CHECKCLEAR, OWNER OF ENDPOINT EXCHANGE NETWORK, ANNOUNCES AGREEMENT TO DISCUSS EXCHANGING CHECK IMAGES WITH THE FEDERAL RESERVE BANKS

OKLAHOMA CITY, OK May 4, 2004,- CheckClear LLC, the owner and operator of the Endpoint Exchange Network, and the Federal Reserve's Retail Payments Office, today announced their intention to cooperate on planning to establish system connectivity to allow for the sharing and electronic exchange of check data and images between their respective platforms. The Federal Reserve provides a nationwide solution that can reach every U.S. financial institution. The Federal Reserve provides check processing services, including traditional check clearing, electronic check presentment, image capture, and image archive services, for commercial banks, thrifts, and credit unions across the country, totaling approximately 8,000 institutions. The Federal Reserve currently offers an array of capture, archive, retrieval, and delivery options that support interactive services not only between the Reserve Bank and the depository institution but also between the financial institution and its retail customers. Under Check 21, the Federal Reserve will introduce a new suite if services to offer customers more options than ever before. Customers with image-enabled operations will be able to send image cash letters and return image cash letters directly to a Federal Reserve Bank, resulting in a more efficient process for return item pulls, return item qualification and cash letter creation. For deposit side customers not yet image-enabled, Reserve Banks can select items for expedited clearing, reduced operating costs and extended processing windows. This will facilitate accelerated clearing of large-dollar items and improve deposit times. CheckClear's Endpoint Exchange Network is a national network through which financial institutions can send and exchange check images rather than paper checks for clearing and settlement. In less than two years over 4,000 financial institutions across the country have enrolled in this fully interoperable network. The changing ratio of paper to electronic payments presents a business challenge to all financial institutions, which are under increasing pressure to generate efficiencies from their item processing operations, particularly with the provision of the Check 21 Act going into effect in late October of 2004. Through membership in the Endpoint Exchange Network, any image-enabled financial institution will have the ability to send images to the Endpoint Exchange Network in multiple formats. The concept for exchanges between Endpoint and the Reserve Banks is that those images and data would be used to prepare image cash letters to send to the Federal Reserve in DSTU X9.37-2003 format. The Endpoint Exchange Network would be able to receive and process images from the Reserve Banks for delivery and presentment to its member institutions. The combined reach of the Federal Reserve Banks and the Endpoint Exchange Network - the imaging technology infrastructure, integration competency, and established customer relationships - could greatly facilitate check image exchange. This collaborative relationship would have a very positive effect on the overall productivity, and efficiency of the national check clearing and settlement system under Check 21. "The Federal Reserve will continue to leverage our new FedImage technologies and work with CheckClear and the other electronic exchanges as they move into production, to provide cost efficient check image exchange to financial institutions across the country," stated Fred Herr of the Federal Reserve's Retail Payments Office. "The Federal Reserve Banks have always been positioned to offer all financial institutions, large and small, access to quality check imaging services and we are very excited to work with them," said Mark Craig, General Manager of CheckClear, LLC, the owner and operator of the Endpoint Exchange Network. "We share the Federal Reserve's commitment to improving check processes through image exchange and we look forward to participating with the Federal Reserve on future industry efforts to foster the electronic exchange of payments information." About CheckClear's Endpoint Exchange Network Use of CheckClear LLC's Endpoint Exchange Network, based in Oklahoma City, enables U.S. financial institutions to clear their check-based transactions by allowing for the exchange of check images between member institutions. Already over 4,000 financial institutions have enrolled in the national network, which is the largest, and only mechanism of its kind in operation. Additionally, several of the country's leading image item processing software companies and image-enabled item processing service bureaus including Jack Henry, AFS, BISYS, VSoft Corporation, Summit, Infonox, Aurum Technology, Intercept, and Data Center Inc. (DCI), have announced plans to make the Endpoint Exchange Network available to users of their image check processing systems. The Endpoint Exchange Network is the country's first and only electronic check clearing network that capitalizes on existing imaging infrastructure and settlement relationships, with the interoperability to connect to every endpoint in the nation. Learn more about the Endpoint Exchange Network at www.endpointexchange.com. For more information on the Federal Reserve financial services, visit www.frbservices.org. For Further Information Contact: CheckClear, LLC Mark Craig, General Manager 4100 Perimeter Center Drive / Suite #160 Oklahoma City, OK 73112 1-405-782-1454 1-405-787-8833 (fax) mcraig@endpointexchange.com Federal Reserve Fred Herr, Senior Vice President Federal Reserve Bank of Atlanta 205-968-6720 fred.herr@atl.frb.org Dexter Holt, Vice President Federal Reserve Bank of Boston 617-973-3736 dexter.holt@bos.frb.org

Metavante purchases Check image provider, Milwaukee, WI. May 7th, 2004, Milwaukee Journal Sentinel.

Metavante Corp. announced today that it has agreed to purchase Advanced Financial Systems (AFS), of Oklahoma City and its subsidiary, CheckClear, that owns and operates the EndPoint Exchange, one of the country's biggest check image exchange. "Metavante has to have this if they are going to be in the payments business" said Avivah Litan, of the technology research firm Gartner, Inc. in Stamford, Conn. "It is a good purchase for them, and it's something they had to do to round out what they already do." The ability to transmit scanned images of checks electronically is growing in importance as the industry and federal government try to reduce the reliance on physically shipping checks from one bank to another to process them. About 42 billion checks are written each year. The long term goal of check imaging is to lower the costs and rsks that come with handling, sorting, processing and returning paper checks. In addition to EndPoint Exchange the Advanced Financial Solutions acquisition brings The Medical Banking Exchange, a health care payment processor to Metavante. Metavante will add 325 employees in Oklahoma City as part of the deal which is expected to close in June, 2004.

Parascript improves check processing and fraud detection 2/3 PRNewswire

Parascript LLC announced CheckPlus 4.0, which gives financial institutions of all sizes the ability to automatically capture more information on business and personal checks, cash tickets, deposit slips, and money orders with the industry's highest read rates and accuracy. CheckPlus 4.0 offers enhancements including signature verification, a fraud detection and prevention feature that automatically verifies signatures on checks. CheckPlus reads and cross-validates the courtesy and legal amounts on checks to improve accuracy. CheckPlus 4.0 processes 8 different standard fields on checks and other bank documents, and user defined custom fields, making it one of the industry's most comprehensive recognition products. "With its enhanced accuracy, read rates and functionality, CheckPlus 4.0 is a powerful tool for data recognition and processing, designed to directly meet the needs of financial institutions today," said Mike Fenton, Parascript. "In response to our customer concerns about fraud and security, we've integrated other value-added Parascript technologies such as signature verification into our product." CheckPlus 4.0 provides 10% read rate improvement on amount recognition over its predecessor, reducing additional keying labor expenses. For expanded functionality, CheckPlus recognizes amounts on money orders and reads the payee line on personal checks for use in data mining, marketing and knowledge management applications. New enhancements and features contained in CheckPlus 4.0 include: Read rate improvements on personal checks, business checks, deposit slips and internal bank documents; Money order recognition; MICR line recognition; Signature verification; Custom defined fields.

Bank readiness for Check 21 4/20 Banktech

In preparation for Check 21, banks are attending workshops to learn more about the benefits of digital check imaging & exchange. Huntington is one of the banks that has participated in a Unisys workshop for Check 21 readiness. The bank was surprised with the number of issues that had to be addressed, according to Ted Kute, Unisys. "We came up with over 100 different functions that we needed to look at." The workshop helped bank employees realize that the whole process involved the bank working together. "An internal benefit was when there was a point in time where everyone participated & did a shared understanding of the way things are done today. Then there was a shared decision on how the new process should work & gave the opportunity for everyone to weigh in on it." Unisys is among several companies that are helping banks with readiness assessment workshops, informing banks on what needs to be improved in order to take advantage of Check 21. Unisys' workshop is designed to guide banks in what their current systems are lacking & how to improve on what is deficient in the systems, according to Gary Cawthorne, Unisys. "We have been working with major banks within the US & looking at what their business looks like today, what it will look like in a Check-21 world, how many gaps there are & what they will have to do with their business processes & systems in order to get ready for Check 21." When Unisys did its first workshop, the technology solutions provider was overwhelmed with the amount of processes banks needed to change in its systems. "The results have been very surprising. When we did the first workshop, we & the bank went into it thinking there were a dozen or so different processes that will be affected. We saw anywhere from the high 40s to a hundred different processes or systems that would have to be evaluated or could change with the Check 21."

