditional fraud detection systems are isolated by product & channel boundaries. Budget & purchasing decisions may have created this situation, but lack of information-sharing between systems creates blind spots. Bank managers must share data and, in particular, link information about suspicious Internet sessions with check-fraud systems. Change your detection logic from static to dynamic. Beyond implementing better communication among systems, it is equally important that each system be able to dynamically change its logic, on the basis of reported incidents & perceived risk factors. Most traditional mechanisms cannot respond to new information with suitable monitoring strategies. "Unbundle" your fraud systems. New risks call for new logic. By unbundling detection systems, you can deploy resources in new & creative ways. Most traditional systems produce a "score" of the perceived risk level that, while useful, can limit the overall effectiveness of the system's resources. Deploy image analysis tests selectively & intelligently. A particularly important area for unbundling is check image analysis. For example, looking at components such as "signature verification" or "payee analysis" can help answer such questions as "Was this group of checks written by the same person?" or "Is the signature appearing on this group of checks a scanned copy?" Look for unusual payee concentrations. An unusually large number of transactions to the same payee is reason for concern. Risk mangers can detect payee concentrations even without full-strength character recognition tools. Simpler image analysis software may not actually recognize the payee, but it may recognize a repeating pattern. Recognize the telltale signs of a large-scale attack - unexpected commonalities in unrelated transactions (such as handwriting similarities in checks from unrelated accounts). Most traditional systems focus on individual transactions. Automate & accelerate damage control procedures. Large-scale attacks can cause significant damage very fast. In addition to preventing individual fraudulent transactions, implement tools that will alert you when you have a million-dollar problem on your hand & will assist in blocking accounts & containing the damage. Phishing-related check fraud is only the first of a range of scams made possible by electronic channels & aggravated by isolated fraud detection systems. The move to image exchange might only complicate matters.

Check-21, ARC opportunities heat up 7/15 IPR

With slightly more than 3 months to go before the federal Check-21 deadline kicks in, banks & their item-processing vendors are wasting no time in getting ready to take advantage of the new mandate. Many financial institutions & their customers are looking beyond the new law toward a strategy that leverages ARC to provide a comprehensive solution for checks that are not subject to truncation via Check-21. Check-21, which takes effect 10/28, aims to make it easier to perform check truncation & electronic check exchange by authorizing a new negotiable instrument called a substitute check or IRD. It says this properly prepared substitute check is the legal equivalent of the original check for all purposes. Financial institutions will process these IRDs - created through the use of image technology - just like the original check. While Check-21 does not require any bank to create substitute checks or to accept checks electronically, there are benefits to doing so, foremost among them eliminating the hassle (& potential payment system vulnerability) associated with having to physically move paper across the country in order to clear checks. Cost savings & efficiencies - including the ability to increase deposit taking at ATMs - are incentives to taking the Check-21 plunge. This change comes at a time when the volume of checks is continuing to decline - only 15.81b checks were processed through the Fed in 2003, down 4.7% over the prior year. In response, by the end of this year, the Fed will have closed 13 of its check processing sites - more than ¼ of the total. The per-item cost of check processing is on the rise. Based on data from the Fed, the number of checks written has been falling by about 5% each year since the 1990s, & the rate of decline is expected to accelerate over the next few years. Electronic payments have grown by at least 5% a year since the 1990s. In a speech at Piper Jaffray Retail Bank Symposium, Cathy Minehan, FRB Boston, commented, "Paper checks as a retail payment mechanism are going the way of the dodo. Consumers & businesses are increasingly choosing electronic payment forms. Even when checks are written, recent changes in law should make it possible, over time, to take the paper out of the clearing & settlement process completely, thereby increasing speed of settlement & overall efficiency." The number of ARC e-check payments is continuing to increase. NACHA reported that the number of ARC payments totaled 208.8m in IIQ, an increase of a staggering 791% over a year ago. The strong adoption of these e-check payments contributed to a 23.6% increase in the total volume of payments financial institutions made through the ACH. ARC volume totaled $60.8b, making that application the largest ACH e-check application. ARC e-check payments for the first time eclipsed consumer ACH payments initiated over the Internet, WEB, which totaled 170.1m. More significant is the growth in the number of e-check payments made through the ACH. The 5 ACH e-check applications totaled 472.5m in the IIQ, up 120.5% over a year ago. The other 3 categories posted growth: TEL amounted to 45.7m, POP totaled 41.7m & RCK accounted for 5.8m. Those numbers did not include estimates of so-called "on-us" ACH payments, in which the originating & receiving financial institutions are the same institution. The Fed's research indicates that, by 2005, the number of retail payments initiated electronically could be equal to or even greater than the volume of paper