FRB Publishes New Reg CC Amendments for Comments by March 12, 2004

The Federal Reserve Bank Board of Governors has published new rules for the availability of funds and collection of checks to implement the recently enacted Check Clearing for the 21st Century Act. The proposed amendments would (1) set forth the requirements of the Act that apply to banks, (2) provide a model disclosure and model notices relating to substitute checks, and (3) set forth endorsement requirements and truncating bank and reconverting bank identification requirements for substitute checks. The proposed amendments would also clarify some existing provisions of the rule and commentary. A complete copy of the proposed regulations and supplementary background information can be found on our web site at www.check21solutions.com , along with a complete, detailed, version of this news letter.

Endpoint image quality assurance feature - 12/9 Endpoint

Members of the Endpoint Exchange national check image exchange network now have a lot less to worry about when it comes to the question of image quality when engaging in a multilateral check image exchange environment. That is due to the fact that CheckClear LLC, operator of the network, has included image quality assurance testing of 100% of the items that pass through the network, as a free service for all of its exchange customers. Concerns over image quality have been cropping up throughout the check imaging industry as banks consider the notion of widespread image exchange systems. Such systems make the receiving institution dependent upon images captured by the sending institution or by other third parties. This has worried some receiving institutions who fear they may find that an image is unusable - only after Reg CC deadlines for returning the item have passed - & worrying sending institutions they may unwittingly forward-present images of unusable quality simply out of ignorance of a problem within their capture system. CheckClear has addressed both concerns with its new IQA suite. Now installed & operating at all Endpoint Exchange Network member sites since first trialed in August, the Endpoint Exchange IQA suite runs in the background on the Endpoint Exchange Client gateway, which is the node on the network installed in each member's check processing site. The Client handles all traffic into & out of that location & interfaces with the local item processing system through an adaptable Application Program Interface (API). The IQA suite includes 31 tests for image quality & image usability which are performed on each item. As Exchange network members forward-present their item images, the IQA software checks each one in real time. Images that are found to have serious & indisputable problems, such as compression or file errors, are rejected immediately so that they never enter the system, & the presenting institution is notified of the error immediately via the standard API. All other items are carried forward, with the suspect items flagged for the receiving institution's inspection, along with data about which tests failed. "This allows the receiving institution to prioritize items that it may wish to review for making an immediate return decision or re-scan request", said Steve Gibson-Saxty, CheckClear. Based upon data collected from live Endpoint Exchange network membership, Gibson-Saxty estimates that less than 1% of items get flags serious enough suggesting human review, while 1 in 200,000 images require re-scan on the part of the sender. If the receiving institution wishes, it can return an item on the basis of image quality alone referencing the appropriate x9.37 return code, within Reg CC return windows. Endpoint Exchange Network members have the added benefit of being able to return items instantly, & electronically, since all the data needed to route the item back to the bank of first deposit is inherently in the item record. Alternatively, receiving institutions can at their discretion choose to accept a marginal image for presentment purposes, but can use the Endpoint Exchange Network's built-in re-scan request feature to request a new image from the sender, in accordance with clearinghouse rules. "Our IQA feature provides tremendous benefit to our members on the receive side, by alerting them to images that they might wish to inspect." Said Mark Craig, CheckClear's General Manager. "But our depositors may want to eliminate quality-related returns & rescan requests, so we continue to encourage them to implement separate image quality assurance programs upstream of the Endpoint Exchange Client, for their capture subsystems. This will ensure the integrity of their transit images prior to handoff to our network & ensuring the quality of their on-us & other non-exchangeable items in their own archive. We have benchmarked the IQA feature right out of the box, & we have found it can check 100% of the deposited volume without degrading exchange throughput". All new members of the Endpoint Exchange Network will automatically benefit from the IQA feature, which is included at no additional cost as part of the Exchange service.

Check-21 readiness - 12/22 Demos

80% of banks surveyed are planning &/or are in the process of upgrading their internal systems to capture the benefits of Check-21 when enacted. Most banks are losing no time in beginning to analyze the complex process changes that this Act will enable. Most banks surveyed will capture images & participate in image exchange – some banks are choosing an aggressive image exchange route while others are taking it more slowly. The most aggressive image participants are reviewing end-to-end processing options including straight through processing. End-to-end process changes can include a major investment in hardware & software, including: new teller systems, scanning & character recognition technology, small check scanners/endorsers at each teller station, higher volume scanners/endorsers at all branches; not to mention multiple item balancing, central group balancing, software & hardware support & maintenance & re-training of front & back office staff. Demos Solutions conducted a survey with 10 financial institutions to determine the status of image implementation in the industry.
? 100% of respondents will have image capture at the sorter with image archives by the end of 2004.
? 80% of respondents will have image-based Day 2 operations by the end of 2004.
? Those institutions actively participating in ECP are planning image exchange pilots in 2004.
? 40% of respondents are evaluating distributed image capture for implementation after Check-21 enactment.
With the initial cost of end-to-end process changes running as high as $15-30m for a 500 – 1000 branch network, bank executives are seeking system features & functions that will help them achieve a high return on investment. With the right process design, the benefits of Check-21 & related teller automation can go broad & deep, offering revenue growth & cost savings across the enterprise.

The potential benefits of these changes are clear, but so are the pitfalls for the unprepared. We hear the same questions from bank process gurus who share our concern:

• How will Check-21 impact each line of business in terms of revenue, products & services?
• How can our investments in hardware & software be minimized in processes & systems that may be obsolete in a few years?
• How will our customers experience the changes, & what are the opportunities to expand our product & service offerings?
• How should we budget for these changes in 2004 & beyond?
• How do I understand the impact on infrastructure (facilities, machinery, & staffing)?

• Forecast prime pass check volumes (industry experts predict a 5% - 10% annual decrease in check volumes over the next 4 years)
• Utilize a workforce management model which incorporates workflow constraints & service agreements to measure capacity impacts

• Determine hardware & software requirements & costs (updated equipment, scanning devices, servers, maintenance, etc.)
• Identify other impacts & issues requiring resolution (teller role, training, image quality, check storage & shredding, etc.)