Check-21 readiness primer 2/12 IPR

The age of check image exchange will arrive on 10/28/04. Will your financial institution be ready? It is certainly in your bank's best interest to ensure that you have arrived at a state of complete readiness on or before that day. Fortunately, if you develop a viable plan of action, your institution will be able to realize all the efficiencies & cost savings inherent in check truncation right from the start. Check image exchange is a dynamic, volatile issue. As your bank creates a strategy for moving to image exchange, some important questions will have to be answered. For instance, is it best for you to exchange images directly with other banks, or work though a third-party clearing house? What quality standards should you adopt for the images you send to other banks, & receive from them? In addition, it's critical that you acknowledge the far-reaching effects Check-21 will have on your bank - some of which you may not have considered. It will transform the way you deal with correspondent banks. But the increased availability of images, virtually on demand, can enhance your customer service capabilities. For instance, by eliminating manual procedures that slow the process (such as the opening of individual envelopes), you'll be able to provide funds more quickly to your corporate customers who conduct lockbox business with you. Check-21 can have a dramatic impact on your back office, or Day 2, transactions, which include the processing of return & exception items, adjustments & research. It's important to develop an overall image strategy & tactical solutions which streamline bank processes from the points of customer contact to the back office. Other factors to consider include vendor selection, solution architecture, integration & testing methodology, & workflow & process improvement. If your financial institution builds a viable strategy, then implements it, you will quickly begin to see the benefits inherent in image exchange: you'll avoid the delays of ground & air transportation methods, lessen the chance of checks being lost, reduce fraud & float through faster clearings, & eliminate backlogs created by paper checks which cannot be transported due to weather or unforeseen events. Image exchange is more than simply transferring files, & banks can choose from different mechanisms for accomplishing that task. Which one is most appropriate for your bank will depend on its size, the number of correspondent banks, how you want to conduct image exchange in future, & how you want to do it in the long term. A good option for a smaller bank may be to work with a third-party aggregator with image capabilities to update its accounts & handle transactional & core processing. Since these aggregators have the capabilities, the bank can sign on for image capture. If the bank partners with an aggregator that uses a clearinghouse, returns would come back faster. Since the bank would have to pay for this service, it will not realize the full cost reduction benefits of Check-21. For banks with less than $5b in assets, especially if they use aggregator services, this may be the most logical approach. 2 approaches to direct image creation & exchange have emerged as the most viable alternatives. Banks may elect to create bilateral agreements that allow for direct-send exchange between themselves & others. Or they may find that image exchange with many banks is best accomplished via Distributed Traffic Agent (DTA) developed by Vectorsgi for SVPCo, a 3rd party clearinghouse. Each approach comes with its own file formats, exchange controls, & settlement models. In either case, banks will need software which facilitates & automates the image exchange process. For banks that maintain, or desire to establish, their own image archive, software-based solutions have been introduced that reside in the bank to create, send & receive images across an image exchange network. Other banks may choose to develop their own solution, using image exchange networks such as SVPCo's DTA. SVPCo is owned by 20 of the largest US clearing & issuing banks, which combined hold $2.4 trillion in deposits, & SVPCo members represent a significant portion of US commercial bank deposits. DTA manages the exchange of financial transactions among SVPCo members - who are committed to check electronification & its benefits - & bypasses traditional check-clearing houses for the presentment of transactions, returns or exceptions. Banks that choose to utilize the DTA exchange image files with other banks directly, while summary information moves through SVPCo as an intermediary, allowing for settlement or settlement reporting. Your bank may be large or small. You may not use check images at all at the moment, or you may use them in a variety of ways. You may want to exchange images with other banks only when necessary, or you may want to eliminate paper checks from your processes altogether. The fact is, not matter where your bank is on the "road' to image exchange, you can get to where you want to be from where you are now. The key is readiness. Check-21 readiness is best achieved in a planned & managed set of phases: Develop an image strategy. This includes looking at check image capture, check image quality assurance, image archiving, & the image enabling of your back office. Such a plan should not be a response to tactical or competitive initiatives or solutions, but rather a strategic initiative supported by the bank's executive management. The plan should be all-encompassing & focused on a synergistic approach. Maintain your primary focus on imaging related to check processing, which will become the foundation for future image deployments. Considerations for the imaging of bank statements, loans, mortgages & trust issues could follow, based on the recommendations of the action plan team or the specific needs of your bank. Evaluate your bank's state of readiness at the present. Identify & consult with candidate exchange partners & vendors of image exchange software. This will help you understand the available options, & decide which one is best-suited to your bank's requirements. Execute & monitor the necessary steps to implement your bank's chosen image & image exchange strategy. While you're moving through these steps, learn all you can about Check-21 & the latest developments. Attend conferences, avail yourself of web resources such as http://www.eccho.com , ask for lessons learned, & network with those who have experienced the trials & successes of image initiatives. This will help you determine how you want to exchange images with other banks, the initiatives you must undertake to achieve that objective, & the time frame you want to achieve it in. The countdown to Check-21 implementation has begun. This is a major moment in history for the banking & financial industry. Those financial institutions making the right moves & positioning themselves to reap the full benefit of what the electronic era will bring will have an edge over their competition. When they develop the right "roadmap," financial institutions can indeed adapt & transition smoothly to the electronic check delivery environment that is Check-21.

Image exchange: get ready, here it comes 2/18 IPR

When Check-21 goes into effect on 10/28/04, a printed check image (albeit in a proscribed format) will carry the same legal standing as an original paper check. This new law will encourage banks to exchange images instead of paper, reducing or eliminating sorting, transportation & delayed posting costs. After a check's image is captured, the image will be transmitted quickly to another bank over a secure, managed network, shortening the traditional clearing & settlement process. As banks create a strategy for moving to image exchange, some important questions will have to be answered. For instance, is it best for an individual bank to exchange images directly with other banks, or work though a third-party clearing house? What quality standards should it adopt for the images it sends to other banks, & receive from them? If banks answer these & other questions correctly, build a viable strategy, & then implement it, they will quickly begin to see the benefits inherent in image exchange: avoiding the delays of ground & air transportation methods, lessening the chance of checks being lost, reducing fraud & float through faster clearings, & eliminating backlogs created by paper checks which cannot be physically transported due to weather or unforeseen events. In addition, banks will see benefits in better customer service. According to the ABA, Americans write 48b checks per year. That means American banks struggle with the burden of processing & transporting over 216m paper checks, on average, each business day. That burden probably would have continued in the foreseeable future if not for the events of 9/11. That day, & its aftermath, clearly exposed the vulnerability of the US financial system's dependence on paper checks. When the FAA shut down our nation's air transportation system, millions of paper checks were left waiting to be transported from one bank to another, & therefore could not be processed. It was clear a change had to be made. The idea of image exchange, proposed early in the 1990s, began to gain momentum, & that momentum culminated in Check-21. Check imaging isn't new. Many banks have used images for the past several years, to streamline internal processes & to enhance communication with their customers. Now, new imaging technologies will allow banks to leapfrog current, limited means of ECP & initiate a new era of image exchange & its operational cost savings. "Item images are clearly being regarded increasingly as bank assets, forming the basis for cost reduction, fee generation & competitive differentiation," said David Medeiros, TowerGroup. "As implementation costs decline, banks are finding that the combined benefits from multiple uses of check images more than justify investment in the technology." By adopting an overall image strategy & implementing appropriate tactical solutions, banks can realize all the efficiencies & cost savings inherent in check truncation. They'll be able to streamline bank processes from the back office to points of customer contact. Other benefits resulting from image exchange include: Reduced transportation costs: The need for transporting paper checks is greatly reduced - translating to greatly reduced courier charges. A 2-day return item process: Significant losses can be prevented by accelerating the return item process. Enhanced ECP: Exceptions are processed using images. Paper products, such as Payable Through Drafts, could become a thing of the past, while Positive Pay customers will be able to access images through your service offerings. Improved contingency for lost cash letters: Banks can package images & MICR data from a lost cash letter for re-presentment. Image quality: Banks will be able to ensure the quality of images they send to other banks, & evaluate the quality of those that are received. Elimination of click charges: Banks will be able to reduce or eliminate equipment, data set & communication click charges, since paper no longer has to be passed through a sorter. Code line correction: Financial institutions can correct or complete the code line by viewing the image & keying the necessary information. This will increase the number of postable items, & reduce requests for new images or physical items from the sending bank. Image exchange is more than simply transferring files, & banks can choose from different mechanisms for accomplishing that task. For banks that maintain, or desire to establish, their own image archive, technology companies have introduced software-based solutions that reside in the bank to create, send & receive images across an image exchange network. Other banks may choose to develop their own solution, using image exchange networks such as the Distributed Traffic Agent (DTA) developed by VECTORsgi for SVPCo, a third-party clearing house. In this scenario, image files are exchanged by banks directly, while summary information moves through SVPCo as an intermediary, allowing for settlement or settlement reporting. Emerging image exchange software products perform Virtual Capture, which simulates physical capture & results in seamless integration with a bank's capture system & item workflow. These products generally include an image archive interface, which allows images to be archived within minutes of capture. These images are immediately available for other applications, & can be used for image-based reject repair, reconcilement, fraud detection & returns processing. Most of the new image exchange technology provides standard ECP processing (ECP with paper to follow), which allows some banks to immediately realize the benefits of early presentment & prepare for full image exchange. Required matching paper items (originals or substitutes) are transported later, & are reconciled with the previous night's exchange file. The presentment capabilities of these new software solutions allow banks to leverage any existing investment in capture technology, whether at branch, ATM, lockbox, central or distributed sites. They allow exchange files, including MICR, to be transmitted & received, & transactions posted, before DDA cutoffs. Generally, they include flexible image capture format options which can be tailored to meet a bank's specific needs. The Distributed Traffic Agent (DTA) developed by VECTORsgi for SVPCo has garnered considerable support from major players in the financial world. Reserve Banks & SVPCo have agreed to leverage their investments in technology infrastructure to support the exchange of digital check images through the DTA. The DTA is particularly well-suited to banks that have implemented a current image capture system. Such banks can enroll in the service today & begin exchanging images in a few short months - it provides immediate access to all the banks currently on the SVPCo network. But the service can be equally beneficial for banks that aren't quite as far along in image capabilities. Software for the creation & receipt of image exchange files is now available. This software integrates to a bank's posting system, handles image quality analysis on both incoming & outgoing cash letters, automates the reconciliation of images to MICR, & provides for interfaces to the bank's adjustment system. Either way, the DTA represents an immediate, easy & cost-effective means of exchanging images. As image exchange becomes a reality, image quality becomes increasingly important. The new image exchange software products include controls that analyze the quality & accuracy of incoming image data captured by other institutions. The best of these products identify poor images through the use of image- quality algorithms & recognition engines. This image capture workflow supports the review of suspect images captured by the client bank or by other institutions, & enables an automated return when necessary. What key attributes should a check imaging system include? Most experts agree that these are critical: Simplicity: Look for a single, common platform for all "Day One" capture streams. Such platforms include dynamic routing capabilities which will help banks manage different workflow environments. Supportability: A single platform will reduce training & support requirements - & you'll have fewer vendors to rely on for support. Easy upgrades: Using a common platform & applications simplifies this process considerably. Interfaces: A common capture platform will reduce necessary interfaces to a core transaction system such as IBM's CPCS. Availability: Distributed architecture should ensure that check images are available to whoever needs them at any time. Quality: Banks using the new imaging systems are experiencing missing image rates as low as one for every 50m checks processed. A high quality of image capture rates, & the resulting accuracy of archive population, should be a high priority for banks seeking to implement an image capture system. In order for your bank to reap the full benefits of image exchange, any solution you choose should include the following capabilities: Send & receive electronic MICR files; Send & receive electronic image files; Perform image validation & quality assurance; Edit MICR data; Post MICR information; Populate an image archive; Cross-reference sequence numbers; Handle substitute checks. "As banks prepare for the era of large-scale, inter-bank image exchange in connection with check truncation legislation, the need for a complete solution to check image management - capture, quality control, storage, retrieval, transmission & receipt - becomes critical," adds Medeiros. "These capabilities, & in particular their seamless incorporation into check operations - not as an add-on technology but as an integral part of core check processing - will be essential for banks that want to remain competitive." How a bank deals with Check-21 will define how efficient its check processing operation can be, & by extension, how well it can differentiate itself from its competition. Image exchange offers substantial opportunities for streamlining & simplifying check processing. Today, banks have available to them several options in implementing image exchange, all of which will help them reap rewards created by Check-21 quickly, conveniently & cost effectively.