payments. Even the way paper checks are collected is changing, & the research suggests that fewer checks are still cleared in the traditional check-processing environment each year. While consumers & businesses are quick to tell most researchers that they want to keep on writing checks, how those checks are collected & processed is not a matter of significant concern. With the advent of Check-21 & the growth in ARC & other e-check payments, one thing is certain - there is an opportunity for financial institutions & their vendors to craft strategies that take advantage of that next-generation payments-processing opportunity. "As we've seen in the industry where between ARC, debit cards & now Check-21, as checks themselves are decreasing, what is not going away is the payment - & payments will be increasing as the economy improves, as businesses expand," says Mike Reynolds, DMP. "I see, as we move down the road, where our application will be that repository of paper payments, ACH, wire, Web payments. Whatever format the payment is, wholesale lockbox or payment processing needs to be that repository that captures it closest to its source & adds value by warehousing that specific information related to that customer, then allowing that customer accessibility to that information as quickly as it can be captured, in a view that is meaningful to them." There are many changes that banks & their vendors are gearing up to make to be ready not just for Check-21, but for the next generation of payment processing. That ultimately leads to imaging. "At some point, every check that is written will be either transformed into an electronic payment by the retailer, or transformed into a digitized image by the first financial intermediary that handles it," says Minehan. "The image could be stored locally or uploaded to national image archives that have been built by both the private sector & the Reserve Banks. At that point, the check would be presented & collected fully electronically using the MICR data on the check. If needed, paper copies of substitute checks could be created by the consumer or business simply by tapping into their electronic banking links." In preparation for this new paradigm, the Reserve Banks are launching 3 new product suites to help banks get up to speed with the new requirements. The services - FedForward, FedReturn & FedReceipt - aim to support the electronic clearing process & to offer better forward & return image cash letter deposit deadlines, large-dollar cull services for forward paper depositors & financial incentives for electronic receipt. FedForward aims to help clear dollars faster, to reduce transportation, to streamline backroom operations & to extend deadlines. This service encompasses image cash letter deposit, electronic endpoint group sort, & paper deposit cull services. FedReturn expedites inbound & outbound returns-processing operations to reduce return-item risk, to improve quality & to speed the returns process. FedReceipt was designed to provide faster & more efficient delivery of inclearings as image cash letters, a process that supports earlier posting to customer accounts, more efficient check-processing operations & the elimination of transportation delays. The Fed put forward an image-quality initiative, requiring the industry to use the ANSI X9.37 standard; ultimately, banks must be able to produce high-quality images to get the job done. In that sense, all of the true added value in the Check-21 process begins with a high-quality image. If a bank has a system in place that can conduct a precise quality analysis on each image file it receives, it can begin to take full advantage of the promise of image exchange. A good image file is important in intrabank applications, where the bank itself is capturing images remotely & is moving them to a central site for processing. One key area of benefit of image quality is with cash letters & POD applications. If the image technology is robust enough, a bank can process large batches of work electronically, without having to run it through a sorter. Ultimately it is the check-processing environment itself that will experience the most profound change. While checks are a key part of banks' business operations, they account for a good share of the costs & the income. "As the retail payments system is changing & check collection is undergoing transformation, each bank needs to have a strategy to manage that change. Although there is still uncertainty as to how the payments system will evolve, banks need to be aware of those changes & ask themselves if they are prepared to confront them." Key questions for banks to consider, include: What is the institution's payments-related cost & revenue profile? Has it assessed the changes that are happening to the retail payments system & the impact of those changes on their own costs & revenues? What are the near-term & longer-term investment strategies the bank will employ as their existing infrastructure becomes under-utilized? Does the institution understand how its consumer & business preferences are shifting? Does it have a strategy that leverages the changes in the payments system to create a more dynamic platform? Minehan maintains that the transition from paper to e-payments is a good thing for all parties involved, & it represents another opportunity for productivity growth in the financial industry. "Electronic payments are cheaper to process, & that cost will be lower as more retail payments are converted from traditional paper processing. Consolidating, & over the longer term eliminating, much of the paper collection infrastructure will release resources that might be used elsewhere tomorrow." Even now, the process is beginning to stake its claim in the payments market. "Those institutions which adapt to the change in a deliberate way will be more productive & will be able to release capital to be invested in other ventures. These are the firms that may come out as the winners over time."