Workforce & other cost impacts based on implementing Check-21 & related technologies will vary dramatically by institution based on the current state of operations & how extensively a bank implements imaging & check truncation technology & procedures. At a number of clients, we did see some interesting & consistent trends in their upfront business cases. The labor savings in the back-office significantly can outweigh the labor savings from front office changes by a margin of 2:1. Proof & encoding will be impacted while savings will be realized in research & adjustments, filing, & couriers. As check volumes decline, banks must strive for continuous, day-to-day improvement while pursuing breakthrough productivity technologies for tomorrow. Don’t discount the basics of good work standards, staffing, scheduling & continuous improvement on your ability to manage costs during this period of volume decline. Front office declines were driven by changes in transaction processing times of the most common teller transactions. For example, time for deposits with cash back transactions can be reduced by as much as 30-65% due to improved technology & processes. Remember, typically only 5 - 10 transaction categories drive about 70% of teller transaction volume. The front office impact can be significantly lower if you are an offline transaction processing bank today – i.e., you would expect not to see dramatic improvements in transaction times at all. The benefits for these organizations will need to come from improvements in fee collections & fraud/loss reductions. Revenue improvement opportunities are often used to justify the investments. Typically fee collection improvement rates are considered “hard” benefits while increased cross selling of products may be considered soft. Obviously these benefits have as much to do with teller automation & good practices as anything driven by Check-21. Check-21 is providing many organizations a reason to investigate dramatic improvements in the utilization of technology to improve productivity & customer service. While the impact can be significant, many of the actual cost savings are due to the simple implementation of improved technologies & sound production management practices. We caution management from relying too heavily on the strategic vision, which may impair their judgment in sound implementation concepts. Strong measure & manage practices drive productivity on an ongoing basis. We have all learned by now that revolutionary concepts - like CRM, ERP & the Internet – are successful when implemented in evolutionary steps.

Fraud detection in Check-21: - 9/03 WesternBanking

Check-21 - no legislation has caused such speculation in the financial industry, until now. What is it? How will it affect my financial institution? How can it help control fraud? Not one financial institution will remain untouched by Check-21 - it applies to all financial institutions from the largest to the smallest. Check-21 allows financial institutions to convert paper checks into electronic images & deliver IRDs in place of the original item for payment. Check-21 revolutionizes the payment processing industry by drastically reducing paper handling, collection time, clearing expenses, & fraud, while improving funds availability & the collection of NSF items. According to an 11/01 ABA study, fraud attempts at US banks doubled in 2001. Attempted check fraud exceeded $4.3b in 2001, but dollar losses hovered at $698m. It is not just large financial institutions that are affected; fraud is increasing for community & smaller financial institutions - up 46% in 2001. Before Check-21, processing a paper check involved transportation & capture at several locations. Each step in the process added time & increased fraud risk. The entire process was typically 2 - 3 days. Historically, fraudulent check ID has been a process where financial institutions could touch, feel & see poor quality counterfeit & altered checks. In a Check-21 processing workflow the paper item can be truncated at the point of presentment dramatically reducing processing time. The paper check will no longer be available for processing & fraud detection. Instead, financial institutions will need to implement new processes & fraud detection methods based on captured transaction information & images flowing through the institution. Capturing of images at the point of presentment enables early fraud processing. At ATM, checks & currency are validated automatically as the deposit is accepted. At the teller before the transaction is completed, standard fraud safeguards such as positive pay match each presented check to an issued checks database. Branch capture provides MICR & image capture at the branch reducing fraud by having earlier access to a customers deposit data in the processing day. Check kiting is another form of fraud that Check-21 will nearly eliminate. Check kiting may occur in various ways involving numerous financial institutions & takes advantage of the transportation requirements & time of today's payment system. The underlying premise is the customer's ability to gain access to deposited funds before they are collected from the institution on which they are drawn. Check-21 enables the creation & delivery of IRD's & will shorten the physical transportation time from today's clearing process. New accounts & identity theft account for 12-13% of fraudulent activity in the US. This type of fraud occurs when an individual uses a false identity to open or obtain an existing account. Fraudulent checks are used to fund the account & those funds are withdrawn as soon as they become available. By using cutting edge fraud filters that detect suspicious deviations such as check velocity, duplicates & out of range serial numbers & amounts, a suspect deposit can be identified & resolved promptly. Just as Check-21 makes the acceleration of the presentment possible, it aids in increasing the speed of return & exception item processing. Since suspect items are returned more quickly using electronic clearing, notification & decisionmaking is completed faster & corrective action is quickly taken. This reduces a bank's exposure to fraud & loss. The Fed estimates that of 251m checks were returned in 2001. While this represents a small portion of the total 42.5b checks written, returns are often processed manually & are costly to process. Financial institutions are in an enviable position to take advantage of the many benefits provided by 99999Check-21, with fraud detection being one of the most significant. In order for banks to take advantage of these efficiencies they must be able to process & decision their exceptions using images instead of paper. It is important that financial institutions understand the impact of Check-21 & how it changes their payment landscape. By capitalizing on the gains in operational efficiencies provided by Check-21 financial institutions will be able to streamline operations & maximize ROI. It's simply not enough to have imaging capabilities for Check-21. The true efficiencies of Check-21 can be best realized by implementing a layered fraud detection system that addresses your needs now & in the future.

WesCorp digital check transfers: -12/22 CUJ

WesCorp FCU has become the 1st corporate CU to leverage Check-21 by sending a digital file of check images to Endpoint Exchange, a national electronic image exchange network. The move followed a 9-month pilot & meant that instead of transporting the actual paper checks to the Fed, the paper trail ended at WesCorp's image exchange processors. After processing, the paper checks went directly to storage.