Southeast Corporate CU to test imaging 4/22 AB

Southeast Corporate FCU of Tallahassee FL is about to begin testing a way for member CUs to capture check images at the branch. In the next few weeks the $1.6b-asset organization will start beta testing a service with one of its 480 member CUs, said Kay Moon, a senior VP. Reader-sorters will use Branch Capture software from Advanced Financial Solutions Inc. to create electronic images. The images will be transmitted to Southeast for posting & archiving & then exchanged with other institutions through the Endpoint Exchange Network, operated by CheckClear LLC, for settlement.

New processes at the Fed

For its part, the Fed is gearing up for the new Check-21 paradigm by investing in technologies that will help it support financial institutions as they consider a wide variety of options that will be available after 10/28. The first step involves the Federal Reserve's investment in so-called "enabling technologies" for Check-21. "We want to provide all customers, regardless of size or location, the opportunity to embrace & take advantage of the many benefits of Check-21 - without significant investment on their part," Santomero said. He pointed out that all of the 12 Reserve Banks have upgraded & standardized their check platforms, a process that aims to level the playing field for institutions across the US & offer the same check processing & adjustments services at all locations. "As that conversion progresses, we at the Fed are looking to October & preparing the service offerings we will make available once Check-21 is implemented. Within the next several months, the Reserve Banks will be rolling out a variety of new & improved products, services, & solutions designed to support banks' best use of their new options under Check-21. To support the current paper check services, we will offer image deposit services that have lower costs & improved deposit deadlines & availability. For our payor services, we will have lower prices for items we collect via images. We will convert paper items to images where we can expedite collection." The Fed's national archiving service, FedImage, is now available to produce substitute checks, & more services will be available over the web in the weeks & months to come. The Fed plans to extend benefits to financial institutions that will enable them to expand their deposit options & extend the cut-off times for deposits. "As we increase our processing efficiencies, we will pass the gains on to our bank customers in the form of accelerated availability & enhanced deposit deadlines. In short, we are both involved in & affected by the changes that the recent legislation has imposed, & we are prepared to respond to its implications for us & for the banking industry we serve." The Fed is developing information that will help banks educate their customers about Check-21, particularly disclosures on the new expedited recredit provisions of the law.

Federal Reserve, ABA offer check-clearing resource guide 3/11 DJ

The Federal Reserve has teamed up with banks & industry trade groups on a new guide to modern check clearing. The guide explains new legislation known as Check-21, which allows banks to use electronic records & cut back on paper check processing. A coalition of 16 entities announced the new guide Thursday. "Check-21 will facilitate significant changes in the way checks are processed in the US. The purpose of the guide is to help organizations - & their members - use consistent definitions when training their staffs & to reduce possible customer confusion." The Check-21 resource guide is a 20-page booklet that will be available for free from the organizations involved. You may download a copy at www.check21solutions.com

First Tennessee, remote capture & Check-21 3/11 AB

First Tennessee has begun selling desktop check scanners to corporate customers so that they can capture the images of the checks they receive at PCs & transmit them to the bank without having to visit a branch. The service, which was announced last week, not only promises to give corporate customers access to these deposits 2 days sooner, but puts First Tennessee in the vanguard. Several larger banks are piloting similar programs. First Tennessee said its First Deposit Plus service is an example of how image technology is likely to transform many banking practices that have remained unchanged for decades, including the timeworn custom of a merchant standing in a teller line on a weekday afternoon with a large zipper pouch of checks to deposit (or the more modern equivalent, the ferrying of checks by armored car). Both lockbox customers & smaller merchants are being invited to use the service. "While we expect to have more business from our lockbox customers, we are offering this to anybody," said Taylor Vaughan, First Tennessee. The target customer is a small or midsize business that deposits "hundreds of items a day, rather than thousands - or even dozens of items." To use the service, corporate customers buy or lease check-scanning hardware that plugs into the USB port of a computer. According to the bank it takes 5 minutes to set up the software, & the customer can store the check images & make them available to designated employees. Though the bank was expecting to attract corporate customers that deposit a relatively small number of high-value checks, the service seems to have had wider appeal. "We're dealing with hospitals, trucking companies, doctors' offices - a whole variety of customers we never thought about." As the banking industry gears up for the October implementation of Check-21, many banks are eager to see paper checks converted to digital images as early in the processing stream as possible. This can take place at the teller window, at the ATM, & now, with this type of remote capture service, at the customer sites where the checks are first received. BofA began a pilot program in December with a client, a property manager, & has said it expects the service to be widely available by midyear. Other leading cash management banks - including units of Wells Fargo & BankOne - are working on the remote capture of images for deposit by corporate clients. Wells has said that it views image deposits as an opportunity to build up its lockbox business in particular. Market watchers said that First Tennessee's speed to market could give it a boost in the growing business of cash management for smaller companies. "It's a great solution for small business, when you think about it," said Avivah Litan, Gartner. "It's another example of innovation coming out of the small-business community." Danne Buchanan, NetDeposit, agreed. "First-mover advantage in this will make a big difference for banks." NetDeposit, which provides the remote capture service for BofA & others that are developing the capability (First Tennessee is not one of them), said the service could help a bank attract & retain an appealing group of small & midsize business customers. "Once you lock them up, it's hard to unwind," Buchanan said. He added that many large institutions are still deciding how to deal with image-based check clearing: "They're anxious to get going, but it takes a lot of work for a big bank to get moving." By contrast, the $25.1b-asset First Tennessee was able to move forward faster. "We know other banks are piloting this. Sometimes smaller is better. We can be more nimble." First Tennessee tested the system last year with an internal customer, its commercial insurance unit Synaxis Group. The first deployment was at an office in Tennessee where, "If it didn't work, they could walk across the street & make the deposit." But it did, & the hardware was added at locations in Kentucky & Atlanta. The system went into commercial operation in December & now has several customers, though Vaughan would not say how many. First Deposit Plus, built on software that First Tennessee developed in-house, uses commercially available check-scanning equipment. The customer must review each check image on the computer screen. "The software forces that," describing the manual step as a safeguard against a bad scan. "You can't send a deposit unless you've looked at every check." The customer then transmits the images & an electronic deposit slip to First Tennessee as an encrypted file. The process puts the original check in the hands of the business, which can decide how to dispose of the item. "We're leaving that up to the client." Most businesses retain the original until they are certain the image deposit was processed properly, & then they destroy it. First Tennessee is offering to reconcile a business' original checks against its image deposits, typically on a weekly basis to minimize transportation costs. That leaves open the question what happens if an imaged original shows up as a deposit later. If it does, the check writer has "recourse back to us." Vaughan said the bank would hold the business customer liable in such a case. When First Tennessee receives the check images, it prints them out, creating image replacement documents - or IRDs - for processing through its own check sorters & for clearing & settlement by conventional, paper-based means. Eventually the bank plans to skip this step & process the items as digital files. "We expect to be able to do complete image exchange with several other banks come October," when Check-21 takes effect. The question would be the readiness of other banks to handle clearing via image. "I can send an image all day long, but someone else has to be able to receive it." The first banks with which First Tennessee would settle by image are likely to be other users of Viewpointe. First Tennessee has stored its images since 2001 at Viewpointe, which runs a shared repository of check images from several of the nation's biggest banks. First Tennessee announced plans last month to settle transactions this year through Viewpointe, joining BofA, JPMorganChase, US Bancorp & SunTrust. First Tennessee might turn the technology over to a vendor for development & licensing to other institutions, though there are no plans to do so. "We're a bank, not a software vendor."

