Data Financial Announces New IRD Printing System, 9/15 Business Wire

Data Financial Business Services introduced the new DCP-IRD printing software this week And packaged it with the HP 2100dn laser printer, MICR toner cartridge and a case of preprinted IRD forms. The system is designed to provide small to medium banks and credit unions with an affordable solution to print IRD's from existing x9.37 image files received from their image exchange. The software will also print return IRD's with a separate MICR line and coded With a "5" in column 44 in accordance with the X9.90 standards.

PARASCRIPT INTRODUCES "CUX", IMAGE QUALITY TESTING: 9/17 Business Wire

The new Check Usability Xpert software from Parascript is now available for use with their Check Plus Intelligent Character Recognition software. CUX tests 17 different fields and potential mis-functioning to insure that the check images captured by the check scanner will pass the image quality standards required under the Check 21 rules for reproducing a legible image Of both sides of the checks. Parasript is a leading vendor of CAR/LAR software and the New addition of CUX is expected to provide the banking community with reliable software To protect their interests in the check image exchange world.

MICR - it's not just toner 9/21 OutputLinks

One of the more important capabilities data centers & transactional service bureaus are seeking today is fast, reliable & accurate MICR printing. But it's not simply a matter of putting a different toner bottle in a machine, or having a print engine dedicated to MICR printing. MICR raises the bar for image quality & consistency because the MICR characters must always be readable in high-speed bank clearinghouses, where rejected checks cost money & reduce efficiency. This makes MICR a very demanding printing application. Text quality must be consistently sharp & clear throughout a print run, with sharp edge definition. Print density is important: MICR text must be a solid, dense black to eliminate misreads. Several factors must work together to deliver MICR printing with the requisite quality & consistency. It begins with the print engine, not the toner. The electrophotographic characteristics of print engines are fine tuned to work with the different toners the device is capable of using. Part of this involves firmware changes to match a machine's imaging engine with the toner fusing parameters. This is done for all toners, but is especially important for print engines like the Océ VarioStream & VarioPrint families on which the type of toner can be changed quickly & which can use conventional, color & MICR toner on a single document in some machine configurations. Precise, accurate & consistent placement of the MICR line is critical because even a small error can misalign the image & cause a reject in high-speed reading & sorting equipment. Developer life & stability must be stable over long print runs to ensure toner darkness & adhesion remain constant over the life of the developer. This stability must be over both long individual print runs & over multiple print jobs taking place over several days or even weeks, as the developer is used up. Rigorous reader/sorter testing is essential to predicting real-world performance. MICR toner that can endure 20 passes through a reader/sorter, generate minimal toner build-up on the reading equipment & achieve a reject rate of under 1% will clearly deliver superior performance for typical MICR printing operations. To help deliver this durability no matter which type of machine is being used, the same MICR toner is used on all Océ cut-sheet & continuous form printers. While these factors help ensure quality & consistency with MICR toner, there's still more going on within the print engine. For print engines capable of using both conventional & MICR toner, the print engine controller must be able to differentiate between toner types & automatically adjust its operating characteristics for the type of toner being used. In some workflows, this ability can be linked to job characteristics, so the system operator is alerted if incorrect consumables for a given job are not loaded on the system. For example, the Quick Change Developer Stations available on Océ VarioPrint & VarioStream digital presses are equipped with a chip that identifies which machine & station it is on, the date of the last developer change, & other key parameters. This information resets all the parameters for that station, while the print engine's front end communicates with the chip to ensure the toner bottle contains the correct type of consumable for the job. If the job requires MICR toner but the bottle contains conventional toner, the printer will not run. This ensures both print quality, job accuracy & eliminates costly errors. A new demand driver for MICR printing is Check 21. The strategy is centered around a substitute check-called an IRD. The IRD is the printed image of the original check, front & back, & is the legal equivalent of the original check. IRD's are a new print application & the volume is expected to range from several hundred million to a billion pages per year. IRD documents must be printed with MICR & cut into "check-size" documents for use as substitute checks, making finishing an important part of IRD production. Efficient production will require finishing equipment that will work efficiently with MICR print engines, especially for those service bureaus & data centers that will be seeing a large volume of IRD production. Check 21 requirements & traditional applications alike are expanding MICR printing on low-volume machines & the fastest continuous-form devices. MICR users in a wide range of industries including banking & financial services, insurance, service bureaus & direct mailers are gaining productivity benefits with reliable, versatile MICR printing performance. As you evaluate MICR options for your data center or service bureau, look closely at what is happening as you place the MICR line on a page. It's not just about toner, it's where you can deliver value for your customer.

Check on bad banking habits 9/19 WashingtonPost

Playing the float - or writing a check a few days before you deposit funds in your account to cover it - is a stupid idea, but it's about to get even worse. On 10/28, a federal law takes effect that will speed check processing. Check 21 will let banks convert more paper checks into digital images that can be transmitted electronically instead of physically. It won't happen overnight, but as more banks take advantage of the new system, checks that used to take 3 - 5 days to clear could clear in 24 hours, says John Hall, ABA. Another result of the new law: People who have been getting their canceled checks returned with their monthly statements will probably start getting a combination of paper checks & so-called substitute checks, which are printouts of the digital image. Some checks might not be returned in any fashion. A substitute check will have the same legal standing as a real check, so you can use it to substantiate a tax deduction, for example. This is not really new because the courts & the IRS generally have been accepting copies of original checks for decades. The new law does not reduce the time banks can place a hold on funds after they have been deposited by check, even if the check clears faster thanks to electronic processing. After you deposit a check, your bank can usually hold the funds for 2 business days if it was drawn on a local bank, or up to 5 business days if it was drawn on an out-of-town bank. In practice, banks generally don't hold funds that long. At BofA, "Many customer deposits are credited immediately, depending on the customer's deposit & balance activity. Other deposits are held using federal guidelines," says BofA's Betty Reiss. BofA will convert to digital imaging gradually. It will start with large checks going across the country because it has the most to gain by processing those quickly. The last to be converted will be checks for smaller amounts drawn on local banks. People who have been playing the float could wind up paying more in bounced-check charges. "Don't write a check unless the money is in your account," says Gail Hillebrand, Consumers Union. This is always good advice, but "it's going to matter more now." The new law is a victory for the financial services industry, which has been trying to expedite check processing for years. It gained traction after Sept. 11, when commerce got bogged down because a lot of checks couldn't be transported by plane for several days. Banks will save money by reducing paperwork but don't have to pass any savings on to customers. Today, when you deposit a check, your bank usually ships it to the bank on which it was drawn by way of a clearinghouse or the Fed for sorting & distribution. The bank on which it was drawn may digitally image the check for storage. It may or may not send the canceled check back to the party who wrote it. Starting 10/28, the bank where you deposit the check might convert it to a digital image. Once it makes sure it has a good image, it can destroy the original check. If the bank on which the check was drawn accepts the digital image, the entire transaction may be processed electronically. If that bank can't or won't accept the digital image, it can make the bank that created the image generate a substitute check. A substitute check is a printout of the digital image. It must be slightly larger than the original, show the front & back of the check & include the words, "This is a legal copy of your check. You can use it the same way you would use the original check." Under Check 21, financial institutions must accept & treat a substitute check like an original. Some consumer advocates worry that Check 21 could lead to more errors. Some could be caused by bad imaging. & because there will be 2 versions of many checks - the original & the digital copy - there might be a greater chance of having a check debited from an account twice. "How frequently that may occur is anyone's guess. It's harder for it to happen now because there is only one piece of paper that moves from bank to bank." Consumers have the same protections against check fraud - such as errors or unauthorized payments - no matter how their checks are processed. Check 21 has created an expedited refund procedure for people who suffer a loss related to a substitute check they have received. "If you have received a substitute check, you can file a special claim with your bank for a refund (expedited recredit) if you believe that the substitute check was incorrectly charged to your account, you lost money as a result of the substitute check being charged to your account, & you need the original check or a copy sufficient to show that the substitute check was incorrectly charged to your account." To qualify for the refund, you must receive a substitute check & contact your bank no more than 40 days from the date your statement was sent. Hillebrand says people should "read their whole statement carefully. If you see a problem, such as the payment went through twice or for the wrong amount, report it to your bank, request that your bank send you a substitute check. When you have received it, then you have the right to have the bank solve the problem within 10 business days." Many banking customers can see digital images of checks they wrote online, but these are not substitute checks. If both banks involved in a transaction accept digital images & a substitute check is never generated, you may never see it. "Banks are not required to keep your original check for any specific length of time, & Check 21 does not add any new retention requirements," the Fed says. "In many cases, the original check may be destroyed. If you request your original check from your bank, your bank may provide you with the original check, a substitute check or a copy of the check." Some merchants have been processing checks electronically for many years under the ACH system, which is separate from Check 21. The system is the same network that lets consumers have their paychecks directly deposited into their checking account or their mortgage payment or gym dues automatically deducted. There are 2 ways merchants can use the ACH to process checks. Under one, called point-of-purchase conversion, you hand a check to a retailer, the clerk scans it into a system & hands the check back to you. Under the other version, you send a check to a company, such as your cable TV provider, & the company converts the check into an electronic payment & destroys the check. In this case, your check won't be returned, but it will show up as a line item on your statement. In both cases, your payment is processed using ACH. Companies can continue to use this system after Check 21 takes effect. Although there is much trepidation about Check 21, Hall predicts, "It's going to be like Y2K. It will come & go" with little disruption. Even Hillebrand admits, "It's always possible that things will go right."

US cheque legislation may affect cross-border cheques CanadianPaymentsAssociation 9/04

When Check 21 comes into effect in the US on 10/28/04, some customers of Canadian financial institutions may see changes to the handling of cross-border cheques they write to or receive from parties in the US. Check 21 aims to foster innovation & improve the efficiency of the US payments system. US financial institutions will no longer be required to exchange actual cheques for clearing purposes. They may deliver substitute checks, which are paper reproductions that are created from cheque images & meet certain criteria defined in the Act. FIs may agree between themselves to exchange electronic images for clearing purposes. Customers that have traditionally received cancelled cheques from their FIs may receive images or substitute checks instead. The substitute check will be the legal equivalent of the original item under US federal & state laws, provided that it meets the requirements of the Act. Customers of Canadian FIs may be affected by changes under Check 21 in 2 scenarios: 1. US Dollar Cheques Drawn on a Canadian Account & Deposited in the US. Some Canadian financial institutions offer US dollar accounts through a US affiliate or an arrangement with a US financial institution. In such cases, cheques drawn on those accounts will have an ABA routing number (9 digits) in their MICR line rather than the standard Canadian transit number (a MICR symbol appears between the first 5 digits & the last 3 digits). Some cheques drawn on those accounts are likely to be processed through the US clearing system as images or substitute checks & delivered to Canadian FIs in 1 of those 2 formats. As a result, customers that currently receive cancelled cheques as part of their service may receive some image-based representations of them. 2. US Dollar Cheques Drawn on a US Financial Institution & Deposited in Canada. Once these items are sent to the US, they may be converted to images or substitute checks. If a cheque cannot be honoured for any reason (for example, insufficient funds), the FI on which it is drawn may return an image or a substitute check to the FI that accepted the original item on deposit. In this scenario, the image-based representation may be used to support a chargeback to a customer's account. Customers of Canadian FIs who have questions about potential changes to their current services should contact their financial institution. An industry-wide project to modernize the Canadian cheque clearing system & enhance its efficiency through image technology is in development, led by the Canadian Payments Association. Implementation is targeted for 2006. An overview of the initiative is provided in Cheque Imaging in Canada: A Change Whose Time Has Come.