Minnesota Corporate CU & MidStates FCU: -12/24 CUJ

Members of Minnesota Corporate FCU voted to approve the combination of the corporate with MidStates FCU, the 3rd corporate marriage this year. The merger, which takes effect 12/31, will create the nation's 3rd largest corporate (behind WesCorp FCU & Southwest Corporate FCU) with $5b in assets & serving 1,100 natural person CUs in 24 states, mostly in the midwest. The combined corporate will be retain the MidStates name & be run out of MidState's offices in suburban Chicago. David Preter, president of MidStates, will serve as president of the entity, while Lew Lambert, president of Minnesota Corporate, will run the Minnesota branch of the corporate.

CU Mergers & Conversions: -12/11 CUJ

NCUA approved 36 CU mergers in October, the most in 1½ years, making a total of 276 mergers approved through the first 10 months of the year. Of the mergers approved in October, 27 involved one or more small CUs under $5m in assets, making a total of 163 small CUs that have disappeared through merger so far this year. The biggest mergers approved in October were: Orange County's CU, Santa Ana CA ($675m) with Coastline Community CU, Long Beach ($42m); CoVantage CU, Antigo WI ($380m) with Community CU Wausau WI ($25m); Horizon CU, Spokane, Wash. ($225m) with Mountain View FCU, Spokane ($26m); & GTE FCU Tampa, ($1.6b) with North Florida FCU, White Springs FL ($15m). NCUA said it approved 13 more conversions to community charter in October, making a total of 112 for the year, a new 12-month high with 2 months still to go in 2003. That makes more than 500 federally chartered CUs that have switched to community charters since the 1998 passage of HR 1151 that eased the way for multiple group fields of membership. The largest conversions granted in October were: K 25 FCU, Oak Ridge TN, to serve 625,000 residents in greater Knoxville; Motor Parts FCU, Auburn Hills MI, to encompass 600,000 residents of Oakland County MI; Inland Employees FCU, Schererville IN, to cover 500,000 residents in Lake County IN; & OSU FCU, Corvallis OR, to serve 500,000 residents of Benton, Linn & Marion counties OR.

Check-21, new FOMs seen as opportunity -12/1 CUJ

What does Check-21 & more open fields of membership have in common? Both offer vast opportunities to CUs-but only if they recognize the potential pitfalls & the expected benefits, according to Milton King, TWS. "It's been exciting to watch CUs really get the opportunity to stretch themselves & spread their wings, growing from just focusing on their one sponsor to community charters. But while that made it easier to grow, it opened them up to more fraud." Check-21 offers opportunity to trim costs & add efficiencies, but the CU that doesn't educate its about the reduction in float time is likely to have angry members complaining about unexpected bounced checks. "Members won't notice that the checks they're depositing are clearing faster & that they can get their money faster if the CU doesn't pitch that. But they will notice it when they bounce that first check." CUs need to take the next 12 months prior to enactment of Check-21 to market what the bill means to members. "When Check-21 passed, I went out & got a bunch of mainstream newspapers & there wasn't a word about it, & that means the average member hasn't heard a word about it, either."

First Tennessee & Check-21: -12/25 CommercialAppeal

First Tennessee has developed a system that will enable businesses to deposit customers’ checks any time without having to take those checks to a bank. It’s called First Deposit Plus, & it will be offered to commercial & retail customers after the first of the year. “Just imagine, a company like International Paper doesn’t have to make deposits in local banks all over the country,” said Taylor Vaughan, First Tennessee. “It means they can deposit everything in one place. It means only reconciling one account.” Jeremy Walding, First Tennessee, said it lets a customer start getting interest faster. The system depends upon a Check-21, which states that banks & their customers will no longer be able to require the receipt of the original paper check that they issue. It becomes effective 10/28/04. The law allows the bank customer to receive - instead of the checks he wrote during the past month - an “image replacement document” or substitute check, which will have exactly the same legal standing as the original. Check-21 is designed to reduce float time, the time when a check is in transit from the receiver to when the dollar value of the check is actually added to the receiver’s own account or when it is received as cash. Tom Burge, Union Planters, estimated Check-21 could reduce float time by an average of ½ a day. A check written to a Memphis retailer from a LA bank might typically take 2 days to clear, but it would take just one after Check-21 is implemented. “It’s going to be the most significant development in checking since we developed magnetic ink back in the 1960s.” Union Planters has been working on the back systems to enable the bank to receive IRDs from other banks, but has not been working on systems for retail customers. “We would like to clear as many checks as we can as images, rather than shipping paper all over the country.” Burge estimated that broad adoption of Check-21 technology could take 3 - 5 years. Synaxis, a First Tennessee insurance subsidiary, has been using First Deposit Plus for a few weeks, Vaughan said. Karen Doyle has pre-sold the service to a few customers. All a customer needs is a particular type of scanner & First Tennessee’s software, which takes a short time to load & master. The service’s price varies according to how much business the customer does with First Tennessee. Check-21 will likely reduce demand for courier services, including air couriers, & over the long term will substantially cut banking jobs related to check handling. For example, no one will have to service deposits from ATMs on a daily basis, as they do now. & since customers won’t be getting the advantage of float or their original checks back anyway, they may start using electronic bill payment more regularly. Banks view Check-21 “as very beneficial to the country. I think consumers will see this as very beneficial because they will see more timely updates for their money. Float costs the country a lot of money. The more float you can get out of the system the more efficiently the money system works.” First Deposit Plus will be helpful for hundreds of banks that correspond with First Tennessee, Vaughan said. Danielle D’Angelo, Unisys, said her organization is conducting workshops about what they need to do to implement this technology. “Banks are just starting to figure out what they’re going to be doing.”