Orbograph check image quality study 3/11 Orbograph

Orbograph, a provider of recognition solutions for the US check processing market, announced the completion of a comprehensive Check Image Quality study - a multi-bank, half-million document review & evaluation. "With the impending arrival of Check-21, financial institutions have been casting a more critical eye upon image quality & its impact on financial risk & exposure," said Joe Gregory, Orbograph. "We commissioned this study to help banks understand the scope & nature of check image quality concerns, & demonstrate how Check-21 readiness can translate into a true competitive advantage for their business." To create a study that accurately reflects "real world" processing environments, documents of varying types were pulled from 10 different institutions, each residing in a different geographic area. Orbograph focused on image readability, usability & negotiability, leveraging many of the ANSI X9.37 definitions to evaluate: CAR readability, LAR readability, MICR readability, existence & legibility of payee, existence & readability of payer & existence of a signature. Other attributes were examined - such as dark/light, "piggyback images," & more. From this universe of substandard documents, Orbograph was able to determine the scope of image quality issues, the nature of the problems & the leading causes of quality concerns. Through a clearer understanding of the issues, banks & other financial institutions can put safeguards into place that stops quality issues before those issues can affect their business or their customers. "Since images are warranted by the Bank of First Deposit or by the organization producing the IRD, catching quality issues early in the process can dramatically limit a bank's exposure."

Parascript & IOS 3/8 PRNewswire

Parascript announced International Outsourcing Services (IOS), which serves some of the world's largest retailers, manufacturers, government agencies, educational institutions, banks & financial firms, has deployed its FormXtra Enterprise solution in the US & is planning more in France & Germany. Having purchased several service bureaus throughout the US, each with their own separate forms processing systems, IOS wanted to establish a common platform for forms processing at its locations that would incorporate all modules necessary for complete workflow, from form setup to recognition, keying & verification, & administration. "We selected Parascript's FormXtra Enterprise for its comprehensive ability to capture data in any format & for its ability to do so with superior levels of performance & accuracy across the entire workflow, enabling us to standardize procedures in any one of our several locations," said Frank Clausen, IOS. "Parascript's technology will help us provide the highest level of service to our diverse client base." IOS Data Services division is using Parascript's technology to process many different types of forms, including credit card receipts, business reply cards, healthcare claims, enrollment forms, order forms, parking tickets & credit card applications. "IOS first started using Parascript's technology in a usage-based model to capture data off of credit card receipts & was surprised by Parascript's ability to automate over 85% of the forms. We are excited to see that our powerful technology has shown significant gains for IOS & become a critical tool in IOS's recent expansion. We look forward to helping IOS to cut costs & increase efficiencies."

What Check-21 means for CUs 3/1 CU-Magazine

Check-21 ushers in the biggest changes in check law in decades. Check-21, which becomes effective 10/28, makes it easier for financial institutions to process checks electronically, although it doesn't make that process mandatory. Check-21 allows financial institutions to send checks electronically without a formal agreement to do so. In addition, if a financial institution doesn't want to receive an electronic check, Check-21 permits the institution to request a negotiable paper copy of the check instead. These changes should accelerate the shift from paper share drafts & checks to electronic payments. This legislation presents opportunities to stakeholders across the payments arena, from payments providers to CUs, to reexamine & retool share drafts. CUs can use this opportunity to reevaluate and, perhaps, change how they process checks & share drafts. The Fed has drafted proposed regulations for Check-21. These regulations will amend Reg CC. By law, Check-21's scope is limited to the creation & exchange of substitute checks-paper copies of electronic checks with a MICR line. Check-21 doesn't cover check-safe-keeping programs, electronic checks, or image-exchange programs. CUNA has commented on the Fed's proposed regulations & will incorporate more CU comments in its communication with the Fed by the March 12, 2004, deadline. Prior to that, CUs can send comments to CUNA. Under Check-21, CUs must accept substitute checks if they reject electronic files. This substitute check is the legal equivalent of the paper original, for state & federal law, so long as the criteria for a substitute check are met. These criteria include appropriate copying of the check's front & back, & the legend stating the substitute is a legal copy of the check. Consumers who suffer losses because they received a substitute check instead of the original check may file for an expedited recredit from the paying financial institution. The financial institution must pay for legitimate claims within 10 days for amounts up to $2,500; 45 days for greater amounts. Financial institutions can delay availability for suspected fraud & other circumstances, & they can reverse recredits that aren't warranted. Financial institutions must provide consumer awareness notices that describe a substitute check & the consumer provisions for these new items. The regulations mandate new disclosures regarding when a recredit is delayed, denied, or approved, or partially or fully funded. Check-21 will affect CUs because it mandates new disclosures about the definition of a substitute check & related consumer protections. The regulation creates potential liabilities for CUs when IF their members handle substitute checks. Although most CUs safekeep their share drafts-and as a result will have limited contact with substitute checks-all CU members will use substitute checks in ways that will trigger the new disclosures & liability rules. For CUs that don't return share drafts to members, the disclosure rules & special expedited recredit rules will apply to a member who deposits a thirdparty check that bounces & is returned to the member in the form of a substitute check. These provisions will cover members who request copies of their share drafts & receive substitute checks. Of course, for CUs that return share drafts, the new disclosures will apply to all of their members, & the expedited recredit rights will apply when those members receive substitute checks. All financial institutions must train employees to understand substitute checks & the consumer provisions surrounding them. CUs that return share drafts to members must provide consumer awareness notices to members at their first communication with members after 10/28/04. Check-21 will affect CUs that safekeep checks on a case-by-case basis, as described previously. CUs may provide comments to the Fed, which could ease compliance with the new rules. The Fed requests comments about whether it should use the term "banking day" or "business day" when calculating the time frame for compliance with certain consumer protections. The statute measures the time frame for a "business day" as a day other than a weekend or legal holiday. The Fed proposes to incorporate the term "banking day," as it has for other parts of Reg CC. Banking day means "that part of any business day on which an office of a bank is open to the public for carrying on substantially all of its banking function." If the Fed uses "banking day" instead of "business day," CUs should have more time to comply. The Fed asks whether it should keep sample notices in the regulation if the act doesn't require it to provide these notices. The board provides sample notices, which aren't mandated, for notifying consumers in the following situations: that their recredit claim is or isn't valid, their account has been recredited, & the recredit has been reversed. Check-21 requires financial institutions to provide these notices but doesn't require the Fed to provide sample notices. CUs should use the opportunity to identify their views on what would make compliance with these provisions easiest: inclusion or exclusion of these sample notices. The Fed has taken this opportunity to draft regulations implementing Check-21 & to review & propose changes to Reg CC. The Fed is allowing entities to comment on all aspects of Reg CC. CUs should take advantage of this to present views on the considerations in Check-21 & items concerning Reg CC. Beyond Check-21, the Fed requests comment on whether it should incorporate into Reg CC a new provision found in the model law of UCC. This UCC revision would change financial institution liability under certain scenarios. In particular, when an item drawn on a consumer account is created at a remote location without a signature, the paying bank no longer would be held liable if the consumer claimed the item was unauthorized. The UCC revision would allow a paying financial institution to use a warranty claim to absolve itself of responsibility for honoring this type of item. The theory is that the depositary bank deals with the creator of this item & can identify fraud better than the paying bank that doesn't have a signature to verify. CUs can send comments to the Fed favoring or opposing this proposal.