Fed plan would extend Reg E to merchants 9/21 AB

The Federal Reserve Board's proposed expansion of Reg E will probably fall harder on merchants than on banks, because merchants will have additional reporting requirements for transactions that involve electronic check conversions. The Fed's proposal, released 9/13, includes 2 major changes. One, which has not generated much controversy, would officially classify payroll card accounts as commercial banking accounts covered under Reg E. This change is expected to clear up the nebulous status of payroll card products. The other revision may well draw fire from the merchant community before 11/19, when the Fed's comment period ends. It would require merchants (and other payees) that use information from a check to initiate an electronic fund transfer from a consumer account to notify consumers & get authorization from them for each transaction. Reg E does not cover merchants & other payees that conduct e-check conversions. The latter change is particularly relevant in light of 2 developments: the trend toward converting checks to electronic payments at POS, & the impending implementation of Check 21, which is expected to hasten the use of check images. A lawyer for a merchant trade group said that putting retailers under the thumb of Reg E, which implements RFTA, will not sit well with his constituency. "My sense is it will raise serious concerns for our members," said Mallory Duncan, NRF. "This appears to raise a number of troubling issues - but I am only just giving it a first going-over." Notification can take the form of a sign at the point of sale or a written statement on a bill or invoice. Merchants are being asked to comment on whether a signed authorization should be obtained from the customer. Autumn is about the worst possible time for merchants to have to deal with this, Duncan said. "They are trying to get ready for the holiday season. Anything that comes up in the fall is always much more problematic." Del Tonguette, ICBA Bancard, said the notification & authorization requirements seem onerous. "I'm puzzled how a payee can possibly comply with the customer notification & authorization requirements without a significant slowdown in the payment process. This is an unnecessary burden for the merchant & payee." A 2001 Fed commentary on the issue of converting checks to EFT at the point of payment put responsibility for notifying customers on the merchant or payee, but it did not put merchants under Reg E, because they are not financial institutions. The Fed noted at the time that it had the authority to extend Reg E to merchants & might consider doing so. The proposed changes announced last week are meant to clarify a long list of issues concerning payroll cards & e-payments that had been vague for years. The Fed's proposal covers payment procedures that were left out of earlier regulations mostly because they were too new or unusual to require set rules until more recently. In the case of payroll cards, Congress imposed a moratorium on any Fed action in 1996 & asked the agency to look into them. "The board noted that given the limited experience at that time, it was difficult to predict whether the benefits to consumers from Reg E would outweigh the corresponding costs of compliance," the proposal said. It did not say how long it will take to issue a final ruling but solicited comment on a 6-month phase-in for the new rules. Payroll cards often substitute for checking accounts for unbanked employees. Each pay period, participating employers credit payroll funds to the cards, which sometimes carry a Visa or Mastercard logo. Workers can use the cards to withdraw cash at ATM or to make purchases. If the cards are classified as accounts under Regulation E, as the Fed has proposed, the issuers will have to make initial disclosures of terms, send periodic statements, establish error-resolution procedures, & offer other consumer protections. Thomas P. Vartanian, Fried, Frank, Harris, Shriver & Jacobson LLP in Washington, said the congressional moratorium had put the cards in a "regulatory netherworld." Consumers Union said that though the proposal included much-needed changes it did not go far enough. "I am pleased to see it but think the Fed needs to act on other cards acting as account substitutes," such as reloadable stored-value cards typically marketed to college students, said Gail Hillebrand. The proposal covers only cards offered by employers. Hillebrand expects little opposition to the payroll card portion of the proposal. "I would not think employers would have an interest in opposing this, though providers sometimes argue against their own best interest. This provides a level of confidence & certainty that can increase acceptance of these products." The Fed notified bankers in May that the change was under consideration because of payroll cards' growing popularity. One industry insider called the changes a good idea. "Consumer protection on payroll cards is a necessary thing for the market to survive," said Rob Drozdowski, ACB. Anything that makes it clearer to consumers how checks may be processed "is beneficial," Drozdowski said. Hillebrand said that some banks comply with most of the Reg E terms. "They are all over the map." Some promote the zero liability that Visa & Mastercard promise, though that is not the same as Reg E protection. BofA treats payroll cards as full accounts, & its cards are compliant with the rule. Tonguette at ICBA Bancard said the payroll card proposal was not surprising. "Banks in general will endorse payroll cards coming under Reg E. We have been expecting it & endorse such a decision." Rhonda Bentz, Visa, said the new rule could have "unintended consequences." One concern is whether the FDIC will decide that card deposits are covered under its rules & how that affects Reg E coverage. "It raises issues such as reserves for deposits & the know-your-customer part of the Patriot Act," Bentz said. The proposal does not address those concerns. Visa will be submitting comments, & many issuers are still weighing their response. Hillebrand said the other significant part of the Fed's proposal, giving merchants new Reg E responsibilities, was a good idea. It is the merchant who makes the choice to turn a paper check into an ACH transaction, not the bank. "You have to tell customers what will happen to a check before they write the check, otherwise it is meaningless." The proposal, citing consumer confusion, requested comment on whether merchants & billers should help educate customers on the topic & offer them the option of specifying under which circumstances a check that could be converted to an EFT should instead be processed as a check. Sometimes the bank truncates the check into an ACH transaction at the lockbox, & the merchant does not have a say. Duncan at NRF said merchants should not have to bear the burden of educating consumers about financial transactions. "The question is, is that an appropriate assignment for merchants, when it is to financial services' benefit? There is a concern about putting on responsibilities for notification for benefits that primarily go to financial services." If the proposal stands, all parties engaged in electronic check conversion transactions will be subject to Reg E for the "limited purpose of obtaining authorizations." Merchants will be required to warn customers that funds may be debited from their accounts more quickly than they are accustomed to, that their financial institution will not be returning their check, & that any insufficient funds fees will be debited electronically from their accounts. The proposal clarifies the rules on minicards or other devices sent to customers with their debit cards, saying that institutions may send more than one device as long as they are sent unactivated. The Fed proposes to loosen ATM fee notification requirements slightly to let banks include language that clarifies circumstances under which Bankers are voicing concerns that the security features built into paper checks may not survive the transition to digital images. An FSTC study indicates several features remain viable after imaging. After evaluating several next-generation fraud-fighting features, the study found that "by & large they work quite well," said Frank Jaffe, MorSecure, a technology security management firm in Falmouth ME. "We think this is great news. There is a set of security features, which we did not know about, that are effective in counteracting fraud in an all-image environment." FSTC would not discuss security approaches, citing concern that releasing such information could become a how-to guide for criminals. Jaffe said the most effective features fall into 3 categories: barcodes, proprietary symbols that can be read by machines, & design features of the check itself, such as typefaces, layouts, background patterns, & borders. Zachary Tumin, FSTC, said, "We recommend that financial institutions & check issuers consider adopting additional security features such as those included" in the tests. FSTC envisions an industrywide system to verify security features that can use imaging technology at the point of presentment. The group, which includes banks, vendors, & government agencies, began the project in November. 19 companies, including 10 financial institutions, were involved in developing the tests, which initially evaluated 60 security features from 50 vendors; that list was pared down to just 13 features that can be applied to consumer or commercial checks. Checks were run through a variety of processing environments to simulate different systems, including automated & manual detection, high-speed & low-speed sorting, gray-scale & black-&-white images at several different levels of resolution, & processing equipment from 7 different vendors. 28 different combinations of equipment, image type & image resolution were tested. The testing was performed by International Biometric Group, & the results were validated by a statistician. 5 of the features survived imaging 90% of the time on full-size images, but 2 others failed the test at low resolutions. Higher-resolution images performed better than lower-resolution ones. Larger files take longer to transmit & are more expensive to archive. Some technical issues could limit the effectiveness of the features. One feature would work only when a specialized camera was used to convert the check to an electronic file. "Operationally, there's a series of trade-offs you have to make." The testing demonstrated that there are security devices that will function within images, Jaffe said, but there are interoperability issues that could make it difficult to implement them in a full-production system. "Today, since every feature is a little bit different, it's like a Tower of Babel." The security features are not widely used today, & those that are available are typically used only by the paying bank. Positive pay information can be embedded in a barcode on a business check to verify the dollar amount, but an altered check will not be flagged until the check image arrives at the paying bank. FSTC defined a set of 16 defects that could affect the quality of images. The list includes folded or torn originals; images that are too large, too small, too dark, too light, or out of focus; & other factors that could limit the usability of the image by a bank that doesn't have access to the original. The goal of that particular effort was to develop a set of image standards, which will become more important as banks begin to exchange digital files. "If you are only talking to yourself, it doesn't matter if you are not using the same language as everybody else," but once banks start sharing images, they will need to speak the same language.

VeriSecure & Check 21 9/20 Businesswire

VeriSecure Systems announced that its Check Fraud Prevention System (CFPS) was tested under the auspices of FSTC, whose members include the largest financial institutions in the US, & community banks, check clearing exchanges & other institutions. VeriSecure Systems technology was demonstrated to survive the check truncation, imaging & exchange & to offer security value throughout the process. Check 21 becomes effective 10/04 & enables the industry to exchange bank check images in lieu of paper bank checks. The purpose of the project was to assess the survivability, performance & viability of "next-generation" document security features in image based operations for bank checks, by conducting real life simulated exchanges among 10 institutions. VeriSecure Systems employed its Check Fraud Prevention System (CFPS) for the project, which is based on its US Patent #5,432,506 Counterfeit Document Detection System. The technology uses cryptography to create a unique code for each check. The security feature is applied as a standard printed barcode symbol by the check issuer. VeriSecure's software, developed in conjunction with Inlite Research, can provide a fully automated solution to read & validate the codes from either the actual paper documents or from the images of the documents. The software rapidly verifies the authenticity of the information printed on the checks, & identifies any alterations, thus preventing the most prevalent forms of fraud. Tom Chapman, VeriSecure, said, "This project has certainly helped to demonstrate how cryptography can easily & conveniently be put to use, to validate any type of physical documents or their images. Along with fraud losses, this technology has the potential to reduce operating expenses of financial institutions & remittance processing for corporations." Gene Manheim, Inlite Research explained that "Industry standard barcodes serve as the robust foundation to secure check images, & enable innovative technologies like CFPS to provide fraud prevention across a huge range of images." Frank Jaffe, FSTC, said "Based on the results of the project, & given the magnitude of the risks of loss from check fraud, FSTC believes that financial institutions & check issuers will be well served by the adoption of these new document security features."