Fed - $2.7b Reserve Bank budget: -12/23 Dow Jones

The Fed has approved a $2.7b 2004 budget for its 12 district banks, which are grappling with the high costs of processing paper checks. The 2004 budget is a 1.5% increase over 2003 expenses. Next year's budget is about $37m higher than predicted in July, largely because of higher-than-expected check clearing costs. "The reserve banks continue to be challenged by check cost recovery shortfalls," the Fed said in its 2004 budget for the banks, approved 12/17 by a notation vote of the Fed Board. The Fed is in the final stages of a multiyear restructuring project to make its check clearing services cheaper & more efficient. However, it acknowledged that it's still vulnerable to swings in processing costs. "The effect of check restructuring changes, volume declines & revenue loss poses a higher risk than usual to the check area in 2004. The budget reflects a projected 8.9% decrease in processed check volume. Check revenues would be affected adversely by further declines." 35% of the Fed's total reserve bank budget is offset by revenues from priced services, & 14% is offset by reimbursement for services on behalf of the Treasury. After these revenues are taken into account, total 2004 expenses are about $1.4 trillion, 3.1% lower than the 2003 estimate. In 2004, the Fed's bank budget will benefit from staff reductions achieved through voluntary retirement programs. Personnel expenses make up 62% of the reserve bank budget. The Fed said its workforce is expected to shrink by 3.9% in 2004 from the previous year's levels. The Fed has cut costs by consolidating its check operations & cutting support staff in some areas. Next year's bank budget reflects higher-than-expected costs for the planned improvements to the check clearing program. The board approved budgets for the Fed's capital investment plans & the Fed's office of inspector general. The Fed approved a $467.4m 2004 capital budget for its banks, its IT division & its office of employee benefits. This is $61m higher than the 2003 estimate, due to construction projects in Detroit, Houston, Kansas City & Seattle. The Fed board approved an $8.5m 2004-2005 budget for its office of inspector general, in a 12/18 vote. This represents about a 4.9% annual increase during the 2 years covered by the budget. The Fed approved its budget for its board operations in Washington. The budget is projected to increase 5.8% for each of the next 2 years, with merit pay & security costs responsible for most of the budget boost.

7 In 10 Americans still write checks to pay monthly bills: -11/7 CPSA

68% of Americans still pay their bills every month by writing checks & mailing them in despite many newer technology-based payment options available, according to Check Payment Systems Association (CPSA) & KRC. It shows that when it comes to paying monthly bills such as utilities only 11% of consumers prefer online banking, 8% choose automatic debit from the bank, & only 2% prefer paying over the phone via credit card. Security & safety measures, record keeping purposes & more control of spending habits were cited as the main reasons people prefer paying the majority of their monthly bills by check. The Fed’s 2002 Retail Payments Research Project supports the findings. Checks remain the most popular form of non-cash payment & are 65 times more likely to be used than all other types of electronic payments combined. When the value of checks & electronic payments in the US economy is combined, checks account for 84% of the total. “This survey shows that Americans still trust & use their checks & they are likely to keep the check writing habit into the future,” said Wade Delk, CPSA. “What consumers are saying in this survey that they want to have a choice in payment options.” The majority of Americans (69%) feel more at ease writing checks for a purchase than using a credit or debit card online. This confidence in checks crosses all age levels. Most 18-24 year-olds (64%), 25-34 year-olds (58%), 35-44 year-olds (73%), 45-54 year-olds (69%), 55-64 year-olds (75%) & those 65 & older (76%) say they are more at ease using checks for purchases than they are using credit & debit cards online. The preference for checks holds true among those who regularly use the Internet for financial or banking purposes. A 12/002 survey by TowerGroup showed that 41% of online banking users still prefer to write checks & mail their bills. The same is true for 26% of US households using Internet bill payment. Security: 62% of those surveyed believe that printed checks have more security measures & enhancements than credit & debit cards. Budgeting: More adults (27%) say writing checks helps them stay within budget compared to using debit/ATM cards (19%) & credit cards (8%).

Alogent - Check-21 solution center: -12/16 Businesswire

Alogent announced the opening of its 10,000 square-foot Check-21 Solution Center at its headquarters in Alpharetta GA. This facility allows financial institutions to view & participate in image-enabled enterprise solution demonstrations & evaluations related to Check-21. Financial institutions now can see for themselves how Alogent's paper-to-image transition solutions, including Straight Through Check Processing & interbank image & data exchange, can benefit their organization. "Alogent's Check-21 Solution Center should prove to be a terrific means for banks to see check imaging in action. Banks are able to gain firsthand experience in creating efficiencies & streamlining workflow processes," Alenka Grealish, Celent, said. "The Center will hit home the immense value of implementing image-based solutions & enabling early truncation." "The interest spurred by Check-21 legislation & Alogent's reputation for excellence in image-based solutions have made it an imperative for us to offer an on-demand demonstration facility, where bankers can formulate strategies that extend beyond the immediate needs of Check-21," said Vijay Balakrishnan, Alogent. "Bankers can see for themselves a range of alternatives that can help them transition from today's paper based environment to full check truncation & image exchange, at a pace of their choice." The Check-21 Solution center features Alogent's Sierra Xpedite, Sierra Xchange, & Sierra Clearing solutions integrated with the banking industry's top item processing platforms, including IBM CPCS. The center features check reader sorters & point of presentment MICR & image scanners from leading vendors. Jeanne Capachin, Financial Insights, said, "Check-21 is going to have a profound impact on banks & their front, middle, & back-office environments. Although there is still more uncertainty than certainty about how this will play out, banks need to work right now to make sure they are prepared for the legislation." The Solution Center is designed to help financial institutions understand the benefits of integrated solutions that provide a paper to electronic transformation. Bankers can observe how Sierra Xpedite reduces work & improves quality at the branch & points of presentment through extensible deposit automation. They can see how the workflow from Sierra Xpedite through Sierra Xchange results in cost savings by capturing image & data earlier, which collapses processing timelines, truncates paper, & reduces transportation costs. Check images & data across all points of presentment are captured & processed by Sierra Xchange as part of Straight Through Check Processing. The interbank data & image exchange capabilities of Sierra Xchange are showcased, including Image Analysis, Virtual POD, Reconciliation & intelligent transaction routing for Image Exchange, ACH conversion, & IRD creation & printing. To address the needs of centralized check processing, the Solution Center provides bankers with an opportunity to see the image workflow efficiencies available through Sierra Clearing, such as Prime, Reject Repair, & Balancing. These applications are integrated & co-existent with legacy check processing systems, including IBM CPCS, Unisys ICPS, & Tri-Syn SuperMICR. Alogent entered into product alliances centered on the successful integration of its products with key hardware & software platforms. At one demonstration facility, financial institutions & technical buyers can weigh the merits of Alogent image solutions running on a variety of equipment, & interfaced to popular teller & item processing software applications. Alogent alliances include BancTec, CTS Electronics, Diebold, Digital Check, DSS, Getronics, Glory, Harland, IBM, Panini, Seac Banche, Source Technologies, TouchPoint & Unisys.