Using Check-21 to help manage systemic & payment risk 4/8 IPR

The events of 9/11 were burned into the retinas of most Americans because of the horror, catastrophic loss of life & devastation that engulfed Manhattan & disrupted business operations. While the payment system did not collapse, organizations that process business & consumer checks found themselves suddenly faced with another key concern - how to manage systemic & payment risk when the paper payment instruments could not move from one region to another by air. The terrorist bombings of the World Trade Center & the Pentagon - & the anthrax attacks & scares that followed - served to highlight vulnerabilities in the system by creating significant challenges for item processing shops. One key problem 9/11 brought into focus was the need for contingency plans when paper checks can not be moved across the country. While electronic payment networks remained largely unaffected on 9-11, the suspension of commercial air service nationwide in the crisis created some complications in the check arena, because checks are largely transported via air. Commercial air service was suspended nationwide from 9/11 to 9/13/01 as federal aviation officials scrambled to beef up security procedures at airports. Enter the law of unintended consequences - since checks largely are transported via air, the suspension of air service delayed processing of out-of- area checks, perhaps increasing the operational & fraud risk associated with checks during that period. Although there is a business case for truncating checks as early as possible in the process, when the Federal Reserve proposed the legislation that eventually became the "Check-21", they did so in large part to address the vulnerabilities that came to light on 9/11. "From the Fed's perspective, reducing the risks associated with the physical transportation of checks is an important benefit of Check-21," FRB Philadelphia President Anthony Santomero told the New Jersey Bankers Association 2004 Annual Convention 3/27. "Our experience in the aftermath of 9/11 focused our attention on the value of electronification from the reliability standpoint. The interruption of air travel - & check transportation - in the days after the 9/11 attacks pushed the Fed's check float up to over $47b, more than a hundred times the normal level." At the time, payments organizations were concerned about payment risk & systemic risk. Many groups urged their members to extend holds on out- of-state checks, scrutinize all large value checks, & re-verify all identification on recently opened checking accounts. The disruptions that resulted from the grounding of the nation's aircraft were unprecedented in the industry because checks continued to be deposited & began to stockpile locally, creating a logjam once the restrictions were lifted & the checks could once again be moved by air.

Embracing Check-21

As the old line goes, if necessity is the mother of invention, panic is its father. While no one would suggest that the Fed, payment processors, vendors & financial institutions were in a state of panic after 9/11, it was clear to all participants that the suspension in air traffic exposed a significant vulnerability for the industry. "Clearly, if image exchange had been more prevalent among banks, the impact would have been much smaller," Santomero said. "It was the opportunity to reduce check processing's dependency on the transportation system that motivated the Fed to approach Congress in late 2001 with the proposal that would become Check-21." But Check-21 is not intended to be a big stick that the Fed will use to beat financial institutions into an e-payments future. When the law takes effect on 10/28, it will authorize a new negotiable instrument called an IRD. IRDs are "substitute checks" that the law says are the legal equivalent of the original check for all purposes. A substitute check is a paper reproduction of the original check that can be processed just like the original check - something most financial institutions will use imaging technology to effect. Check-21 does not require any bank to create substitute checks or to accept checks electronically, & collecting banks will not be forced to truncate or image checks & paying banks will not have to accept electronic images. All paying banks must accept substitute checks & originals, however. But the Fed fully expects Check-21 to generate a strong increase in the volume of electronic presentments & to encourage institutions to truncate checks at the earliest point in the process. "Over time, we should see substantial efficiency gains as a result of Check-21," Santomero said. "It is estimated that once the full effects of Check-21 are realized, the banking industry could potentially reduce its check processing costs by over $2b a year. That estimate includes a reduction of $250m in transportation costs alone. Banks will benefit from improved availability of funds, greater efficiency in processing return items, & smaller losses from check fraud."

Vendors focus on Check-21 education

All too often in the financial services world technology & innovation outpaces the perceived market need. But Check-21 is on track to becoming an exception to that rule. A lot of financial institution executives are eager to find out more about the specifics of Check-21 implementation & the impact the law will have on their operations. At the heart of this effort is education. Fiserv has been conducting a series of seminars around the country on Check-21 & the seminars have drawn more than 1,900 attendees so far. The seminar series will conclude in May. Many of the executives attending the sessions initially did not know that the minimum requirements of Check-21 are to have the ability to accept substitute checks, to train financial institution employees & to notify customers of the changes, Mark Damico, Fiserv, said. By 10/28, financial institutions will be required to accept substitute checks - essentially documents produced from images of the actual checks. They must educate their staff on various aspects of the law, including processing implications & expedited recredit, a provision that requires a financial institution to recredit a consumer's account within 10 days if the customer disputes a debit resulting from a substitute check. Banks must explain to consumers that their checks could be converted into substitute checks, & they must be prepared to tell customers about the expedited recredit process & how to make a claim under that provision. Lila Yingling, 1st Mariner Bank attended a Fiserv seminar on Check-21, & said it helped dispel some of the hype surrounding the new law. "There really is quite a bit of misunderstanding about Check-21. Some bankers were under the impression that checks would disappear with Check-21 & that, obviously, is not the case." The $1.1b asset institution has formed a committee - with participants from throughout 1st Mariner - as part of its plans for Check-21 compliance. "We want our customers to feel comfortable when they begin seeing these substitute checks in their statements." While many banks are looking at adding imaging capabilities before Check-21 takes effect, others are relieved to know they don't have to do so just yet. "The good news is that we do not have to invest in new equipment by October," said Lorraine Broshears, First Arizona Savings. "The seminar cleared up many confusing points & put to rest speculation on what was absolutely necessary by October." First Arizona Savings, a $238m asset institution in Scottsdale. will consider adding imaging capabilities next year. While it is not necessarily true that he who hesitates is lost, deployment of imaging technology early can yield significant benefits for institutions. "As a whole, the banking industry is onboard & busily preparing for Check-21," says Alenka Grealish, Celent. "Many individual banks are waiting to finalize their initiatives until they have a better understanding of how specific Reg CC amendments will impact them. At this point, consumers are apathetic, but we expect them to have questions as soon as image replacement documents are in circulation. Anytime you introduce something unfamiliar, there is a definite learning curve." NCR has been working with financial institutions to develop individualized imaging strategies. Taking a wait-&-see approach to Check-21 won't cut it, Keith Taylor, NCR, believes. "The cost of indecision for banks will be tremendous. With an upward cost of $70b to process checks in the US & new competitive pressures from non-banks, it is critical for banks to strategically address Check-21's economic impact, fraud reduction & consumer education." Taylor believes that banks with imaging technology in place will experience several benefits. Fraud Reduction. Use of check imaging technology will help to reduce the annual $10b check fraud problem because transactions will be cleared & returned faster & fraud detected sooner. Paper-based banks could become targets as fraudsters move to known systems, NCR believes. Customer Service. Banks can use check truncation & imaging technology to boost the number of hours they are open for businesses & consumers. Other benefits include the ability to offer next-day funds availability & the ability to access check files online 24/7 online. Operational Advancements. If banks can clear checks faster it will accelerate interbank collection, resulting in processing cost reductions. Banks have several options to choose from when deciding where to capture & store check images - the teller window, in the branch back office, at commercial customer locations, via ATM, at the retail POS or in a central processing area. New Revenue Opportunities. Taylor believes banks will be able to expand their service offerings & tap new sources of revenue. They will be able to provide more effective customer service if they can explain to customers in plain language what impact Check-21 will have. Although the Fed is requiring banks to include a legal statement explaining Check-21 in statements, banks have the latitude to decide for themselves what consumer education efforts they will put in place.

Check-21: not quite black & white? 3/15 AB

As banks prepare for a future in which digital images of paper checks are exchanged instead of the physical items themselves, one ancillary point of controversy is whether images should be captured in black & white, or in the more nuanced grayscale format. Most banks use black & white, which is less expensive to work with than grayscale. The advantage is that check images can be transmitted faster in black & white, because grayscale image files are bigger. But there are those who argue that grayscale should become the standard, & that without it a good % of return items cannot be resolved. This camp says that the small characters & light-colored inks used for the indorsements on the back of checks may not show up well - or at all - when the items are imaged in black & white. Unless the industry invests in grayscale, it risks a nightmare scenario of rising returns. Under current rules, depository banks must print indorsements in black or dark purple, & other companies in the check stream must use a different color. But in a move that is likely to put the grayscale advocates on the losing side, the Fed has proposed that all indorsements on the backs of checks to be printed in black ink. Banks had until Friday to submit comments on the Fed's proposed change to Reg CC, which themselves are meant as a prelude to the October enactment of Check-21. ABA sent the Fed a letter supporting the proposal. "Black ink will show up better in the images," said Steve Schutze, ABA. Fred Herr, FRB Atlanta, said that the likely rule change will probably make the grayscale debate irrelevant. The argument for grayscale is predicated on banks' current practice of printing out crucial data on the actual paper. Once images become the sole instrument moving through the processing stream, that information will probably be included in an addendum file accompanying the image. That, in turn, will eliminate the need for grayscale imaging, Herr said. With no need for printed indorsements, ink color will not matter. "A lot of what we're worried about now, in the long-run won't be there." Among the dissenters is Joseph Keller, Solutran. He says when checks are cleared using image files, information from the front of the check is typically all that is needed. But if the check must be returned, data on the back become more important. A study by his firm found that black-&-white images often do not pass muster. "Our concern is that if there's not a high-enough-quality image, it adds risk" to return processing, & that could drive up processing costs. Solutran compared 3,000 image files in both formats & found that 51.5% had at least one unreadable field on the back of the checks when using black & white. "We believe that the industry will be fine with a black-&-white image of the front. But for Check-21 to be successful, we need a grayscale back." Grayscale offers a more detailed facsimile of the original, including a far better reproduction of the indorsements on the back of a check; black & white is less expensive & more common. Solutran says a grayscale check image file is 50 kb, including the front & back, whereas a black-&-white image file is often smaller by ½ or 1/3. But that difference means additional expense, said Lou Riehl, JPMorganChase. Larger files take up more room in archives, which increases storage costs. Bigger images move more slowly across exchange networks. "If grayscale becomes a standard, there will be significant economic costs."