Take Check Imaging To The Front Counter Business Solutions, September 2004

With Check 21 less than two months away, banks are striving to move check imaging from the back office to the front counter of each local branch. With the increased adoption of technologies such as direct deposit, debit cards, and online billing, the era of the check as a form of currency is coming to an end, right? Wrong. Even though the number of checks written each year has declined, we are unlikely to see a world without checks anytime soon. In fact, several document imaging technologies have been developed and modified over the years to help banks, financial institutions, clearinghouses, and other remittance-intensive organizations process the influx of paper checks they receive on a daily basis. Traditionally, these solutions have come in the form of centralized systems consisting of a high-speed scanning device and customized data capture software. All of an institution's paper checks would be shipped to these centralized locations, where each payment would be processed. Last October, the federal government announced a new law called the Check Clearing for the 21st Century Act (Check 21). This piece of legislation goes into effect on October 28th of this year and is designed to enhance the efficiency of the payment system by recognizing an electronic image of a check (known as a substitute check) as the legal equivalent of the paper original. By transmitting check images rather than transporting the actual paper versions, any remittance-intensive organization can save money on shipping costs and reduce float (i.e. the lag time that exists between when a check is accepted and when those funds are actually available). Many new technologies, such as Endpoint Exchange and Viewpoint, have been developed in the wake of Check 21 for the sole purpose of providing a common image exchange platform and clearing network for financial institutions. "The rise of image exchange platforms has helped many banks realize they can increase the effectiveness of their check processing solution by capturing the check image earlier in the cycle," says Dave Youngerman, president of Panini North America (Dayton, OH). "These banks don't want to wait to have checks imaged at a central back office location; they want to image each check at the point where it enters the system -- the local branch." A New Entry Point Requires New Scanning Hardware While common overseas, the desire for a front counter check scanning solution has only been in demand in the United States for the past year or so. For this reason, there has not been an abundance of scanning hardware that fits this specific application. As a result, many vendors have focused their efforts on creating a cost-effective, countertop check scanning device that addresses the needs of an American bank teller. While several models now exist on the market, all continue to be enhanced as new pain points become apparent. "First and foremost, a countertop check scanner must be easy to use to combat the high teller turnover rate that banks face," says Youngerman. "It needs to be simple enough so that new hires can quickly learn how to proof images for the transaction without a great deal of training." Image quality is also a crucial feature for a countertop check scanner. At minimum, the scanner must capture a bi-tonal black and white image at 200 dpi (dots per inch) resolution. Grayscale and color-ready options are also recommended as they can significantly improve the CAR (courtesy amount recognition) and LAR (legal amount recognition) read rates on overly busy checks (e.g. checks with cartoon or scenic backgrounds). CAR represents the numeric dollar amount written in the box on a check, while LAR represents the dollar amount as it is written out on the line below. "A higher CAR and LAR read rate results in higher teller productivity," says Youngerman. "A teller must manually key in and balance the transaction for every amount the scanner doesn't recognize. This inhibits the teller from making eye contact with the customer and selling additional services the bank has to offer." Grayscale and color-ready options may also come in handy for exception processing purposes. For example, a financial institution can keep a grayscale or color substitute check on-site to refer to in case a recipient can't read the transmitted black and white image. Finally, branch check scanners must be multifunctional. A bank teller's countertop is often already consumed by equipment such as a computer terminal, printer, and PIN keypad. Many tellers simply don't have the counter space for another piece of hardware. "A countertop check scanning device should be able to replace one of the other devices on the teller's countertop -- namely the receipt printer," says Roger Markham, marketing manager for Capture/IMAGELINK products at Eastman Kodak (Rochester, NY). "Bundling an AGP (advanced graphic printer) with the scanner allows users to print a four-line endorsement on the back of the check before the image is captured, as well as produce a customer receipt. This allows several functions to be performed by one device, which frees up counter space."

Long-term benefits of Check-21 9/10 AB

The effective date of Check-21, will be a watershed date for banking. This law will revolutionize US banking by requiring that banks be able to receive substitute checks - IRDs. Check-21 will affect almost every facet of banking, including products, marketing, facilities, equipment & technology investment, float & check clearing, & operations. Though the result will be revolutionary, the implementation will be evolutionary. Banks need only be ready to receive substitute documents, not to create them. This approach has caused uncertainty about the impact on individual banks, so it is not surprising that Check-21's effect has not yet made it into earnings forecasts. When forecasting earnings, CFOs speak with assurance when they have some idea about portfolio growth & are confident about interest rate trends. They have a good handle on what cost cuts can do for earnings. But the result of a Check-21 investment is determined by what other banks do. No framework or business model shows how fast Check-21-related benefits will accrue. There are competitive benefits to be gained, & banks that act slowly may suffer for it. Most banks still have time to go beyond what the legislation requires - but they must have a plan. Check-21 represents an opportunity to reduce the costs of moving paper within & among banks. These costs may be significant, particularly if a bank has a large network spread over a number of states or does a lot of check clearing. The law opens the door to addressing the needs of corporate customers. Traditionally their deposits are collected through a lockbox system, but banks with an effective imaging system can use capture technology within the framework of Check-21. Those banks can provide electronic deposit services, including image services, for which demand is increasing. Check-21 can greatly expand the geographic market for banks to serve existing customers & compete for new business better. & because checks are cleared faster, banks can enhance their availability-of-funds policy & reduce fraud. Banks should communicate with each other to help ensure success in the electronic era. Those with elaborate image exchange & capture strategies can reap the full benefits only if their competitors have deployed systems that support this strategy. The whole industry will win if everyone moves to participate in Check-21 with all deliberate speed.

Setting sights higher than Check-21 9/15 AB

Much of the banking industry considers this year the culmination of a years-long effort to implement an electronic processing system to replace the vast paper check infrastructure. But some executives are more excited about the next potential transition in payments: processing & settling transactions in real time, & across all of a bank's networks. Yes, Check-21 is expected to transform a check processing system that handles more than 40 billion paper items every year. & yes, that shift should lead to annual cost savings of billions of dollars. But those changes are just a step in the right direction, according to William Randle, CEO of Synoran LLC, a Columbus, payments technology vendor. Instead of just automating paper check processing, he is focused on developing a payments system that can automate & streamline all of a bank's transactions. "Check-21 is just a minor thing, really," he said. "The future of payments" does not revolve around image replacement documents, the paper printouts of check images that will be legal instruments & will shortly enter the check processing system. & using image exchange networks to settle checks is just a way to automate a paper-based system, & it leaves much room for improvement, he said. The future of payments revolves around "creating a whole new environment that's more efficient," Randle said. "This country is not known as having one of the more efficient payments systems in the world." & he has a big personal stake in this vision. He said this week that Wells Fargo has become the first banking company to license Synoran's net settlement system, which will enable the bank to clear & settle transactions faster. Eventually, when other banks adopt comparable technology, the system will give Wells a much clearer image of its positions. Randle called the system a way for banks to monitor incoming & outgoing payments to multiple partners & across all of their parallel payment systems. Banks today move money across numerous systems: the ACH, ATMs, credit card transactions, wire transfers. These operations are generally handled by different bank units, which often do not communicate with each other, & many of these systems do not settle their accounts until the end of each workday. Though a bank may be expecting many incoming ACH payments, that balance could be negated by a large outgoing wire transfer. As a result, he said, the bank probably does not have a clear view of its positions until all of these payment networks have finished processing their daily activity. "We see the need for a real-time payments hub. There's no way a bank can know its intraday position across the entire enterprise, but I think bankers will want to know that, if they could." Mitch Christensen, Wells Fargo, does want to know. "We want the ability to control & manage our settlement. There isn't a lot of that capability out there right now." Wells has completed testing & installing the Synoran settlement system, & by next quarter it will be able to use the technology to settle several different types of payments, including cash, paper checks, check images, & wire transfers. If other banks implement this type of system, Wells will be able to keep tabs on its intraday positions with correspondent banks. That type of information is invaluable, he said, because processing payments faster would help Wells dramatically improve its risk management procedures. The funds would be available sooner, & more importantly, Wells would know exactly how much money is available, so it can better invest its funds, even for short periods. "We think information is critical. "We want that information available as soon as possible." Randle has been working on these technologies for more than a decade, since he was an executive vice president spearheading an ambitious electronic payments effort for Huntington. When the company decided in 2001 that it no longer wanted to be involved in developing technology, he bought out its stake in the technology & formed e-Bank, which has since become Synoran. Along the way he picked up a few marquee partners who have bought into his vision of a unified payment system: MCI, which is providing the networking backbone; EDS, which has a joint marketing agreement with Synoran; & Oracle, whose database applications are at the foundation of the net settlement system. Andrea Klein, Oracle, said the level of information offered by a net settlement system "appeals to banks that want to look at payments as an enterprise." Many other banks around the word are interested in the concept, Klein said; she expects "several" to sign up to use the system this year. "We see this as a global initiative." Randle says the large banks that are most forward-thinking in making payments a key part of their business will be the logical target market. "If they accept that payments are a large part of their revenue, then they will want their system to be as efficient as possible." Randle says it is a big leap between the siloed payments systems, often paper-based, which dominate banking today, & the efficient, integrated one he envisions. Fortunately, the industry is currently at an important inflection point. Check-21 will take effect Oct. 28, & many banks have decided they will need to invest in new technology. Though Check-21 systems are expensive, the cost of getting left behind in the transition to check imaging could be worse. As long as banks are ready to go shopping, Randle hopes they will be willing to spend a bit more to upgrade other parts of their payments infrastructure. If it weren't for Check-21, he would not expect banks to be investing in Synoran's system for 2 to 3 years. "Legislation is the catalyst for big change."