Jack Henry & Endpoint: -12/15 CUJ

Jack Henry & Associates will begin offering its financial institution clients the ability to exchange check images & electronically clear & settle checks through NCHA & CheckClear’s Endpoint Exchange Network. The company, parent to Symitar Systems, plans to introduce solutions in full compliance with Check-21 & help accelerate the adoption & implementation of image clearing by its core & item processing customers. “We see Endpoint & NCHA as the backbone infrastructure for connecting all of our bank & CU customers, in-house & outsourced alike, for nationwide check image exchange,” said JHA’s Jack Prim.

CipherCheck anti-forgery product: -12/12 BusinessNorth-Duluth

Charles Jackson, 27, was a clever crook with a knack for computer art. By the time he was caught & sentenced to 10 years in prison last year, Jackson had defrauded small banks & CUs of an estimated $300,000 in his hometown of Cincinnati. He did it by creating look-alike payroll checks on a PC & using runners to cash them - a scheme that's part of a growing caseload of computer-generated check fraud. If only those banks had accessed a new security product being developed in Duluth, muses Win Scott Erickson, Cipher Check & inventor of an Internet-based system designed to root out counterfeit payroll checks, & other phony documents. "That criminal enterprise would be impossible with Cipher Check," Erickson said upon learning the details of the Jackson case. The former Secret Service agent, who specialized in spotting bogus currency, is raising capital to help launch the system. It uses a unique code printed on legitimate checks to help banks or retailers verify them via the Internet, & prevent the crime. Erickson said there's a big demand for a quick, cost-effective way to verify the legitimacy of a check because of the growing Charles Jackson fraternity of digital fraud artists. Jackson ran a large-scale computer-generated check forging operation for five years, using a PC to print up authentic-looking payroll checks with the logos of some of the city's best-known employers. He then recruited runners to go to small bank offices to cash the checks, sometimes as many as 10 a day. A handful of banks suffered "tremendous losses", according to police. 5/3 was hit 25 times for a total of $100,000; another institution, Provident Bank, lost $150,000 in 31 instances of check fraud. The clever part of ploy is that Jackson knew the cashing bank always would get a positive response when checking to see if there were funds available in the accounts of the large corporations the counterfeits were "issued" by. "But if the cashing banks were online with Cipher Check, each & every time that crime couldn't be committed." The forger wouldn't have the capability to put the correct cipher on the check. The police would be standing by the next time he tried it." Erickson has partnered with investigator Gene Halvorson & Points North Consulting of Duluth to develop the concept & the technology of Cipher Check & is seeking financial backing to implement it on a commercial scale. The firm is a spin-off of Erickson's IWIS, a company that makes devices to identify counterfeit currency. The start-up has received extensive help in developing its business plan from Kathy Forslund of University of Minnesota-Duluth's Center for Economic Development. Forslund said she has worked with Erickson & Halvorson for about 3 years, refining their business plan & getting the fledgling company ready to present to investors. "Her help has been absolutely invaluable in getting this concept off the ground," said Halvorson, who conducts investigations on behalf of several law firm clients. The idea behind Cipher Check is simple. When a bank issues a payroll check, it prints a numeric code, or cipher, on the paper. Each check has a unique cipher that is entered into a computer database operated by Cipher Check. When the employee presents the check to be cashed at his or her bank, those bankers can access the Cipher Check database via the Internet & see if the number is listed. If not, the check likely is a forgery. The problem with existing solutions is that forged checks can't be detected until after the crime is committed, said Erickson. "There's no way to dissuade the crime right now. A lot of banks feel that getting stung by computer-generated fraudulent checks is just a part of doing business because all they can do is try to get compensated after the fact. Our system changes that situation." As a former lawman, Erickson is passionate about nabbing financial bad guys rather than just dealing with the results. Once the system is financed & deployed, he envisions that anyone - even a retailer - will be able to stop a check forger in his tracks, merely by calling the issuing bank with the cipher code. The design for Cipher Check's software is completed & ready to go, said John Foucault, Points North, a Duluth software consulting firm. "The main challenge we faced was making sure that it could be both sophisticated & secure, & that it be able to work with existing applications used by financial institutions. Those areas have all been validated. The process took six-to-nine months." Foucault is excited by the Cipher Check's system potential application beyond computer-generated check fraud to the validation of all kinds of official documents. "Any document can be forged using a computer - drivers licenses, passports, green cards, you name it. This technology would work with any & all of them." Erickson said he's reluctant to forecast revenues for the company because he has greatly expanded the technology's original scope - fraudulent check detection - to broader security applications, for instance, fighting terrorism. "Putting a unique verifier on visas, social security cards, military IDs, temporary residence ID cards, can make it possible to detect counterfeiting or altering of all these kinds of documents, prior to the completion of a terrorist act." Another advantage: Thinking bigger makes the company more attractive to potential investors. Erickson has discovered looking for venture capital backing for less than $1m doesn't open many institutional doors these days. The potential applications beyond check forging has ratcheted his concept into the $10-$15m range that makes it more attractive to mainstream venture capitalists. Possible homeland security applications have prompted Erickson to look hard at the availability of government grants & to generate political interest in the idea.