Check-21 value proposition 3/11 IPR

As the clock ticks down to Check-21's 10/28 effective date, item processing shops, their vendors & clearinghouses are gearing up to put in place strategies that will take full advantage of this new order in check processing. The Check-21 Act aims to make it easier to perform check truncation & electronic check exchange by authorizing a new negotiable instrument called an IRD or substitute check. This point of law provides that a properly prepared substitute check is the legal equivalent of the original check for all purposes. A substitute check is a paper reproduction of the original check that can be processed just like the original check - something financial institutions will use imaging technology to effect. Although Check-21 has generated a great deal of attention of late, it is not the only way to electronify checks. The ARC e-check application, which took effect one year ago this month, is used in consumer bill payment. In the ARC check conversion process, a consumer's check sent to a remittance location is converted into an ACH debit. One key issue on either approach is how consumers will deal with the changes. In an effort to get ahead of the debate, the voting members of NACHA approved an amendment to the ARC Entry rules that requires companies that originate ARC payments to provide consumers with the ability to opt out. The provision that would allow consumers to choose not to have their checks converted to ACH debits takes effect on 6/11/04. The new rule will likely have little practical effect. NACHA found that 93% of companies that originate ARC payments provide the ability to opt-out. In many cases, less than 1% of consumers are electing to opt-out. NACHA estimates that in 2003, there were 220m ARC payments, including on-us payments. ARC is used almost entirely for consumer bill payments such as credit cards, mortgages, insurance & telecom. "Consumer acceptance of check conversion has been extremely high," said Elliott McEntee, NACHA. "NACHA's new rule ensures that the small % of consumers who prefer not to have their checks converted will be accommodated." Consumers who opt-out of check conversion may still experience electronic check processing. Beginning on 10/28/04, all checks become eligible to be processed electronically under the framework established by Check-21. Analysts are viewing Check-21 & ARC not as competitive approaches to check truncation & clearing, but as working in concert to accelerate efficiencies. They offer check & remittance processors 2 more tools for clearing & settling checks faster, cheaper, & more accurately than ever. The danger companies face is implementing one of these methods in place of the other, limiting their organization's ability to meet the industry's fast- changing check & payments landscape, BancTec believes. Companies that take early steps to develop a comprehensive check clearing strategy - encompassing both check truncation & ARC - will be rewarded with unprecedented levels of operations flexibility, while protecting current investments. Check-21 was created to facilitate check truncation. It accomplished this by introducing a substitute check or IRD as a legal equivalent of the original check. An IRD removes the legal barriers to allow a financial institution to unilaterally truncate checks & implement full electronification. All checks are eligible for truncation as long as the check can either be processed electronically or reconverted to an IRD. In a perfect world, Check-21 would be sufficient for full truncation & electronification of the check. But this is not a perfect world. Like ARC, Check-21 requires an intermediary, such as a financial institution or other company, to accept & process checks, images, MICR & IRDs. Without a single solution for check truncation, check & payment processors must choose from among several options for check clearing. They can deposit checks with a local or regional bank (using traditional paper processes). They can deposit ACH items with an intermediary. They can deposit substitute documents or IRDs with an intermediary or financial institution that offers the service. Or they can deposit MICR data & images to an intermediary or bank. The value proposition to any of these clearing options can be measured in unit cost, funds availability, & the deadlines to process a check or its equivalent. The base line is whatever a user currently is charged to deposit a paper check at its local financial institution. From the end-user perspective, the viability of these initiatives should have less to do with check truncation & ACH & more to do with savings. As independent approaches to check clearing, all of these options have their uses & their fans. ARC/ACH is a proven product that is less expensive than traditional check processing, relatively easy to implement, & requires no infrastructure changes by paying banks. ARC does not require the movement of images, & its storage demands are lower since archived images need only be kept for 2 years, not the 7 required by Check-21. Check-21 allows for all items to be converted, including high- dollar checks, business checks, money orders & government items, which are not eligible for ARC. Check-21 is a law, governed by rules under Reg CC. Reg E governs ARC. Check-21 & ARC can provide substantial benefits independent of each other, but because they address problems & possibilities inherent in check clearing, using them in tandem will allow banks & payment processors to extract far more value. Together they provide a cost-effective solution for all of the transaction types that may appear in a back-office, with Check-21 serving as a "fill-in-the-blank" truncation compliment to ARC. Once integrated, many of the costs & issues associated with traditional check clearing can be reduced or eliminated. To simplify the migration for end-users, new tools from software developers can integrate Check-21 & ARC to make sure decisions are made quickly & data is passed smoothly. Ultimately, the industry is on the verge of a new era in check clearing. The embrace of a combined Check-21 & ARC solution, with different approaches for different business processes, promises to deliver extraordinary value for financial institutions & payment processors, making them more cost-effective & responsive to change. But organizations that choose to delay or ignore ARC in favor of anticipated migration to Check-21 may forego immediate benefits of lower costs, & in the longer term, be disappointed with their ROI & results. Safeguarding image quality is a key strategy for banks that plan to take advantage of these new capabilities. BancTec launched Image Sentry, a software solution that provides customers with flexible tools to analyze images & identify quality deficiencies for repair or return. Image Sentry is the first of BancTec's portfolio of products designed specifically for the emerging check truncation & check image-exchange processing environment. The anticipated growth of check image exchange & distributed check image capture is driving the need for financial institutions to properly plan & implement a strategy to optimize image & data availability & integrity. "As we enter the new era in check clearing, BancTec is committed to delivering the kind of technological leadership & service excellence that will help take financial services customers into the future," says Malcolm Gurney, BancTec. "Image Sentry will play a key role in helping our customers better manage & leverage the check images & information critical to their success in the emerging image exchange environment." A wide range of issues from the lack of industry image quality standards & the wide variation in image quality tolerance levels accepted by different institutions, to the potential consumer outcry over image clearing initiatives are driving the banking industry to accept the importance of high-quality images. With financial institutions ultimately liable for defective or low quality check images, the stakes are even higher. The financial exposure to US banks may approach several billion dollars per year, estimates one industry consortium. Vendors increasingly are looking to provide ways to help banks leverage the new for these new IRDs. There are significant benefits that can be passed through to customers & First Tennessee is one of the first banks in the country to offer such a product. First Tennessee is providing hardware that enables business customers of any size to capture check images then, via secure encryption software, transmit the scanned images to First Tennessee. From those images a duplicate of the original check is created & the transaction is completed simultaneously. Businesses can choose to process their payments once a day or many times throughout the day. "Businesses that receive check payments can now get access to their money up to 2 days sooner than before, which means they have better availability of funds for reducing debt or increasing investments," said Taylor Vaughan, First Tennessee. "Businesses can save time & money, because they no longer need to send employees to the bank to make daily deposits or arrange for armored courier pickups." To use the system, a business simply needs a personal computer with an Internet connection. First Tennessee will provide the check scanner, which can be leased or purchased, along with the secure software. The scanner is connected to the computer's USB port, & the automatic set-up of the software takes less than 5 minutes. Images of the scanned checks can be stored at the business, & access is available to multiple users with separate passwords. "This product, which we call First Deposit Plus, enables business customers to take advantage of this legislation. While many banks are determining how the Check-21 legislation will affect them, we have developed a product with real value to our clients now." To determine whether or not this product is right for a business, managers must consider the extra value gained from faster availability of funds, the costs of an armored courier service, & the lost productivity when an employee is driving to the bank rather than working. The cost to process deposits through First Deposit Plus will vary depending on the number & size of transactions & the customer's relationship with First Tennessee.