Check-21 & fraud 9/1 NorthwesternFinancialReview

As an attorney focusing much of my practice in the bank fraud area, I have been particularly interested in the effects Check-21 will have on the world of check fraud, both positive & negative. Like many, I am optimistic that Check-21 will notably decrease a number of prevalent types of check fraud. Still, banks & businesses should carefully consider some of the negative implications for check fraud detection & prosecution that flow from Check-21. In a perfect post-Check-21 environment, where most banks participate in the electronic exchange of check images (keeping in mind that this requires an agreement either between banks or between banks & an intermediary processor), the collections process will decrease from 2 - 3 days to a few hours & float will fade away. Thus, check kiting will decrease dramatically & payor banks & their customers will have more immediate access to checks to determine their legitimacy. With earlier fraud ID, fraudulently procured funds could be retrieved from the bank of first deposit before they are released to the perpetrator. This is the tangible benefit of decreased float. On another front, image exchange will push fraud detection from a paper environment to a more efficient, perhaps more reliable, electronic image-based fraud detection platform. However, as banks consider the expense associated with wholesale check imaging, image quality is typically the first cost-cutting casualty. Herein lies the problem. The Fed's imaging standards under Check-21 require no more than a binary black & white check image for the creation of a substitute check - not grayscale & certainly not color. Watermarks, coloring, bleed-through ink & other common check stock security features will be lost in the imaging process. Thus, check imaging presents a fraud detection risk & a new liability risk to a reconverting bank under the Check-21 Act. A hypothetical: A substitute check drawn on the account of ACME, Inc., is presented to ACME's bank, which pays the item & sends the substitute check to ACME. The check was altered, & security measures on the original check would have alerted ACME & its bank to the alteration, but the security measures did not survive the imaging process. ACME has a statutory indemnity claim against the reconverting bank. This is a statutory liability for the reconverting bank that didn't exist prior to Check-21. Perhaps just as troubling, there is mounting sentiment among prosecutors that they will be less likely to prosecute check fraud cases where an original check is not available. Prosecutors worry that wholesale truncation & shorter timeframes for destruction of original checks will seriously hinder law enforcement's ability to request & secure original checks before they are destroyed. Without the ability to use the original check for fingerprinting, check stock comparison & other evidentiary purposes, some prosecutors feel that their ability to convict will decrease and/or the cost for pursuing a conviction (i.e. having to hire handwriting experts) will be unrealistic for smaller fraud matters. So what can banks & businesses do? Focus on fraud prevention - Fraud prevention efforts should begin to focus on identifying & implementing image survivable check security features, employing more sophisticated automated fraud detection platforms, integration of imaging systems & corporate security efforts, & real-time information sharing among banks & businesses to prevent repeat offenders. Finally, while it is not fraud proof, positive pay services remain one of the best methods for detecting & preventing fraud losses. Find alternative methods to deter fraud - Deterrence is crucial. If prosecution of check fraud offenders begins to lag due to unavailability of original checks, the onus will fall on banks & businesses to seek out offenders & send the message that fraud will not be tolerated. A shift would necessarily occur from criminal prosecution & restitution to civil enforcement & collections efforts. The voice may change out of necessity, but the message must remain the same. Identify & manage risk tolerances - Finally, as with any risk of loss, it is important that banks & businesses identify the check fraud risks associated with Check-21 & make a calculated business judgment based on their tolerance of those risks. If a bank is willing to accept the risk associated with the hypothetical, but only up to $100,000, a bank may not want to convert the original or image of a 6-figure check to a substitute check, thus foregoing the statutory indemnification that flows from creating substitute checks. This is a calculation that only the bank or business can weigh.

Shoppers & banks cash in on check law Virginian, Pilot 9/14

I lost my checkbook. At least, it seems like I lost it, because when I looked at my bank statement, I noticed that I had written just 5 checks last month. Five. This would not bother my husband. He hasn't written 5 checks in the past 5 years. But I am one of those women who has been known to carry her checkbook in a holster on her hip. I used to easily write 30 checks a month for bills & clothes & food. Now I find that my checkbook is no longer a part of my mandatory gear. I toss the checkbook into the same drawer as my unpaid bills & get to it a couple of times a month. Maybe. & now it looks like I'll be writing even fewer checks. At the end of October most banks are supposed to follow a modernization law, known as Check 21, passed by Congress last year. Instead of handling paper checks, the law allows banks to process electronic images of original checks. The main change for check writers is that our checks won't have that blessed two- to four-day cross-your-fingers float period. Now checks will be processed in a few hours - almost as quickly as an ATM transaction. This law is supposed to be great for the banking industry, saving billions every year. But is it good for us? We seem to use credit cards & debit cards & ATM cards more than ever. I paid for a $3.03 cup of coffee with my ATM card at Barnes & Noble the other day. Made me feel weird. Like writing a check for a quarter. Then the guy in front of me at Walgreens bought a 63c pack of gum with his card & got $20 in cash - cheaper than the $2.25 ATM fee. Even at my son's school the kids use debit cards to pay for lunch & school supplies. Cash? What cash? A check? Heaven forbid anyone try to write a check in front of me. I'm sure to give the potential check kiter the old fisheye. Ain't she got no stinkin' badge? On one hand, the convenience of the ATM card, the swiftness of the electronic check, the swipe of a credit card seem perfect for our online lives. On the other hand, they worry me. Money on a card doesn't seem to spend like real money. I still balance my checking account. I still keep track of my spending & watch myself consistently fall off my budget (it's a very slippery budget, mind). But the money I spend swiping doesn't seem quite as real while I'm spending it. When I was writing checks for diapers & electricity & petunias & clarinet lessons & cups of coffee, the act of writing the check kept me pretty honest. I had a lot of time to think about how often the words "Home Depot" or "Target" or "Talbots" popped up on my register. I had a long time to write out "One Hundred Dollars & no cents." I kept track of my bank balance. The challenge of our increasingly cash-free society will be how we make electronic money feel like real money. Maybe Congress could throw us a bone & require stores to post ATM swipers at the front of the store. Maybe store owners could post not only our current balance but the date the mortgage is due. The projected electric bill. The proposed cost of educating three bright children. The expected expenses of living well as an octogenarian. Then we could be sure that the billions the banks save will be the billions they didn't have to spend on transporting & tracking & storing paper checks. & not the extra billions we will be spending one swipe at a time.

Check 21 not a sprint but a marathon 9/7 AB

The 10/28 implementation date of Check 21 is often portrayed as the banking industry's equivalent of a start gun at the Olympics, the opening salvo in a race to use check images, the day on which every bank must be in perfect technological form. But the vast discrepancy between that portrayal & the financial & operational realities at most banks is starting to show. Yes, banks have been moving forward with image technology, installing the necessary equipment & making other essential preparations. 2 weekends ago KeyCorp & the BankOne division of JPMorganChase started exchanging check images & suppressing the paper in a limited number of items. The level of activity related to image & paperless check processing has probably never been higher. But many banks have been less aggressive on this front than image enthusiasts had forecast, & the results are manifesting themselves in various ways. Vendors specializing in Check 21 technology say 2004 will not turn out to be the banner year many people thought it might - that perhaps the big investment in Check 21-related products & services will be next year or even later. Carreker announced a meager IIQ profit ($199,000) last week, versus a net loss of $800,000 for IQ & a $3.9m profit in the year-earlier period. The company said it expects a breakeven IIIQ & that it does not expect revenues to rise until "later 2004 or early 2005." Invoking the statements it had made in earlier earnings calls, Carreker said on 8/31 that "the timing of bank decisions relative to Check 21 was generally 1 to 2 quarters later than our initial assumption." That projection is now "playing out," said Lisa Peterson, Carreker. "We're not seeing additional delay in the market." At Alogent, Vijay Balakrishnan, called 2004 "the year of the early adopter." Only a small number of banks have invested heavily in Check 21 technology, but he predicts that others will follow quickly after the early adopters prove the benefits of swapping check images. Meanwhile, Balakrishnan said banks are busy researching their options. "RFP activity has been tremendous. From January through April of this year, our guys were constantly responding to RFPs. There's been a blizzard of them." Sydney Hicks, Vectorsgi, said that because so many aspects of image technology are new, "The sales cycle is a bit longer than it is on a traditional process." It typically takes her company 6 months to close a deal that involves other technology, but its imaging technology sales are taking about a year. "The analysis around the buying decision is very heavy." But revenue at Vectorsgi has not stalled as it has at Carreker, Smith Hicks said. It projects a 40% jump in revenue for 2004. Carreker reported IIQ revenue of $29.6m, against $29.8m in the IQ & $36.2m in the year-earlier quarter. Denny Carreker said, "We saturated the US market coming into this year" for early Check 21 products. Carreker's clients include KeyCorp & Wells Fargo. Gary Craft, Financial DNA, said it is doubtful that big banks will make any major purchases this year, & that will hurt all vendors in this market. "The real question comes down to, who's making any money off" check imaging technology. "I don't think anybody is." Stephen Ward, Fiserv, said that "there isn't a compelling reason" for banks to migrate to image exchange yet. "The one thing to keep in mind about image exchange: the payback isn't there until everybody does it."