Royal Bank of Canada check imaging 7/21 CanadaNewsWire RBC

Royal Bank has become the first major Canadian bank to give clients direct access to digital images of paper-based transactions online, making cheque tracing as easy as a click of a mouse. Through online digital imaging, paper-based transactions such as personal & business cheques, business deposits & personal credit line transactions are stored in an image bank (for up to 90 days) & can be called up instantly. It has virtually eliminated extended waits of up to a week for tracing. This service has been available to RBC clients through branch & telephone inquiries since 10/03 at a cost of $5.00 per printout. But now clients can view & print the image within their RBC Royal Bank OnlineBanking service at a reduced fee of $1.50 for each viewing. "Even the possibility of a cheque gone missing or a disputed payment can leave people flustered & anxious for answers quickly," said Carolyn Burke, RBC Royal. "Now with online cheque imaging, they can get their answers safely, securely & almost immediately. & they can do it when it's convenient to them." Digital cheque imaging is the latest addition to a host of innovative RBConline banking features that includes Interac Email Money Transfer, third party payment services, stop payments, & secure email communication with RBC Royal Bank staff. RBC is the only major Canadian bank to offer its clients the ability to view accounts held at other financial institutions. "We continue to add services that are relevant for our users & that make sense to do online. Online banking has come of age so our online banking clients can manage more of their financial needs themselves than ever before." RBC first introduced online banking in 1996 & today has over 2.6m online banking & trading clients. Bill payments & transfers are 2 of the most common activities performed online & account for over 72m transactions processed annually.

Checking account fraud is increasing 7/19 WashingtonPost

When Shereen Greene scanned her bank statement, she found a $139 charge from a company she had never heard of - Pharmacycards.com. The Atlanta paralegal dug out her canceled check & easily saw it was fake. The name on it was her maiden name, which she had not used in 7 years. The address was 5 years old & her signature was missing. In its place, was a brief message: "Authorized by your customer. No signature required." Still, the numbers at the bottom of the check belonged to Greene's bank account, & in the increasingly automated world of check processing, that was all that mattered. Greene is one of the latest victims of checking-account fraud. In her case, it was a large-scale scam that tried to extract $12m from 90,000 bank accounts, according to a lawsuit filed by the FTC in May. "This is the e-commerce equivalent of a mugging," said Howard Beales, FTC. Such scams are on the rise, partly riding the huge increase in the volume of automated checking account withdrawals & deposits as part of the nation's wide acceptance of online banking. The system that processes all these requests is clearing 10b electronic transactions a year as consumers abandon paper checks to have their payroll or Social Security funds deposited directly to their accounts or have many of their bills - such as their mortgage, monthly gym fee or telephone bill - automatically debited from their accounts. Regulators at the Fed issued a warning to banks last year citing "alarming changes" in the automated check-clearing process, in which "dishonest persons are using the ACH to originate unauthorized debits." Some scammers are using sophisticated & cheap technology to print checks & take advantage of a banking practice that allows companies to write unsigned, paper checks on a consumer's behalf for one-time transactions, such as when a consumer wants to pay a bill at the last minute or buy from a telemarketer. Through these unsigned checks & automated withdrawals, thieves can seed thousands of bogus payment requests into that huge system, which was built on the underlying belief that the money in an individual's account is not available without the customer's permission. Crooks who find their way into that flow can walk away with millions without having so much as a phone conversation with the people they are defrauding. Banks are supposed to refund any unauthorized withdrawals, but there are fewer consumer protections than there are for fraudulent credit card charges. It is not always easy to convince a bank that a charge is fraudulent, since banks often argue that using the correct account number is proof it was authorized, consumer advocates say. There are no federal rules instructing banks what to do when a depositor challenges an unsigned paper check. Practices differ among states, including whether it is the merchant's bank or the customer's bank that is liable for the loss. For electronic debits, Fed rules require banks to promptly investigate consumer complaints, & put any money back in a customer's account if the probe takes longer than 10 days. If the bank decides the charge is valid, it can take out the money again. By contrast, credit card companies are liable