Gearing up for Check-21 3/17 EFTR

Since the Federal Reserve Board's comment period on the regulations that will enable Check-21 law ended last week, most financial firms have started viewing the new order of IRDs as just short of a fait accompli. But while the industry has been waiting a long time to take advantage of the ease of truncating checks earlier in the process, the details of implementing the law will take some time & adjustment. The new Check-21 rules will take effect in October, giving banks, lockbox providers & businesses that write checks seven months to get ready to take advantage of the new mandate. This legislation & its enabling rules will accomplish this by legalizing the use of a substitute check or IRD within the check clearing system, speeding up the availability of funds. The payoff for the industry is pretty good - Celent predicts annual cost savings generated by check truncation will reach at least $1.2 billion. 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 a recent report from 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. Even now, banks are looking to their ATM vendors to provide upgraded machines. 7 months may seem like a long time to prepare, but careful planning is an essential part of making sure that the right changes are made & that they work with the systems in place. For its part, the Federal Reserve on 12/22 offered up proposed regulations on how to implement the Check-21, which takes effect on 10/28. Check-21 aims to make it easier to perform check truncation & electronic check exchange by authorizing a new negotiable instrument called a "substitute check" & provides that a properly prepared substitute check is the legal equivalent of the original check for all purposes. A substitute check is a paper reproduction of the original check that can be processed just like the original check - something financial institutions will use imaging technology to effect. The Board's proposed amendments set forth the requirements of the Check-21 Act that apply to banks; provide a model disclosure & model notices relating to substitute checks; & set forth bank endorsement & identification requirements for substitute checks. The proposed amendments clarify some existing provisions of the rule & commentary. But despite the broad-based support for Check-21, there will be issues that need to be worked out in the final rules & implementation. For retail bankers, the key issue is one of customer service - how to tell their customers that they will no longer be getting their real checks back in the mail with their statements. Consumers will most likely receive image statements that incorporate the check image or IRD in some format. For business users, however, the issue is a little different. A growing number of businesses have cash management services that are closely tied to the progress of a paper check through the system. AFP last week urged the Federal Reserve to consider the needs of business check users & clarify the legal protections corporate users have in a world where the new IRDs become the rule. AFP asked the Fed to make sure that any industry standards for substitute checks are accepted only if they retain the integrity of corporate cash management services, incorporate advanced fraud control techniques & require strict adherence to quality measures. AFP said it opposes any provision in the rule that would deny legal equivalence to a substitute check requested by a company specifically to resolve a payment dispute or claim. The group requests that the Board explain the relationship between substitute checks & checks eligible for conversion to ACH debits in order to clarify if & when companies collecting checks are able to choose between creating substitute checks or converting them to ACH debits. Payors who receive substitute checks should be afforded the same legal protection against fraud that they have when fraud occurs on their original checks, the group said. AFP requested additional explanation of the term, "paper or electronic representation of a substitute check," & examples of its use. The uses & legal rights attached to "a sufficient copy of an original check" should be clarified. 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 (and 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. There is a fine line that bankers have to walk here, however, similar in many ways to the way bankers managed the ATM versus teller window question in the mid-1980s. Seeing how cost effective it was for the banks to have customers with lower balances use ATMs instead of tellers for customer service, some banks assessed fees to customers if they wanted to see a live teller. Customers & consumer advocates met those policies with howls of protest. Other institutions used the carrot instead of the stick & sought to create incentives to boost ATM usage. Expect some early customer relations challenges that will need to be managed with a gentle touch on the retail side, but eventually most of these concerns are likely to be eclipsed by the benefits of image-enabled ATM deposits & the like. On the business side, the issue becomes potentially more complex, since a wide variety of trading partner & credit agreements can hinge on the form of payment & business users, thanks to the Internet, are increasingly using cash management products. With one such product, positive pay, banks inform the business what checks were presented on a given day & obtain approval to pay those checks. This is a powerful fraud control tool for corporations & a service that generates considerable fee income for banks, so decisions made regarding Check-21 in this space must be weighed against relationships & revenue.

Check imaging expands potential buyers of ATMs 3/11 ATM & DebitNews

The expected growth in the electronic imaging of paper checks is prompting some nontraditional ATM deployers to use the machines because of their imaging capabilities. Fidelity Investment Services is using ATMs that electronically image checks to provide a convenient way for its customers to fund stock & investment accounts. Fidelity last year paid $2m for 112 NCR Personas ATMs that are equipped with the ATM maker's check-imaging features. The machines are deployed in Fidelity's 91 offices to serve on-site customers who deposit checks. Unlike financial institutions that offer electronic check depositing at ATMs, Fidelity's machines do not support cash withdrawals. "They are a depositing kiosk," says Charles Young, Fidelity. Before the ATMs were installed, customers using Fidelity's branch offices typically waited in line to write a check to buy equities. 35% of all checks written at Fidelity's branches are imaged at ATMs, noting check images reduce risk because they can be checked instantly against a customer's past check-writing history. Check imaging enables Fidelity customers to make instant stock purchases because they do not have to wait days for checks to be processed. Traders cannot sell a few hours later the stocks they buy with electronically imaged checks. That kind of instant use of checks is still too risky. "They can trade on it immediately, but they can't cash out that account," noting that an equity purchase typically involves values worth "several thousand dollars." But with Check-21 going into effect in October, the prospects are great for using imaged checks at ATMs to fund & cash out accounts. The legislation allows check issuers & acquirers to settle checks using electronic images instead of the actual paper check. The measure requires that check issuers accept for settlement substitute checks printed from electronic images. Young anticipates that check-imaging ATMs will be used by investment companies when regulations take effect in 2005 that require settlement of stock trades within a day instead of 3 days. "This industry is moving to faster & faster settlement," noting that ATM companies have the most useful technology to image checks. ATM makers are gearing up their marketing to nontraditional customers that may want to use their machines primarily to image & settle checks quickly. Diebold began offering new check-imaging software on ATMs called ImageWay that is produced by Alogent. ImageWay is designed for use with Diebold's Opteva ATMs. "We are positioning for the next wave of imaging for Check-21," says Peg Bost, Diebold. While Diebold offered check imaging software before ImageWay, it was proprietary & would not have met the technical needs of transaction processors. "We think the ATM is going to be an important part of image capture." NCR has for several years offered check-imaging ATMs that can potentially meet transaction processors' technical spec's for image capture. Not all ATM concerns, though, are convinced that imaging systems on ATMs are worth the cost. Steve Gutterman, E*Trade, which owns the nation's 2nd largest ATM ISO. E E*Trade has no plans to incorporate check imaging on any of the 15,000 ATMs it has under contract in retail sites. Gutterman says E*Trade's securities-trading business is conducted mostly on the Internet, as the firm does not maintain investment branches like Fidelity does. He does not believe that ATM imaging at retail stores would be used by many of E*Trade's securities-trading customers.

FSTC check imaging & truncation special interest group 3/31 PRNewswire

FSTC has formed a Check Imaging & Truncation special interest group (SIG) to address challenges & opportunities associated with Check-21. FSTC named 3 industry veterans to steer the group. Katrina Brown, WellsFargo, Glen Ulrich, US Bancorp, & Ian Goodall. NCR. "By testing & evaluating new check imaging technology on quality issues & security features, FSTC has a long history of assisting its members optimize their check processing operations," said Zachary Tumin, FSTC. "Building on that success, we've chartered the SIG to look over the horizon to establish & prioritize FSTC's long-term agenda for action in check imaging & truncation." Katrina Brown, WellsFargo Deposit Risk Operations group where she has enterprise-wide responsibility for planning, development & implementation of loss reduction strategies for the Transit-In-clearings channel & shared responsibility for the ATM channel. Glen Ulrich, US Bank Deposit Services Division, which includes Exceptions/ Outgoing Returns, Incoming Return Items & DDA Fraud Prevention. He has check processing experience with Fiserv, First Interstate & WellsFargo. Ian Goodall NCR, is responsible for NCR's check imaging & truncation & marketing for the US. Previously he had global responsibility for NCR's ECP & image interchange solution business. The formation of the special interest group & its new leadership was announced on the opening day of the Check-21: Image Assurance & Security in a Truncated World conference, FSTC's second in a series of national learning events designed to help industry members explore & meet the challenges of implementing Check-21 in today's truncated environment. Sponsored by FSTC & industry partners, the conference provides banking executives with up-to-date industry knowledge & insights. The Check Imaging & Truncation SIGs will provide an opportunity for financial service professionals-from member financial service companies & technology companies that provide services or systems to the financial service industry - to come together on an ongoing basis around Check-21 to share knowledge & experiences, identify common issues or barriers, & to take action.