Dawn of the substitute check BankingStrategies 9/1

Questions abound as banks prepare to send, receive by 10/28. Having been an industry preoccupation since the enabling legislation was passed last October, substitute checks - or IRDs as they are called in standards - continue to be the subject of considerable debate. How many financial institutions will create substitute checks? In what volumes? At what cost? How will they be handled in the transaction processing stream? Check 21 does not require any bank to truncate originals or create substitute checks. But it covers all US checks & requires: Each bank to be able to accept & process a substitute check; Each bank to educate customers about the Act & their rights to recredit under it; Each bank that creates substitute checks (thereby becoming what's called a "reconverting" bank) to provide warranties & indemnification. The IRD opportunity in forward collection is to move checks as images, convert them back to negotiable paper substitutes when needed & clear them more quickly, gaining float savings & reducing risk. Bankers & technology suppliers generally agree that the return on investment in returns processing is even greater. The IRD may function as an "effective transition tool," says Robert Hunt, TowerGroup. Banks that have invested in electronic presentment technology believe that Check 21 may encourage other banks to slow their migration to all-electronic processing. "If IRD volume represents only a small portion of total check volume," IRDs will help the transition from paper to image. Hunt predicts that high volumes will magnify the costs & processing problems associated with IRDs. Volume estimates published in months leading up to the effective date were widely divergent. At BAI's TransPay 2004, Steve Ledford, Global Concepts, estimated that volume would peak at 3.3b in 2007 & begin to decline in 2008. A TowerGroup paper estimated IRDs would peak in 2006 at about 325m & start tapering off the next year. Hunt argued that IRD pricing, incentives to move to full ECP, low short-term interest rates & declines in check writing would limit volumes. Most published estimates agree that substitute checks will be around for at least the rest of the decade. If a bank wants savings in transportation & labor that Check 21 makes possible, they will still need an IRD strategy to deal with banks that are not yet image-enabled, says Jeff Johnson, NetDeposit. "An IRD option will be necessary until all banks are accepting imaged cashletters." A host of problems surround truncation. Operations staffs need standards for exchanging electronic images of checks & for creating & using substitute checks. Customers need education about truncation, ECP & electronic imaging & resulting check products & account services. The industry needs a broader understanding of the business cases for various types & sizes of depository institutions to take part. The stakes for reconverting banks are high. The Act requires them to warrant that their IRDs meet the requirements that make them the legal equivalent of an original check & that an account will not be debited twice because of the substitute check. Reconverting banks are required to indemnify a party that sustains a loss because a substitute check was presented instead of an original. Although substitute checks gain their new legal equivalence at the end of October, they are not unknown. The Fed created the first production IRDs in the Montana Project in 1999 using software from ImageSoft. NetDeposit employed them under agreements in some of the earliest bank-to-bank tests & says its software has produced 750,000 IRDs that have been accepted & processed by 3,700 financial institutions, including the nation's 20 largest banks. "We think that if you decide not to produce IRDs, you're going to be passing up opportunities to reduce costs & generate revenue." Banks will incur costs in accepting IRDs (testing, customer awareness, new recredit pressures, & training) & sending them (printing & managing, warranties & indemnities). Johnson said banks should leverage existing check-processing systems wherever they can to reduce IRD production costs. They should look for revenue opportunities. NetDeposit customers using remote capture at 25 sites have found savings in transportation, equipment & labor. They have found they could sell a cash management product, offer better fraud detection to merchants, extend retail-banking hours & improve operations. Fiserv, which has 1,700 outsourced check-processing clients & 2,400 for which it handles processing at the customer's site, is less sanguine about remote capture. Ted Umhoefer said Fiserv has done 100 studies. 9 times of 10, the savings don't offset the cost of moving to branch capture, says Umhoefer, whose 26-year Fed career included serving as sponsor of the Montana Project. "The cost to create substitute checks is going to vary, depending on volumes & the operations windows that you have to do it in. But our studies indicate the cost is going to be somewhere between 5 & 10c per item. So, it isn't going to be cheap." The Fed prices processing of conventional checks in a range of 3c - 9c. When banks have the option to eliminate physical transportation entirely after 10/28, the business case is likely to succeed more frequently, about 30% of the time. Umhoefer said bankers need to scrutinize each case individually, asking: Can we save on transportation? Can we push back the cutoff hour? Can we improve services to clients? Can we add new services? At community banks, fewer than 1% of items generate enough savings & availability improvements to justify conversion to substitute checks. This is largely a factor of the average dollar value of the items, how many items will be available the next day anyway, & interest rates on collected funds. At larger banks that deal with more commercial items involving larger dollar values, the proportion of items that could justify treatment as substitute checks creeps up a couple of % points. The return items scenario is even clearer. If a bank's paid items are in an image archive, it's going to make sense to use the archive every time the bank needs to generate a return. It's less expensive to inquire into the image archive, extract the item & create a substitute check return item than to execute a physical exception-item re-pass, affix a strip to the bottom of the item & place it into a qualified return cashletter. The bank could earn additional benefits by eliminating non-local fees & the wait on non-local availability schedules. The process can improve risk management. "If returns are coming back, the entity that those returns are coming to doesn't much care if they're going to hit the account sooner. They want to know that it's a bad item so they can protect themselves. They will be doing whatever they can to make it easy to accommodate an electronic or IRD return." Substitute checks offer opportunities in other areas. An institution that processes checks 95% electronically might have some customers that need physical items. It could move items electronically from one branch to another, then print substitute checks for those clients. The bank could print substitute checks where it still needs the physical item in internal operations, eliminating the need to image-enable Day-2 operations immediately. "Check 21 really is a stepping stone in the movement toward image exchange & processing." The question to ask is "Where can substitute checks help in the transition?"

Check 21: are we there yet? 9/3 eWeek

As we approach 10/28, the date that Check 21 goes into effect, are banks & their customers ready for the changes it holds? The reality is that the infrastructure for "checkless" banking isn't quite in place yet. There's a great deal to be done on the technology-& many bilateral agreements must be made-before banks can take that step. The act authorizes the creation of a new instrument, an IRD. An IRD is a substitute check that has been imaged from the original paper version presented to the clearing bank. It has the same legal status for proof of payment as an original check. Until now, the law did not allow for the electronic conversion of business checks which, according to EDS, total 60% of the value of all checks written. Check 21 provides for that electronic conversion. Consumers Union has published its list of 7 policies to mitigate what it considers the "adverse impacts" on consumers of Check 21. Fear? Uncertainty? Doubt? Sounds like another day at the office. Check 21 is another one of those favorite tools of government bodies: an unfunded mandate. It's not a bad idea to encourage the banking industry's use of image technology to make the check-payment system more efficient & to lower check-processing costs. But there's no direct plan to get us from where we are today to where the government would like us to be on 10/28. Implementing Check 21 will require investment in storage equipment, secure networks & software development. Who will pay for the changes? Banks themselves will end up footing the bill, but they could reap the benefits of faster clearing of large checks. Large banks are jumping into the market since they want to accelerate collection of the big checks written out of state. They want to cut their courier costs. Most people think of electronic banking as ATMs, credit cards & online bill-paying, but they're totally different animals when compared with electronic images of checks. Credit card processing is well ahead of checks because those transactions are electronic. Credit card companies have been doing this for years. The laws that govern the physical exchange of checks are quite complex. Today, banks still get together & exchange checks, & as a result, many pilots who work for courier services still have full-time jobs. The attacks of 9/11 provided the impetus behind Check 21. Tons of paper checks were sitting on planes, & they sat, uncleared, on the ground for days. Checks are a commodity where technology can be used to cut costs, & provide business continuity as well. One of the big hurdles is the whole archiving issue, which is partially practical & partially emotional. Most physical checks will be destroyed. This is part of the technology quagmire, though, as the exact process hasn't been mandated. Every bank can handle original paper checks on its own. Some banking officials think the original will be destroyed within 3 days of presentation at some point in the not-too-distant future. Ed Herman, EDS, says his company is working with most of the top 25 banks in the country to solve the major Check 21 issues. EDS has been involved in check processing for 30 years, & Herman says a large portion of EDS' business is from an outsourcing perspective. "People don't know we're performing these activities behind the scenes. Banks don't want to tell their customers, 'By the way, we're outsourcing your check processing.'" Banks don't have to do much to comply with the legislation. They just have to accept the IRD as legal tender in lieu of an original check. They don't have to be able to create IRDs-they just have to accept them. "People think the legislation is forcing banks to do a lot of different things but it's really not." The reason banks are going to want to comply is to reduce costs of clearing checks. By being able to capture the image of the check at the earliest point in the process, banks can avoid putting checks on planes & shipping them around, which will reduce courier costs & reduce float. By capturing a check as an image & transmitting it across the country, you can clear it 1 - 2 days faster than is possible today. The 3rd reason to get with Check 21 is the ability to reduce fraud. If it's a bad check, a bank will know about it in 1 day, rather than 2 - 4 days as they do now. "Fraud prevention is a huge opportunity." Check 21 does open the door to other types of fraud. The crooks out there are undoubtedly looking for ways to get their hands on digital images of checks. When you digitize, you lose security features such as watermarks. Banks have systems in place that look at certain patterns of behavior. Digitizing images will help accelerate the ability to pick up on fraud. The biggest check frauds happen when crooks use the same check number over & over, using different payees & trying to clear through different banks. Fraud purveyors will still find ways to take advantage, but they'll be challenged. Today, a crook might try to make a deposit with a fraudulent check. A fraud artist knows how long it takes to clear a bad check, so the crook takes the money out before it clears. Once Check 21 is implemented fully, the banks will know in one day that it's a bad check, so the hold time is much shorter.

Document Security Systems Check 21 protection technology 9/8 PR Newswire

Document Security Systems has created a hidden security image for checks that can be read by the banking industry's current check processing equipment. Under a new Federal Reserve regulation called "Check 21" that takes effect in October, banks where checks are deposited will no longer be required to return the original paper check to the bank on which the check has been drawn. The originating bank will receive only electronic images or scans of its checks from the banks at which the checks have been deposited. Until now, there has been no known security feature that has been able to survive the scanning process on the current generation of check processing equipment used by the banking industry, leading to concerns over the potential for increased check fraud once the new "Check 21" regulation goes into effect. "The banking industry has been trying to find a cost effective security feature that can survive the imaging process on the check processing technology currently in use, & we have it," said Patrick White, Document Security Systems. "Our new 'Survivor 21' check pantograph technology will allow originating banks to assure the authenticity of the new electronic checks that will become standard under the upcoming 'Check 21' regulations. An important element of 'Survivor 21' is that no expensive software or hardware will be necessary to utilize it. All that will be necessary is for a bank's check printer to print a background pattern (sometimes called a pantograph) on the face of the check that incorporates our new patent-pending 'Survivor 21' technology." Tom Wicker, Document Systems & the inventor of the patent pending "Survivor 21" technology, said: "We have tested the 'Survivor 21' pantograph on the older 100 bit map check processors & the new generation of high resolution scanners & our new hidden security feature is surviving the scans every time. This is significant because it means the banking industry will not have to convert or upgrade their current check processing equipment. The only thing a bank would have to do is to change the printing of the check itself by directing their check printer to incorporate 'Survivor 21' into the printing process. The fact that the banking industry will not have to invest in new & expensive software & hardware detection systems is a very important benefit from our new technology." Patrick White said, "We are in discussions with leading security printers & imaging equipment manufacturing companies for the licensing of this technology, some of whom have tested 'Survivor 21'. We are licensing our technology directly to end-users, such as banks & payroll companies, giving them the freedom to use the security printer of their choice." According to Standard Register: "While Check 21 will speed the handling & collection of checks, the potential for enormous unprosecutable check fraud losses is nearly certain as the conversion process destroys the evidence of fraud in most cases....For this reason, the search for effective image survivable security features is a high priority. The 'Holy Grail' of image-survivable security technology is a feature or features that could be authenticated using images captured as the 'normal' part of the sorting process. Such a solution would require no additional expenses or modifications to the different hardware platforms in place. If the technology described above by Standard Register is indeed the 'Holy Grail' of image-survivable technology, then we have it."