SVPCo, Carreker & Check-21: -12/9 Businesswire

Carreker announced that SVPCo has formed an alliance with Carreker to deliver Carreker’s Check-21 Workshop to SVPCo financial institutions. Carreker’s Check-21 Workshop is an intensive 2-day set of sessions designed for all areas of a bank impacted by Check-21. It is delivered on site at the client bank, tailored to the client’s business strategy & technology environment & focused on ensuring that the bank’s Check-21 response is synchronized across the enterprise. It includes a comprehensive post-workshop analysis of the relative preparedness of each area of the bank & a detailed report that guides the bank’s ongoing preparations & prioritization. Hank Farrar, SVPCo, which is owned by 22 of the largest US banks & Clearinghouse, said, “The pace of image exchange & associated planning has stimulated a demand for Check-21-related education. From conversations with participating banks, we felt that Carreker’s Check-21 Readiness Workshop was setting the standard for Check-21 education & preparedness, so we chose Carreker to help us bring SVPCo participants the best introductory services for improving the understanding of Check-21 implications.” Nancy Langer, Carreker, said, “We are gratified to see our relationship with SVPCo evolve to include this important educational component. Our Check-21 workshops contrast sharply with others by getting behind the firewall to tailor our content to each client’s circumstances & needs. We don’t just prepare the bank for the immediate Check-21 impact, but for all the domino effects we foresee across the bank, & we give them tools to sustain their efforts.” Carreker has contracted its Check-21 Readiness Workshop for twelve leading banks. The company was chosen by Wells Fargo to develop image exchange software, called ExchgLink, for sending & receiving image files & software for ensuring image quality, called Image Inspector. Both solutions will be in pilot in 2004.

Check-21 raises new liability issues for banks -11/17 BNA Banking Report

An act designed to bridge the gap between paper-based check processing & a pure electronic system may pose new challenges for banks, according to remarks 11/7 by a lawyer at FRB NY. Warranty provisions contained in the check clearing act will increase litigation among banks. The Federal Reserve Board hopes to issue regulations, including commentary with clarifying examples of how the warranty provisions apply, close to the end of the year.

ATMs & Check-21: 12/10 EFTR

Protecting the payment system from future terrorist attacks may have motivated Congress & the White House to move on legislation that will give banks an alternative to physically transporting paper checks across the country, but the real winners may be ATM vendors & owners. Under Check-21, banks may electronically scan the front & back of each check, create an encrypted, electronic image of each check, & then transmit the images rapidly from one area of the country to another. Consumers who wish to receive copies of their checks for record keeping purposes or who are investigating bank errors or possible fraud may receive printed copies of these electronic images. This new system is a boon for ATM vendors & owners because the machines can be equipped to take image deposits, boosting the number of deposits that will be made at the machines. The business case can be demonstrated in dollars & cents. The average cost for a typical teller transaction is $1.70 while an ATM transaction costs an average of $0.40. The resulting cost reduction from deposit automation at the ATM can be used as a basis for moving more routine transaction processing to the ATM. For retail banks, the advantages can be considerable. The combination of deposit imaging & truncation will bring convenience to the consumer while increasing the value proposition of an ATM program for banks. According to Dove Consulting, only 10 out of every 100 banking customers use an ATM today to make a check deposit. The primary reason is due to lack of confidence in using the current envelope-based ATM check deposit system. Over the past year, a few major banks have run ATM deposit imaging programs, eliminating the use of deposit envelopes. Results showed increased consumer acceptance, & an increase in per machine ATM revenue. "I think Check-21 will be the foundation for increasing the number of deposits at ATMs because, while 80% of cash withdrawals are done at ATMs, 70% of deposits are still made at the teller window," Peter Fiorella, Infonox says. "With the capability to image checks, you now raise consumer confidence in the deposit transaction because you're now printing the front & back image of the checks deposited & the customer goes away with immediate [credit] of the deposited items. For the bank, that translates into 'I can reduce the number of deposit sweeps I make because now they have the check image immediately available for processing. It virtually eliminates empty envelope fraud, it reduces check kiting, it reduces the number of full time employees that are required under the current system to open the envelopes & verify the contents. A minor benefit would be your reject repair costs are reduced." SEI & Infonox announced the certification of SEI's Enterprise ATM Deposit Processing solution. "By leveraging the Infonox technology, SEI is able to transform a traditionally paper-based process into an image-only, Check-21 compliant process," said David Garavelli, SEI. "The solution lowers processing costs, reduces risk & enables financial institutions to extend their deposit windows while streamlining the deposit handling process." The deal combines SEI core processing imaging technology with Infonox's Active Payment Platform to support the image capture of check & cash deposit transactions at the ATM. The resulting deposit automation & imaging solution enhances cash & check deposit processing at ATMs, heightens customer convenience, & dramatically lowers the traditional operating costs associated with ATM deposit processing. The use of the Infonox technology allows a financial institution freedom to choose the ATM hardware used & supports mixed vendor ATM networks. By imaging the deposited checks at the point of presentment, a financial institution is able to eliminate empty envelope fraud, reduce deposit sweeps & lower servicing costs. The Infonox solution raises the deposit transaction to a higher level of consumer confidence by displaying the check image on the ATM screen & printing the check images on the customer receipt. With an image-enabled depository, an ATM can be utilized as an effective marketing tool for the "unbanked" market. "I think the biggest play is the bank gets into deposit automation," Fiorella says. "They could use that technology to fund an automated initiative toward the unbanked portion of the population, which is currently 30%. You now would be able to cash a check at an ATM, the proceeds of the check cashing can then be used to fund other revenue-generating services like prepaid debit cards, bill payment." Other vendors see gold in Check-21 for ATM deployers. Diebold & ACI Worldwide demonstrated intelligent check handling on an ATM at the BAI show. The demonstration focused on Diebold's Intelligent Depository Module (IDM), which accepts a check deposit without the use of an envelope. Company officials say this increases the accuracy & speed of the transaction & allowing financial institutions to adjust funds availability policies in the self-service environment so they are similar to those applied in the teller line. An image of a check is captured & displayed on the terminal screen for verification & the check image is printed on the receipt along with the transaction details. The IDM is a benefit to both the financial institution & customers. As the passage of Check-21 has more financial institutions looking at the value of intelligent check handing for self-service, the deposit authorization role played by ACI takes on increasing value & importance. "Diebold's IDM has evolved to be the most reliable check handling device available for the unassisted transaction environment," said Danny O'Brien, Diebold. "Our Opteva ATMs are the first in the industry to be designed to easily integrate check imaging." ARGO, a provider of branch automation software, & Carreker, a provider of consulting & technology solutions for the financial services industry, extended their alliance to deliver an end-to-end solution for branch capture of check images. Carreker is developing a suite of solutions known as Source Capture, which will take check images & data captured in the branch, inspect for quality, & send to the bank's back office to support posting, bank-to-bank image exchange, & check archiving for customer support purposes. To accommodate the 50% of the top US banks that use ARGO's BANKPRO Teller solution, Carreker & ARGO will integrate the Source Capture solution suite with ARGO's Teller Image Capture Solution. TREEV took advantage of the BAI show to launch its new Deposit Solution, developed to assist financial services organizations in reducing risk associated with check fraud. TREEV collaborated with several financial services partners to develop a browser-based solution to meet the unique operational requirements of managing deposit documents. The solution allows institutions to enhance productivity by supporting both remote & centralized document scanning & providing high-volume capture capability for information such as signature cards, legal documents, & corporate resolutions. The solution utilizes advanced recognition technology to automate the indexing process & reduce cost & error associated with manual indexing. The TREEV Deposit Solution ensures the secure storage of customer information to address stringent compliance regulations & provides tellers with access to signature card information from within the teller platform.