Unpacking the Check-21/ARC value proposition 4/1 EFTR

Philadelphia FRB President offers bankers advice on coping with Check-21. For the US banking market this fall, one law enacted largely as a result of air traffic disruptions following 9/11 is poised to make a big splash. On 10/28, Check-21 will take effect, potentially revolutionizing the way checks are received in ATMs as deposits, taken in at the point of sale, & processed by billers such as credit card companies & utilities. It's no secret that electronic payments are growing at an aggressive rate. Transactions via ACH over the past year doubled to more than 100m, FRB Philadelphia President Anthony Santomero told the NJ Bankers Association 2004 Convention. "The US is catching up to the rest of the world in its use of electronic payments. Undoubtedly, the trend will continue. A competitive market will drive banks to offer new electronic payments vehicles in response to consumer demand for greater convenience at lower cost. Yet, the use of that expressly American payment vehicle - the paper check - remains widespread here." Santomero said that check use in the US peaked in the 1990s & has been steadily declining since then, Americans still write about 40b checks a year. "That represents ½ of the nation's non-cash transactions. Checks are likely to represent a significant share of payments for a long time." While banks have been able to gain more efficiencies in their check processing operations, declining check volumes are having an impact on the value proposition. Since electronic transactions are more efficient than processing paper, Check-21 is a first step toward that new processing paradigm. The potential benefits are big. "It is estimated that once the full effects of Check-21 are realized, the banking industry could potentially reduce its check processing costs by over $2b a year. That estimate includes a reduction of $250m in transportation costs alone. Banks will benefit from improved availability of funds, greater efficiency in processing return items, & smaller losses from check fraud." Check-21 will make it easier to perform check truncation & electronic check exchange by authorizing a new negotiable instrument called an IRD or "substitute check". This point of law provides that a properly prepared substitute check is the legal equivalent of the original check for all purposes. These substitute checks are paper reproductions of the original check that can be processed just like the original check - a task that financial institutions will use imaging technology to implement. Although Check-21 has generated a great deal of attention of late, it is not the only way to electronify checks. The ARC e-check application is used in consumer bill payment. In the ARC check conversion process, a consumer's check is sent to a remittance location & converted into an ACH debit. ARC, which just experienced its 2nd birthday on 3/15, is used in consumer bill payment. NACHA says that 55m checks have been converted to ARC payments in IH 2003. The use of these ARC payments is rising dramatically. NACHA reported that 1b e-checks were processed last year. These e-checks seem to be following the general trend of growth in payments originated via the ACH - last year 10b ACH payments were made. "The results that NACHA announces are proof of consumers' increasing use of electronic payments," Leonard Heckwolf, BankOne, said. "The greater reliance on electronic payments benefits financial institutions of all types & sizes, & their customers." While Check-21 & ARC appear on the face of things to be competitive approaches to e-payments, analysts increasingly are viewing them as 2 parts of a comprehensive e-check strategy that can work in concert to accelerate efficiencies. They offer banks & billers 2 more tools for clearing & settling checks faster, cheaper, & more accurately than ever. The either/or approach may be far less effective for most financial organizations than it appears. If banks implement only one of these methods in place of the other, they may be in effect limiting their own ability to address changes in the check & payments landscape. Banks generally are better served by taking early steps to develop a comprehensive check clearing strategy - one that includes elements of check truncation & ARC. These financial institutions are more likely to reap the benefits of future operational flexibility while protecting existing investments. Any check that can be processed electronically or reconverted into an IRD is technically eligible for Check-21. ARC & Check-21 require an intermediary, such as a financial institution or other company, to accept & process checks, images, MICR & IRDs. If payment processors do not have a consolidated solution for check truncation, they will have to choose from among several options for check clearing. The options available are the following: Deposit checks with a local or regional bank (using traditional paper processes); Deposit ACH items with an intermediary (using ACH or ARC). Deposit substitute documents or IRDs with an intermediary or financial institution that offers the service (IRD). Deposit MICR data & images to an intermediary or bank. Banks can develop a business case that works best for them by examining each of these clearing options & evaluating them based on unit cost, funds availability, & the deadlines to process a check or its equivalent. The base line for that calculation would be whatever amount a user currently is charged to deposit a paper check at its local financial institution. From the end-user's perspective, the viability of these initiatives should have less to do with check truncation & ACH (or the technology that drives them), & more to do with savings. There are pros & cons to every approach to check clearing. ARC/ACH is a proven product that is less expensive than traditional check processing, relatively easy to implement, & requires no infrastructure changes by paying banks. ARC does not require the movement of images, & its storage demands are lower since archived images need only be kept for 2 years, not the 7 required by Check-21. Check-21 allows for all items to be converted, including high-dollar checks, business checks, money orders, & government items, which are not eligible for ARC. Check-21 is a law, governed by rules under Reg CC, whereas Reg E governs ARC. Check-21 & ARC can provide substantial benefits independent of each other, but because they address problems & possibilities inherent in check clearing, using them in tandem will allow banks & payment processors to extract far more value. Together they provide a cost-effective solution for all of the transaction types that may appear in a back-office, with Check-21 serving as a "fill-in-the-blank" truncation compliment to ARC. Once integrated, many of the costs & issues associated with traditional check clearing can be reduced or eliminated. To simplify the migration for end-users, new tools from software developers can integrate Check-21 & ARC to make sure decisions are made quickly & data is passed smoothly. The industry is on the verge of a new era in check clearing. The embrace of a combined Check-21 & ARC solution, with different approaches for different business processes, may well deliver extraordinary value for financial institutions & payment processors, making them more cost-effective & responsive to change. But organizations that choose to delay or ignore ARC in favor of anticipated migration to Check-21 may forego immediate benefits of lower costs, & long term, be disappointed with their ROI & results. Vendors are looking to provide ways to help banks leverage the new capabilities. Accenture is now offering consulting, development & testing services to Viewpointe. Accenture is enhancing the ability of Viewpointe's image exchange platform to handle large image exchange volumes for banks taking advantage of Check-21. Viewpointe offers a bank-shared national image archive that stores 50% of all checks written in the US & provides image sharing & exchange services. Image sharing is Viewpointe's model which is designed to eliminate the need to electronically ship images between bank archives, significantly cutting the storage & telecom costs associated with exchange. Viewpointe moves check images between Viewpointe & non-Viewpointe banks. "Each year, Viewpointe banks store over 20b check images in the shared national archive & 12b of those are eligible to be shared or exchanged. That's 45m images each day," says John Lettko, Viewpointe. "Our image sharing & exchange models were proven in limited production in 2002; we asked Accenture to augment our infrastructure & platform to help maintain its integrity & operational excellence in such a high volume production environment."

Counting down to Check-21: Is your community bank ready? 3/1 BankNews

Research done prior to President Bush's signing of Check-21 revealed that many financial institutions were not prepared for the electronic or image-driven check delivery era. Once the president signed the bill, he started a virtual countdown for banks hoping to gain an advantage over their competitors. Although October 2004 is the witching hour, some of the nation's larger banks will begin exchanging images in the first half of 2004; however, the transition may pose more of a challenge for community banks. There are 3 factors that affect community banks & their approaches to Check-21. The first is the development of a business case for smaller banks. Although truncation of checks between banks is seen as a blessing for many financial institutions, there are thousands that do not plan to participate in the image sharing process on any level. For those banks, the case has not been made & the perceived benefits do not outweigh the costs. A second factor is the impact of competition. If a bank's competitors are exchanging images, it may feel compelled to do so as well. The perception that competitors have gained an upper hand through imaging may force some banks to participate in truncation whether they want to or not. & finally, certain corporate requirements may drive community banks to image exchange for the improved efficiencies it brings. For instance, the treasurer of a company that does lockbox business with a community bank may want to get his/her money faster than the bank can produce it with today's non-Check-21 processes. To enjoy the full benefits of Check-21 by 10/04, community banks should have begun preparation no later than 5/03. Within the Check-21 landscape there are varying degrees of participation. For example, some community banks may simply want to send & receive images & nothing more. The time constraints for those banks are not as severe. The ability to send & receive images would satisfy front-end operations. Substitute checks would be used in the processing of return & exception items, adjustments & the associated research involved with those transactions. Community banks could choose a third-party aggregator that has image capabilities to update all of its accounts & handle the transactional & core processing. Since aggregators have the capabilities, the community banks could simply sign on for image capture. If the bank partners with an aggregator that uses a clearinghouse, returns would come back faster. Of course, since the bank would have to pay for this service, it would not experience the full cost reduction benefits - transportation, postage & staffing considerations - of Check-21. For banks with less than $1b in assets - many of which use aggregator services - using an aggregator for imaging makes all the sense in the world. Those community banks that desire to have their own systems for image exchange would incur incremental costs for software & equipment. The cost savings & fee income increases from a proprietary image environment could offset the cost for the technology in the long run. The community banker's approach to Check-21 will define how efficient his/her check processing operation can be and, by extension, how well it can differentiate itself from its competition. Clearly, image exchange offers substantial opportunities for streamlining & simplifying check processing. By adopting an overall image strategy & outlining an effective implementation of software solutions, banks have a unique opportunity to realize all the efficiencies & cost savings inherent in check truncation. The first step a bank should take in its approach to image exchange is the development of a bank-wide action plan & strategy to implement image processing. Such a plan would not be a response to tactical or competitive initiatives or solutions, but rather a strategic initiative supported by the bank's executive management. The plan should be all-encompassing & focused on a synergistic approach to imaging capabilities. Primary focus will be on imaging related to check processing, which will become the foundation for future image deployments. This is a logical first step, since Check-21 deals with substitute checks. Considerations for the imaging of bank statements, loans, mortgages & trust issues could follow, based on the recommendations of the action team or the specific needs of the bank. While in the planning stage, banks should keep in mind that image exchange goes far beyond the mere transference of files & that they have a choice when it comes to choosing the vehicle for the image delivery system. Some bankers might want to maintain their own image archives. Technology companies within the industry have developed solutions that banks can use as part of their enterprise system that will enable them to create, send & receive images across an image exchange network. Check-21 enables banks to go to full truncation, & image exchange is just one element of truncation. Eventually the bank will want to truncate at the branch, ATMs & corporate locations for new revenue opportunities. Meanwhile, some banks have chosen to develop their own solutions that involve image exchange networks using third-party clearinghouses. Here, imaged files are exchanged by banks directly, while the summary information is passed through the clearinghouse for settlement or settlement reporting. Image exchange software products perform "virtual capture" for the banks, resulting in seamless integration with capture systems & item workflows. These solutions can provide banks with image archives through an interface within minutes of capture. The action team must decide on the right solution for the bank. Most experts agree that the following key attributes should be present in every check imaging system. It should be user friendly. Look for a single, common platform for all "day one" capture streams. These platforms include dynamic routing capabilities, which will help banks manage different workflow environments. It should have supportability. A single platform will reduce training & support requirements - & you'll have fewer vendors to rely on for support. It should be easily enhanced or upgraded. Using common platforms & applications simplifies this process considerably. A common capture platform will reduce necessary interfaces to a core transaction system such as IBM's CPCS. Distributed architecture should ensure that check images are available to whoever needs them at any time. The images should be of high quality. Banks using the new imaging systems are experiencing missing image rates as low as one for every 50m checks processed. A high quality of image capture rates & the resulting accuracy of archive population should be a high priority for banks seeking to implement an image capture system. Technology is a friend & not a foe to community banks. It has helped level the playing field against the larger regional banks. Check-21 is a natural progression m the evolution of financial transactions processing. Community bankers who participate in the process will remain competitive with larger institutions & could gain a considerable advantage over their peers who chose to stand on the sidelines rather than joining the game.