Fed's image processing to cost more than paper 9/3 AB

Banks have known for a while that it will take time to realize the cost savings & efficiencies that are supposed to result from the replacement of paper checks with digital images. But they may not have had as powerful a symbol of that truth as the one they got Friday, when Reserve Banks released their pricing structure for check image processing. Surprise: In most cases, they will charge more per item for images than for paper checks. Industry observers & participants expect the prices for images to come down quickly as transaction volumes build. But the structure does show that the dismantling of the paper check processing system & the migration to an electronic infrastructure are not going to come as cheap, or as fast, as many bankers might have expected. "The paper infrastructure has been in place for many, many years & has become very efficient," said Steve Whitney, FRB Boston. "The electronic environment is new & still does not have the critical mass" of volume that would be needed to reduce the processing costs. Though he says that settling electronically will make the funds available as much as a day earlier than using paper items, the pricing structure still seems to contradict the idea that images are easier & less costly to handle. The Fed released its prices for handling IRDs; the fees are significantly higher than those for processing paper checks. Even though the prices seem to defy conventional wisdom, analysts say they look reasonable. The image pricing setup, which emulates the current one for paper checks, includes a tiered structure with rates that vary by the receiving bank's volume & by the time the items are submitted. The service will be available 10/28 the day Check 21 will take effect. There is a single rate structure for all the Fed banks for processing images. The per-item fee for electronic files ranges from 1.5c, for a file submitted at the earliest deadline & destined for a high-volume receiving bank, to 18c, for a file submitted at the latest deadline & drawn on a low-volume receiving bank. Pricing levels for the 1 am deadline, which Whitney said is comparable to many of the last deadlines available for paper checks, range from 2.5c - 6c, depending on the receiving bank. The fee for all electronic cashletters is $2, which is generally cheaper than the fees for paper-based cashletters that are typically in the $4 - $6 range. The prices for handling paper checks vary at each Fed bank. At Boston FRB, paper check fees for mixed cashletters submitted by 12:30 am range from 2.1c - 7.3c. The fees for cashletters with only items that need to be handled by the district's regional check processing center range from 1.8c - 4.7c. Paper processing rates at several other Fed banks are comparable, or even lower. In Atlanta, a cashletter that is submitted by midnight & contains paper items that must be handled by the district's regional processing center will incur a fee of anywhere from 2.1c - 7c. Such a letter will incur a fee from 1.7c - 7c in Dallas & 1.1c - 7c in Minneapolis. Chicago Fed's structure is the exception to the rule that paper is cheaper to process. A paper item submitted by 1 am & drawn on a high-volume bank will cost 3.3c, v 2.5c for an image file. Though the prices can be higher for electronic files, Whitney said, the service still offers several advantages, especially speed. Electronic items can be handled, & thus settled, more quickly & can be submitted later than paper. Though the exact times will vary, banks can typically expect electronic files to clear about one day faster, & in many cases this advantage could offset any price differential. "There is some portion of the current paper check population that will be happy to improve their collection by a day." Because paper items must be physically moved from place to place, the Fed banks impose a hard cutoff time - generally between midnight & 1 am - after which they will not accept checks for that day's processing. Because electronic files can be transmitted anytime, the Fed can accept the files much later; banks could submit electronic cashletters as late as noon & still have the transactions settle that day. Submissions that late will carry the highest fees, but there is no comparable fee for processing paper checks, because "you can't clear an item at 4 am in the paper world," Whitney said. Steve Schutze, who left ABA & set up Foreword Financial, said many banks will be able to take advantage of the lower prices for electronic files that come from submitting the items before midnight. The 2 least expensive pricing levels have deadlines of 9 pm (when the lowest fee is 1.5c) & 11 pm (when the lowest fee is 2c). It is difficult for a bank to deliver paper checks this early, but electronic files can be submitted instantly. "If I'm doing image processing, once I run the items through the sorter, they are ready to go. Why wait until midnight? I can make the earlier deadline." The prices were designed to attract banks to electronic processing. "I think this is fairly aggressive pricing." Viveca Ware, ICBA, predicted that the prices will fall over time. "I think they are struggling with a chicken-&-egg phenomenon. You must get the infrastructure in place, & you have got to get volume moving over the system, before you can get efficient pricing." Mark Craig, CheckClear, the Metavante subsidiary that operates Endpoint, said the Fed's pricing is in the same ballpark as his company's. Endpoint has a different rate structure: flat base fees offered throughout the day, with discounts based on the collecting bank's volume. The base fee is 1.5c for in-district items & 3c for out-of-district checks. "At first blush, it does seem surprising" that the Fed prices for image are in the same range or even higher than the paper processing prices, Craig said. The Fed is not likely to get huge image volumes initially, & it is obligated by statute to cover its operating costs, so the pricing structure "does make sense." SVPCo, which has been setting up an image exchange network that many large banks are committed to using, has not released its rates. Whitney said the Fed is putting together a list of banks that will be ready to receive electronic files next month. That list will likely include 1,000 banks at first, though there is a long list of banks that are setting up the connections necessary to receive image files from the Fed. Nearly every bank he talks to has some kind of transition plan for eventually becoming image-ready. & once volume goes up, the Fed will revisit the pricing issue, perhaps as early as next year. "We are trying to encourage as much electronic processing as we can. The more electronic receivers there are, the more it benefits everybody." The transition to electronic processing will be long, Whitney said. "It will probably be another 3 - 5 years before we see a significant critical mass, with more than ½ of check volume" being cleared as images. "Once we get over 50%, then we start to get a snowball effect," that will drive up volume. & for banks that cannot receive images, the Fed must deliver either the original item, or, if the sending bank has submitted only an electronic version, an image IRD. Because producing IRDs - high-quality printouts of the images - is more work, the prices for handling these items are higher than those for either paper checks or images. The rates follow the same structure as the one for electronic items, with volume- & time-based tiers, & prices ranging from 3.5c for early submissions to 25c for the latest ones. Schutze said creating IRDs is a tedious process that complicates processing. "I'm surprised they weren't charging more than that."

Check 21 image-only settlement passes a critical test 9/1 AB

The banking industry has been through a lot in its quest to move check settlement from paper to electronics - debates about technology, merger-related delays, confusion over operational & legal issues, & doubts about whether the whole thing would work. But at long last, in what bank technology executives call a milestone, 2 of the largest banking companies began settling a small number of checks exclusively with digital images this past weekend. & they plan to continue doing so, in ever-increasing volumes. Other large banks are expected to soon join the 2 pioneers: KeyCorp & JPMorganChase's Bank One. "We think it was a huge event," said Susan Long, Clearinghouse Payments Co. who was promoted 8/1 to lead its image exchange initiative, which involves a major roster of the largest banks. "Everything went well, as planned. It is the first time in the industry that an exchange has happened end to end, bank to bank, so that's very significant." The Clearinghouse said that more than ½ of the 2 dozen major banks that own it have committed to using the image exchange platform by IH 2005. They would be the first large banks to do so, though some small banks have been settling checks by image through the Endpoint Exchange network run by the CheckClear division of Metavante, which in turn is majority-owned by M&I. The imaging effort has been goaded by the passage of Check 21, which will take effect 2 months from now. The technical effect of the law will be to give banks the right to present replacement checks - known as IRDs, or image replacement documents - rather than the original iteBut the gist of it is being taken as a broad imprimatur to develop image-related products & services & tie them to other payments technology. Bank One & Key have been swapping some check images - but settling with the original paper documents - since June. They had been scheduled to start image-only settlement in July, but that project postponed for a month, because JPMorganChase had scheduled a post-acquisition upgrade to its demand deposit account system the same weekend. On Friday the banks presented check images to each other; the transactions were settled by image Monday. "This past weekend was the first interchange of a real transaction, a live transaction," said Earl Jennings, JPMorganChase, who has been involved in the project on Bank One's side. Before the purchase, JPMorganChase had not been preparing to be a part of the image exchange network The Clearinghouse has set up through its SVPCo division. The first transactions originated from a JPMorgan Chase facility in Phoenix & a Key facility in Albany.; the files traveled electronically between the institutions through a network operated by SVPCo. They were checked for image quality & readability, & the receiving bank sent an electronic receipt through the SVPCo network. Had the transactions been processed the traditional way, the checks would not have been shipped until Monday. They would have spent 6 hours in flight, plus time on the ground, & likely would not have cleared until Tuesday, at the earliest. Over all, fewer than 100 transactions were processed electronically Friday to Monday, with no failures. "They were the real deal." The accounts belonged to a small group of KeyCorp & Bank One retail customers who had elected to receive image-only statements. Jennings said that even though the initial volumes were small, the banks will increase the volume of their image-based settlements. "It's a continual step along a process to ramp up image exchange." Don McLaughlin, Key, said, "We're kicking the tires & making sure everything works as it's supposed to." Now that the technology has proven itself in the real world, "increasing the volume is a prime objective," so Key will add more accounts to the network. "It won't take very long to begin adding new accounts." However, adding another bank to the network would require testing image transmissions before actual settlement took place. The tests between Key & Bank One took nearly 3 months. Though the Key accounts involved in the project had been signed up for truncation, the account holders may not have been aware that they were the first to have their checks cleared electronically. "We're very excited, & I guess I'd even go so far as to say we're proud of this milestone," McLaughlin said. "This is brand-new stuff, & we're the first on the block." Though the transactions are considered settled, Key would likely keep the paper checks longer than it will when image settlement becomes more widespread. Leonard Heckwolf, JPMorganChase, said the successful implementation points to a broader trend: What had been perceived as a cacophony of payments technology is starting to look more harmonious. Image exchange & accounts receivable conversion were once viewed as competing systems, but they are now seen as convergent. "The next wave of products will start to link the paper & electronics in a way that's seamless to the customer. I think it's all synching up reasonably well. I think all of the concerns of a year ago or so that these products would kind of trip over each other - I think they've begun to complement each other." Large banks have made their intentions clear in image exchange, & "the big open question is how much volume, how fast." It has taken some time to get the infrastructure ready for the image-based future & the improvements will be ongoing, but things seem to be proceeding smoothly. "I'm just not running into a lot of customer opposition around any of this. I think the industry has done it pretty well." Because of the importance everyone is attaching to the image exchange effort, the slight changes in plans along the way have received intense scrutiny. In January, SVPCo said that Wells Fargo & KeyCorp would be the first image exchange partners, & that things would start up in June, with 2 banks a month coming on board. Hank Farrar, who had been COO SVPCo during much of the project, was put in charge of CHIPS at the same time that Long, his longtime colleague, was promoted to his job. CHIPS is the wire transfer system run by Clearinghouse Payments Co. Executives involved in the image exchange project warned against reading too much into these changes & said Wells Fargo is still on track to begin exchanging images soon. Long called the switch in executive responsibilities a "natural realignment" that grew out of the reorganization of The Clearinghouse at the beginning of the summer. From here, things are likely to progress rapidly. There is a piece of equipment called a DTA, or distributed traffic agent, that an institution - be it a bank, a vendor, or the Fed - needs to connect to The Clearinghouse's image exchange infrastructure. So far 17 DTAs have been purchased. "You would not make this capital expenditure unless you're committed to moving forward." Any perceived delays have been a function of banks' desire to "do this right," Long said. "The last thing they would want to do is do this wrong. I wouldn't say they're living so much by a schedule as by a need to do this the right way." Darrell Royal, Carreker, which designed the software that generated Key's images, said that even though the 2 banks will continue to exchange images in low volumes, "we do not see structural barriers to a significant ramp-up in volume." He agreed that some caution was necessary in moving the image-based settlement process from concept to reality, but "any significant operational concern or quality concern has been addressed." Steve Ledford, Global Concepts, predicts that the 10/28 effective date for Check 21 will act as a shotgun of sorts, accelerating what has so far been a gradual but steady effort to build infrastructure. "I think we'll see a much broader & perhaps faster ramp-up to production volumes than some folks have been anticipating." Whether or not they are involved in SVPCo, financial institutions "are looking at image exchange &, quite frankly, don't have a whole lot of patience to go through a long, slow ramp-up." Also, as paper check volumes continue their rapid descent, "the faster you implement, the faster you get your payback." Edward Neumann, Javelin Research, called the KeyCorp/JPMorgan Chase exchange symbolic & "an important development for the industry." The message is that it is only a matter of time before such exchanges become commonplace. Robert Hunt, TowerGroup, said this past weekend's exchanges were "the toe in the water for image-based exchange." A small volume was necessary for the first run in case of a failure, since it is easier to correct a hundred errors than it is to correct several hundred thousand. Eventually, the volumes will grow, & image exchange will become the standard. "The most efficient way of doing business is to exchange electronically. It's going to take years & years to get there, & we've got to do the baby steps." By yearend fewer than 10% of banks will be making electronic exchanges, fewer than 20% of banks will use image replacement documents, & those that use these documents will do so "on a very limited basis." Even after Check 21 takes effect, fewer than 1% of items will be converted to IRDs. "The IRDs are a bridge to get us to" full electronic conversion & settlement.