for fraudulent charges & customers do not have to pay until charges are proven to be valid. It took Greene a few weeks & multiple calls to her bank before she was able to recover the $139 taken from her account. Still, she had to shell out $70 for new checks with the new account number she was given because of the fraud. The days are long gone when only banks had access to account numbers. On the front line, there are the merchants who traditionally have not been held to the same kind of strict security rules for managing sensitive customer information as have banks, said Rick Fischer, a District attorney who advises financial institutions on their security systems. "That's the gap & it is being exploited" by criminals. Behind the scenes are 3rd party processing firms that handle many of the transactions for merchants, depositing customer checks into banks or processing the customer's electronic account information. These companies weaken the connection between the bank, which is obligated under law to "know the customer," & the merchant who is generating the payment request. "3rd party processors play a pretty major role in the payments business," said Elliott McEntee, NACHA. "When a bank permits a 3rd party to process transactions on behalf of a merchant, it's putting a lot of confidence in the 3rd party" to make sure that the merchant is legitimate. "Unfortunately in a few cases, banks have not exercised their fiduciary responsibilities & they have allowed 3rd parties to enter payments" that are not valid. Bank officials said that is what appears to have happened with Pharmacycards.com. The phony company convinced 3 third-party processing firms it was a legitimate business that offered consumers a discount prescription card, according to FTC. The company created a Web site where it promised the card would be accepted by most major pharmacies, including those at WalMart & Target. It gave processors business references & a balance sheet. FTC added "the processors did not initially ask for more information. They did not even insist on complete application information." 2 of the processors involved, InterBill & Universal Processing, declined comment. The third firm, Payment Resources, did not return phone calls. FTC says that the size of the fraud suggests that Pharmacycards.com obtained a list of names & account numbers, but from where - a merchant, a telemarketer, a list broker, a financial processing firm - is still in question. FTC believes that the list is a few years old; 70% of the attempts to take $139 from individual accounts were canceled or returned because of bad account numbers, fraud protection measures at the banks or vigilance on the part of bank customers who noticed the fraud & reported it. But enough transactions were made to allow $3.5m to be debited from checking accounts, mostly through unsigned paper checks. The operation was shut down within about 3 months of its start after customers reported the fraud to their banks or to fraud watchdog groups, FTC said. Law enforcement officials say it has been surprisingly easy for crooks to win a consumer's confidence & convince them to give out their checking account numbers over the telephone or on the Internet. The officials suspect thieves have obtained bank account numbers from checks sent to unscrupulous mail-order suppliers that offer goods that either are never delivered or are valued at far less than what was promised. Lists of these customers are then sold to other firms, some operating legally, some not. Officials worry that thousands of consumers have been tricked into giving out bank information by responding to bogus e-mail messages that appear to come from banks, or Web sites like eBay or PayPal. The tactic, called "phishing," has become so widespread that one consultant estimated that at least 57m Americans have received these e-mails. As reports increased of unauthorized electronic debits, the electronics payment association tightened its rules last summer, requiring banks that use its automated clearing system to more vigorously question companies that had high rates of consumer charge-backs. If more than 2.5% of a company's monthly transactions are rejected by consumers, a bank is required to investigate. If the charge-backs remain high, banks should stop processing that firm's automated payments. The Fed is considering rules that would require a merchant's bank to be liable for unauthorized customer charges made through the unsigned checks, called demand drafts, such as the one posted to Greene's account. It is up to the consumer's bank to refund the money if it decides the draft is unauthorized. 12 states now say the merchant's bank should be liable for any unauthorized demand draft. The Fed wants to make that a national rule, on the premise that that will force banks to be more diligent in policing their customers. The FTC's Beales does not believe that tougher rules would deter checking account fraud. "I don't disagree that this is a threat the financial system needs to respond to. But whatever you do, thieves are going to look for ways around it. The people we're talking about don't pay a whole lot of attention to the rules."