Outsourcing & check handling & Check-21 - 12/11 AB

2 intersecting trends are driving more & more financial institutions to consider outsourcing their check handling operations, just as the imminent arrival of check image exchange promises to slash the costs of processing paper checks. The industry is gearing up for the widespread use of digital check images for clearing & settling transactions. It is anticipated that this will be much cheaper than processing the actual paper items, but many banks are beginning to realize it will take a hefty investment to reap any financial benefit from this shift. At the same time, the overall volume of paper checks is plunging now that more consumers are making purchases with debit cards & paying bills online. As a result banks must spend to support a shrinking business. Or, they can get out altogether. "From a cost standpoint, when all was said & done we determined it would be more cost-effective to outsource than it would be to buy our own equipment & do it all ourselves," said Vickie Sibbitt, $82m-asset Farmers & Commercial Bank in Holden MO. Instead, last month Farmers turned over its item processing to Fiserv, which says it is the largest third-party check-processing vendor. "We're seeing a lot more interest in outsourcing," said Mark Damico, Fiserv. The company processes checks for roughly 1,700 financial institutions, & prospective clients are calling every week. "Our pipelines are more full than ever." Most banks are archiving images of cancelled checks instead of returning the paper items to customers, & a few have started settling transactions by transmitting electronic files to one another instead of transporting the actual paper item from place to place. The rapid implementation of image technology is transforming check processing, & offers numerous opportunities for savings, including lower transportation & labor costs & faster settling. Banks that do not move into imaging may well find themselves left behind by the rest of the industry, Damico said. All these advantages are appealing, but they can be expensive, which is why many banks are turning to outsourcing. At first Farmers & Commercial was leaning toward in-house image processing, & it hired a consultant to help out. But the bank balked when it saw that equipping its check sorter with image-capable camera equipment would cost more than $100,000. "That was a lot of additional money to invest," she said. At bigger banks the expense is much higher. Damico said it can cost upward of $500,000 to add image cameras to the sorters used by large banks; adding in the software expenses can bring the price of upgrading one sorter close to $1m, & the largest banks might have several dozen of the machines. Robert Seltzer, Meta Software, said that some banks will find it gradually harder to make a business case for this investment because the number of checks in the industry is shrinking, & that will ratchet up the unit costs for each check moving through the system. Not only are consumers writing fewer checks, Seltzer said, but many items are removed from the process by billers that can scan the items & turn them into ACH transactions. With roughly 42b paper checks moving through the banking system this year, it costs about a dime to process each one. But check volume could fall as much as 45% over the next 7 years, pushing up the per-item cost to 14c. An extra 4c may seem small, but not when multiplied by an anticipated 23b checks in 2010. "There's no question that unit costs are going to increase. This is going to be a real challenge." Polly Thorsness, Community First Bankshares in Fargo ND, said the prospect of rising per-item costs prompted the $6b-asset bank to ditch in-house item processing. It had previously handled ½ of its check volume itself & outsourced the rest to Fiserv, but by next month Fiserv will be handling all of the bank's checks. "As we started to put the numbers together, we just said that it would be cheaper to outsource. With outsourcing, the minute our volume goes down, our costs go down." Jack Prim, Jack Henry & Associates, said his firm has been ramping up its item processing operations so quickly that it has had to open seven new processing sites in the past 3 years. It now has 17 sites nationwide & they handle about 30m items a month for banks - against less than 15m 5 years ago. "Banks began to look at outsourcing as a way to offer image services," Prim said. "Image will require a fairly significant investment in hardware & software, so I think that a lot of them prefer" to outsource.

AirNet & NetDeposit - 12/5 PRNewswire

Fast Forward Solutions, LLC, a subsidiary of AirNet Systems, announced that Fast Forward Solutions LLC & NetDeposit have signed a term sheet regarding their intent to finalize an agreement to provide a standard Image Replacement Document check processing solution to the payments industry. With the recent passage Check-21, financial institutions will be allowed to accelerate their transition toward complete electronic processing of paper checks. Check-21 goes into effect in 10/04. The use of IRDs, which are known as "substitute checks," is an important electronic check processing option that should allow both image- & non-image-enabled banks to potentially achieve powerful new operational efficiencies. IRDs are also expected to play a significant ongoing role in "Day 2" processing of checks for both returns as well as in the accommodation of customers who want copies of their checks to be included in their monthly statements. Fast Forward Solutions' goal is to bring a comprehensive, end-to-end IRD solution to the market that leverages both the "best in class" electronic check processing technology & imaging of NetDeposit & the national distribution network capabilities of AirNet Systems, Inc. Fast Forward Solutions plans to launch its end-to-end IRD solution in 1Q 2004.