Check 21 readiness 8/31 Banktech.com

In the race to meet the deadline for Check 21, some financial institutions are closer to the finish line than others. Check 21 offers an opportunity to innovate & improve processes. For others, the 10/28 Check 21 deadline looms as a reminder of how far they still have to go to comply. As with any change, there are obstacles to overcome. For banks preparing for an electronic checking environment, these obstacles include sufficient image quality, the threat of fraud & the need to gain customer acceptance. Concerns about these issues have grown as the Check 21 deadline approaches, & the debate over the pros & cons of IRDs has gotten louder. "There are good factors about them & bad factors," according to Robert Hunt, TowerGroup. "The best thing is that Check 21 allows banks to create images for presentment. It allows for a transition without forcing banks to change technology." They can simply utilize technology in which they have invested, like scanners & printers, to create substitute checks. "The bad point, is that the ultimate system is still electronic. It complicates the process because there are now 3 ways to present the check." With the availability of the original paper check, the IRD & now the electronic presentment of checks online, banks must ensure that their systems can handle each transaction type. In addition to the fact that not all banks will be ready by the October deadline, the processing costs of IRDs are still unknown. The #1 concern of many banks is the quality of image replacement documents. Low-quality IRDs can be disastrous - they can prevent checks from clearing & can damage customer satisfaction. For banks that will adopt the use of image exchange, the quality of IRDs is critical. First Tennessee ($23b) is among the institutions that are ready for Check 21, according to Taylor Vaughn, First Tennessee. In the top 20% of the industry in terms of Check 21 preparedness, First Tennessee is not only ready to print substitute checks; it is set to exchange images with participating banks by the October deadline, adding that the bank is concerned about how image quality will impact check processing. "We are concerned with image quality because, if we receive a bad image, we are going to have to pass that on to our customer in an image statement. Or, if we print an IRD, the IRD wouldn't be of sufficient quality to cut the mustard for clearing that check." Printing a poor-quality image, or exchanging that image, can cause problems with the availability of funds, Vaughn continues. "There are liability concerns with being able to negotiate that check if the image of it is not good." If a bank creates a poor-quality IRD, the MICR line may not be recognizable. This can increase the cost of check processing, instead of reducing it, as Check 21 intended. There are several problematic scenarios that can develop during the image process, Vaughn notes, including human error. For example, an employee can send an image file twice, mistakenly thinking that the first attempt did not go through. "There are operational errors that can happen along the way that we are going to have to get used to managing. There are going to be new & different operational errors from what we are doing." Vaughn acknowledges that the potential for errors exists in the current paper-based processing of checks, banks need to be particularly diligent in monitoring the electronic truncation of checks because the image process for substitute checks is still fairly new to bank employees. "There are certainly errors that can happen in the paper world. But we are going to have to be diligent in monitoring, identifying & correcting these problems as they occur" in the new electronic environment. While Check 21 requires financial institutions only to print & accept substitute checks, it does not require them to invest in technology to embrace an electronic world. Vaughn suggests, banks can prevent image problems by investing in the right technology. "Being able to do the capturing of images is important. How good your devices are to capture these images dictates the quality of that image." Banks have to invest in proper recognition technology & technology that assures proper transmission capabilities. Because check images consume more file space, banks must ensure that their infrastructures are capable of handling the larger file volume. According to Andrea Klein, Oracle, one way to address the storage volume issue is to store data & images in one place. "It cuts down on the storage that they need." It saves time by eliminating the need to search twice for a single piece of information. Banks "are storing it together, so the net amount of storage is going to be less & retrieval time is less." Already a major concern in the financial industry, the threat of fraud is heightened in an electronic environment. There is no shortage of counterfeiters willing to create fraudulent checks, & there will be criminals interested in creating fake substitute checks, notes Paul Obermeyer, Comerica ($55b). By paying close attention to the image quality of the original check, the ability to protect the integrity of substitute checks & images to be exchanged can be improved. Transitioning the image capturing & IRD process deliberately & efficiently will allow financial institutions to worry less about the risk of fraud. "In any change there is risk. We have to be extremely vigilant for potential new opportunities for attack. We should be able to detect those new threats & respond accordingly." One way to detect those threats is to closely monitor check activity & customers' behavior patterns. "We have the systems in place today to detect counterfeit. They are not based upon the visual review of that item, but they are based upon parameters that we use to monitor the nature of the account activity. We monitor the typical patterns that a customer uses with regard to their checking account: what kinds of items they write, what frequency do they write them with & what amounts do they write them for. We pay attention to the sequence number of their checks." Banks must be aware of the threats of identity theft & counterfeiting that a customer's electronic signature can pose. "As an industry, we need to look at the digital signing of check images at the individual check image level to be sure that when an image is introduced into that network that it is in fact the image that was originally captured & that image has not been altered at any point in the image capture stream." The process of image exchange creates an opportunity for fraud. "I think that is a potential vulnerability that we have as we adopt electronic means of exchange. We as an industry should adopt standards around that & ensure for our customers that by migrating to the electronic exchange network, we are not exposing any more privacy risks that we don't currently have today. We probably will reduce risks if we do it right." Perhaps most important to reducing the risks of using IRDs, is to have specific details in the document to make it distinctive. "I would like to see the industry rally around document originality standards for the substitute check, just like we see on personal checks today. Things like security seals, water marks & durable bar coding that will survive the image capture process downstream. This has to be done so that we can ensure that a properly authorized substitute check is able to be verified by another handler of that instrument at another bank." The current standards for electronic truncation are precise, but there is always room for improvement. To protect their reputations & strengthen relationships with customers, banks should pay more attention to the security threats created by IRDs as they move to adopt electronic check processing. "That is one of the technological areas that I would like to see some serious attention focused on. It is very important that we maintain the trust of our customers as we transition to the new electronic world." Because image quality & the detection of fraud are so critical to a bank's survival in the new electronic world, some banks are taking a cautious approach, rather than rushing to be the first to adopt image exchange technology. Making sure all systems are operational is an essential part of participating in the image exchange of checks for clearing. Though JPMorganChase ($1.1 trillion), in a joint effort with KeyBank ($84.4b), sought to be the first in the industry to exchange check images, it recently decided to push back its late-summer timetable to go live with image exchange. According to Earl Jennings, JPMorganChase, the bank is still conducting some testing. "KeyBank & Bank One, being on the cutting edge, agreed that we will be the first banks to test image exchange & head up the rest of the industry." But the July-August deadline was an aspiration. "We stopped & took the time to state what it takes to be successful." As an advocate for electronic image exchange, Jennings says that the technology will create fundamental opportunities to improve the clearing of funds & exchange of information. Electronic image exchange will make the clearing of funds quicker & less expensive than the traditional processing of paper checks, which might require customers to wait 3 or 4 days for their funds to clear. To successfully achieve the exchange of images industrywide, financial institutions need to address their own internal issues & set individual milestones, working at their own pace. Each bank must first ensure that it can exchange & settle images, & provide images of sufficient quality as to be readable, for the industry to successfully transition to electronic check processing. "We have to move the industry at some pace so that it is beneficial for all engaged to use image exchange instead of the traditional check." Banks aren't the only ones that must come to grips with a paperless world. Customers must be ready for the move to an entirely electronic checking environment, & financial institutions must take the lead in transitioning them to an unfamiliar future. By training bank employees on the essentials of Check 21 & its impact on customers, inquiries about the changes in account statements, for example, can be easily addressed, according to Ted Kute, Huntington ($30b). "One of our main concerns is education. Being able to educate the customers & our employees about this new document, what it means & how to answer questions that will come up." According to Kute, customers have questions, particularly regarding the return of IRDs instead of their original checks. Most banks are mailing instructional materials to customers & setting up seminars with corporate customers to address their questions. Banks are now legally required to provide information on substitute checks & the non-return of paper checks to customers, according to the amendments to Reg CC, pertaining to Check 21, made by the Fed in July. One part of the amendment states that banks must provide customers with a model disclosure & model notices relating to substitute checks. Because some customers will not be comfortable with the return of IRDs, they will decrease the use of personal checks in favor of other payment options that are popular, such as debit & credit cards, says First Tennessee's Vaughn. "I believe that once people see how checks are being treated, & it's not how they're used to & they don't get their original checks back, they are going to begin to say, 'Why do I even write the check in the first place? I may have just used my credit card,. In the long run, we are going to see more activity going toward plastics & less activity going to paper checks." Further complicating the adoption of a completely electronic check processing environment are the disparate resources available to financial institutions. For larger banks with bigger technology budgets, the resources are available to pursue innovation & properly prepare for electronic image exchange. Smaller financial institutions, however, are waiting to see how far image exchange adoption will go. Black Hills FCU, Rapid City SD ($470m), will have IRDs of cashletters in time for the October deadline, but it will not invest in image exchange technology until next year, according to Sandi Stone, the CU's share draft purchasing supervisor. "We are not looking at getting fully electronic right now. We'll be looking at some electronic cashletters, but I do not feel at this time that, if we jumped on board on 10/28, it would be cost effective for us to create a total electronic cashletter," echoing the sentiments of many small-bank executives. "There won't be enough banks & CUs doing it to make it profitable." 10 Techniques for Mitigating Check 21 Risks: According to Frank Liddy, Unisys, banks should implement the following procedures to mitigate the risk of fraud associated with electronic check processing: 1. Analyze Internet log-ins for suspicious indicators. 2. Communicate suspicions to the check-fraud system. 3. Mask high-risk components of the check image. 4. Recognize the limitations of using check amount & frequency as fraud indicators. 5. Implement dynamic detection strategies that change based on risk conditions. 6. Make use of the hidden components within an image analysis system. 7. Use advanced character recognition techniques to provide additional context. 8. Profile payees for suspicious payee concentrations. 9. Implement automated procedures for rapid identification of other affected accounts. 10. Automate the blocking of accounts & devices for rapid response.