AirNet to sell digital image systems - 12/4 AB

Facing a long-term threat to its check transportation operations, AirNet Systems has formed a subsidiary that will sell check imaging systems to financial institutions. The subsidiary, Fast Forward Solutions LLC, will focus on selling digital imaging technology to AirNet’s customers, the parent said. This seems like a big departure for a company whose main business is providing charter passenger service & transporting small, time-sensitive packages to customers in such industries as banking & medicine. However, one observer said that if its role in the check processing chain is transportation, selling imaging equipment is a near-match. “Instead of moving checks with planes, they are talking about moving the checks electronically,” said Avivah Litan, Gartner. A closer parallel would be a digital image network, such as Endpoint Exchange, which some banks use to send check images across the country. However, creating such a network would require AirNet to develop a new electronic infrastructure & would be far more complicated than simply reselling imaging systems. Litan called the unit’s creation a response to Check-21, which will take effect in October & is expected to drive financial institutions to begin settling checks electronically, rather than transporting the paper items. That will be a significant challenge to AirNet’s business. With check volume on the decline, “in the next several years they will see a lot fewer checks being transported. AirNet is obviously under tremendous threat.” Bank services are by far the largest chunk of its business. It reported IIIQ net revenue of $38m, with 68.4% of it coming from bank services. Though overall revenue rose 2.9% from the same quarter last year, revenue from bank services dipped 1.1% over the same period, to $26m. AirNet managed to temporarily block the passage of Check-21 this summer, by lobbying the House to add an amendment that would require the Fed to disclose its check transportation costs. The company argued that such a provision was necessary to ensure that government subsidies did not put private companies at a disadvantage. The entire bill stalled when the Senate balked at that provision, but in September the Fed agreed to reveal its expenses & revenues for transporting commercial checks between processing facilities. Joe Biggerstaff, AirNet, said that Check-21 would not change his company’s fundamental strategy. “We anticipate there will be opportunities for us to continue serving the banking community for many years.” Litan said that air transportation operations have thin margins, & that even a 10% reduction in AirNet’s check volume could mean the difference between posting a profit & posting a loss. Check-21 is almost certain to lead to far steeper cuts in the number of checks being flown around the country. Many banks cite lower transportation fees as one of the main reasons for image processing. Litan said AirNet’s volume might drop 10% within 6 months after the law takes effect, & 50% within 2 years. She characterized Fast Forward’s creation as a survival technique. “Obviously, they see the writing on the wall, & they need to diversify their business.” Litan said that, in the near term at least, the unit could be a good fit for AirNet. “This is probably the easiest business to get into, because it is just selling equipment, & they have the right contacts in the right places. They are just going to leverage their existing sales channel.” In the long term, AirNet will likely find itself competing against many of the same companies that manufacture the systems. “Check imaging equipment is a commodity business. It will be hard to compete against big companies like NCR or Unisys.”

Image specialists tackling the Day-2 problem - 12/2 AB

Return items & exceptions have been considered stumbling blocks on the path to exchanging digital check images for processing. But now at least 2 companies claim to have solutions. An exception item is a check that cannot be processed automatically; a return item is a one that is returned to the financial institution at which it had first been deposited. Collectively they are known as Day-2 items. The lack of an electronic way to handle them was the biggest problem in an image-exchange pilot test that BofA & JPMorganChase started last year. When the test was concluded in February, the participants realized it was impractical to process some checks digitally & others with paper. The problem is not pressing yet, because few banks are swapping check images, but it will become more important, especially next October, when Check-21 will take effect. AFS, which operates Endpoint Exchange, says it has solved the problem. The Oklahoma City company is one of the few players settling transactions by exchanging digital images. The Endpoint network was developed to run with AFS technology, & the systems are configured to process returns & exceptions in electronic format. Last week Viewpointe, which stores check images for 10 of the 50 largest US banks, said it would shortly be using software that can handle Day-2 items electronically. The software is Touchless Return Item Processing System, TRIPS, & the vendor is Data Support Systems. Viewpointe, which was founded by JPMorganChase, BofA, & IBM, will run Trips centrally. Banks that store images in Viewpointe's archive will simply grant one another viewing access. The company said it expects at least 2 of its customers to be using the technology by yearend & perhaps settling transactions with images early next year. "What we are trying to do is remove any reason for having paper in the process," said John Lettko, Viewpointe. "The economics are such that I believe we will have some customers in production by the end of IQ." Lettko expects ½ of the Viewpointe banks to use the Data Support Systems software & the others to develop Day-2 applications internally. Carl Bortol, DSS, said the banking industry has scarcely addressed the problem. "In order for image exchange to work well with forward presentment, banks need to automate their Day-2 operations." DSS was one of the first to try; some components of the Trips suite date back to 1995. A long list of top-tier banks are using some or all of the suite. Bortol estimated that 200m Day-2 items will run through his company's applications this year. "We are integrating this mature product line into Viewpointe's archive service," Bortol said. John Mateker, Global Concepts, said handling Day-2 items electronically will not be a critical issue until more banks start to introduce image exchange. "In the initial phases there will be so few players using images that it will be relatively simple to do returns. Pilot volumes will be low." Once the business matures, electronic methods of handling Day-2 items will be considered an important part of the clearing process. Jim Blasingame, First Tennessee, agreed. "In an image-exchange environment, this is something we are going to need," said Blasingame. Eventually image-based clearing will simplify check processing, but at first it will complicate things, because banks will need to support the existing, paper-based system while phasing in the electronic version. "At some point Check-21 will cut our costs. But we've got a lot of things to do between now & next year."