Check 21's impact on cash management products 8/18 CognizantTechnologySolutions

Check 21 facilitates check truncation by providing legal equivalence to a substitute check. This marks a shot in the arm for the entire banking industry in the US to counter the increasing cost per unit of check processing as a result of declining check volumes. The lawmakers' vision about the Act is loud & clear: 'Fostering innovation'. It is not just the legal equivalence of substitute check that makes Check 21 a milestone in the history of payment processing, but the avalanche of creative steps being taken to foster the innovation makes it comparable to the MICR revolution of 1956. Exchange of a check image instead of a physical paper check is an immediate innovation accompanying the concept of the substitute check. Check 21 does not address the exchange of check images. It will be governed by an agreement signed by the parties involved in such an exchange. The possibility of image exchange has an impact on various functions in a bank, from operations to IT & from legal services to product services. & cash management services are no exception to this. The cash management offerings for corporate customers will undergo transition as Check 21 is implemented in 10/04. The transition will happen gradually as various innovative ideas make their way into the clearing process & eventually mature. This article elaborates how the prime cash management offerings will get transformed post Check 21, especially due to the possibility of image exchange. Some of the prime cash management products & services offered by banks to its corporate customers in the US are: Collections - lockbox; Payments - positive pay, controlled disbursement; Information reporting - check research, reconciliation Lockbox. The lockbox is a product that is popular among billers (cable TV, utility companies, telephone companies etc.) for collecting the remittances. The checks posted with these remittances are collected using regional post boxes that typically have unique ZIP codes, for faster mail processing. These checks are cleared either via the traditional clearing process or are truncated by initiating an ACH debit. The use of lockbox helps to reduce mail float & helps to make funds available more quickly for the corporate customers. It is certain that the check imaging and, more importantly, image exchange will reduce the postal delays involved in the process of check clearing, reducing clearing float. Image exchange will prove to be an alternative to the existing check truncation using ACH debit. It will be more pervasive than ACH debit, which allows truncation of only consumer checks & not corporate checks, money orders, etc. It is estimated that the day-two clearing will gradually reduce with an increase in same-day clearing as the exchange of images becomes widely accepted. As a result, the average clearing time will fall, improving the availability of funds for the bank. It will be up to the individual banks to decide what share of the benefits they pass on to their customers. The challenge for product developers in the banks will be to estimate the savings correctly & price the product optimally to pass on a share of savings to their customers to remain competitive. The other aspect of the lockbox offering is the unique zip code based mail processing, which helps in reducing the mail float remains unaltered even in the post Check 21 scenario. The positive pay offering helps corporate customers counter the check fraud. The corporate customer sends a file to the bank containing the information about the checks issued. Using these details, the bank verifies the checks presented against various accounts of the corporate. If any of the checks does not match, it is reported to the corporate & researched further. Typically a list of exceptions is notified in the morning & a response from the corporate is expected within a few hours. There are multiple variants of this offering prevalent in the industry. Reverse Positive Pay is one such variant, in which the bank sends a file containing the details of checks to be cleared during the day. The corporate carries out the verification & subsequently reports the exceptions, if any, to the bank. Positive pay products are available with reconcilement & payee match options as well. Theses options leverage the image processing techniques to extract certain information attributes from the check image. Payee name is one such attribute. Post Check 21, it is likely that the payer bank may receive a substitute check instead of the physical paper check. As the Act does not specify any standard for digitization & imaging, the quality of image for substitute check is entirely dependent on the financial institute, which converts the paper check into an image. Due to this, the payer bank loses control over the image quality of the check, which happens to be a competitive advantage for one bank over the other. As image exchange matures, standards will evolve to result in better quality images. Such features as payee match will then be extended for medium & small companies. The controlled disbursement product is designed for corporate customers to optimize their cash. It utilizes the information about daily cash requirements effectively to manage the cash position. The banks provide summary information containing the current day's disbursement total by early morning. This helps the corporate customers to either fund the account or mobilize excess cash for better investment. This service takes advantage of the fact that paper checks presented for payment reach the bank in a batch as a single shipment, each day typically by 10am EST. This is the time by which the bank informs its corporate customers about the amount needed in their account for clearing the outstanding checks for the day. Controlled disbursement is affected by Check 21 to a great extent, as it is critically dependent on time. The cut-off times may vary as image exchange replaces the physical check delivery. It is possible that the checks can be presented electronically, several times a day, leading to intra-day clearing. This means multiple cut-off times during a day. It is certain that the offering needs to be transformed from its current form & the evolving changes in the clearing process will drive this transformation. Information reporting services typically offer a variety of products such as balance reports, account analysis, check research & account reconciliation. The image exchange will help strengthening the reporting services, as the check-image will now be made available on-line. As mentioned earlier, the payer bank currently digitizes the paper check into an electronic image to offer an online view to its customers. Post Check 21 it may not be the case. This will force the payer bank to provide the customers with the check-image as received. This may hamper the quality of the image depending on how the check gets truncated & the payer bank will not have any control over it. The other impact of image exchange will lead to better availability of the check-images. This will improve the communication between the corporate & the bank regarding the check research & adjustment functionality. Image exchange will have an impact on some other aspects as well. The fraud management will have positive & negative impact. The check-image can be secured using certain image processing techniques such as watermark information, barcode embedding. Losing the touch & feel of a physical check will make it difficult for experts to identify handwriting styles, pen pressure etc. The transportation cost cuts will definitely lead to savings in the processing costs. However, the additional infrastructure & technology costs need to be properly estimated while arriving at an ROI for the entire check-imaging initiative. The expectations from corporate customers will have to be managed while revisiting product pricing. The corporate customers will have to be educated to know about the entire picture behind the pricing model. Though it appears that the banks will enjoy more collection float income due to image exchange, it is important to know that the reduction in disbursement float income will compensate for the same. Check 21 is facilitating exchange of check images. The payment processing is going through a phase of innovation. The changes to various cash management products are imperative in this regard. However, the fine print of these changes will become evident as the image exchange process matures. Check 21 has created an atmosphere conducive to new & innovative ideas. But it is the implementation of these ideas that will truly drive the post Check 21 era.

BAI Check 21 impact survey 8/31 BAI

From January to June this year, banks made significant strides toward readiness for Check 21, according to bankers who took part in BAI's 2nd survey on Check 21 readiness. 32% reported that they were implementing a strategy, up from 26% in the December survey, & 21% said that their companies had a detailed implementation plan & were just waiting for the final rule, up from 6%. That means that 3 months (at the time they took the survey) before the 10/28 effective date, 40% of the surveyed group declined to place their banks in one of the 2 ready categories. 22% reported they were still evaluating options, although that was down from one in 3 during BAI's first survey. ½ those banks were in the range of $500m to $5b in assets. This time, only 3% reported that they were still just learning about Check 21, down from 17%. 4% said they had had a significant dialogue with their outsourcer about its readiness. Doing the minimum to comply was a strategy embraced by a small group of financial institutions (6% of the surveyed group), more than ½ of which were banks with less than $1b in assets. 5% chose Other & wrote in their readiness status, & 7% did not respond to the question. The % of Check 21-ready organizations (either implementing a strategy or ready with a detailed implementation plan) shoots up to 60% among companies with more than $1b in assets. Several respondents indicated that readiness for Check 21 itself was not the major issue: "Opportunities come with image exchange after Check 21." "Check 21 will have a minimal impact on most of your question areas. However, in longer term, with what Check 21 can help cause, i.e., image exchange, the ramifications are enormous." Bankers reported: Their primary Check 21-related investments in the next 12 months will be in employee training, marketing to consumer customers & electronic check presentment. Fraud control is the single most important Check 21-related issue they need more information about. Check 21's impact on the bank will be felt most in reduced float & a bank-wide analysis of payments approaches. Its largest impact on customers will be initial confusion. The survey BAI went to its national banking industry database during the first 2 weeks of June & invited senior executives to comment on the impact of Check 21. By the first week of July, 160 had responded via a Web-based survey. 2/3 of the respondents reported that they came from banks1. The survey collected perspectives of bank technology suppliers, financial services consulting firms & regulatory agencies. More than ½ of the bankers reported that they worked in operations & payments & the rest in the retail bank or in risk management. ½ said they were middle management & 1/3 said they were senior or executive management. The results represent a snapshot of how this group of bankers felt about the impact of Check 21 on their institutions in June, 4 months before the effective date. BAI plans to poll executives once more before the effective date to identify information gaps that still need to be closed & to chart progress on critical issues such as readiness to accommodate substitute checks or educate customers. The 3rd survey is scheduled to go to the field at the end of August. ½ the respondents reported they planned to invest in ECP, & more reported they planned to spend on employee training (67%) & marketing to educate customers (61%). ½ the interest in ECP was in banks from $250m to $5b, with ½ of that in the largest banks in that range. Marketing to ensure customer awareness about Check 21 & consumer recredit rights is required by the Check 21 Act, & training employees to explain the law to customers in the branch & through the call center is a logical extension of that requirement. Leading areas planned for investment related to image: Shared archive - 42%, with 1/3 of the interest from banks in the $1b to $20b range. Check imaging - 40%, with most interest in banks of $1b to $20b. In-house archive - 30%, mostly from banks in the $1b to $5b range. Business process management - 27%, evenly spread across asset sizes but with most interest in the largest banks & least in the smallest. "Most investing will go toward branch deposit automation," wrote one. "Expense to train employees," said another. Other investment areas mentioned in comments: "Document image (not check)" "Service providers" "Image-enabled workflow management in Day 2 operations" Many bankers' information wish lists placed detailed plans for implementation close to the top. In late June, the single largest information gap that bankers wanted to close was regulation details. The next 2 most important information needs were for an overview of what was required to comply with the Act & legislative updates. The survey response period closed about 3 weeks before the Fed published the final rule for implementing Check 21 on 7/26. Beyond the final rule, respondents rated fraud, training & technical standards as high on their lists of information needs. The industry standard for IRD is still a draft standard. Trailing close behind were information about supporting technologies payment system changes, risk training & project plans. Asked to identify the single most important issue that the entire organization needed more information about, respondents most often selected fraud. The need for more information on Check 21's impact on fraud control was present across asset sizes. In comments, respondents wrote: "We need insight into potential fraud schemes." "Emerging areas of fraud & strategies to combat them." Bankers expressed a desire for detailed step-by-step project plans for implementation, detailed training for all areas affected by Check 21 & detailed training to c