check 21- check electronification catherine c berg, ctp product specialist oct. 19, 2007
TRANSCRIPT
Check 21- Check Electronification
Catherine C Berg, CTPProduct SpecialistOct. 19, 2007
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Agenda
Exploring recent trends in image adoption
Image Cash Letter with ACH
Building a business case for Image Cash Letter
A checklist for transitioning to an image environment
ARC, POP, BOC
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Conversion
Truncation
ACH:ARC/POP/RCK/BOC
Image ExchangeSubstitute Checks
The time is now for check conversion and check truncation
• Check conversion transforms a check to electronic settlement
• Check truncation transforms a check to an image-enabled electronic transaction for settlement
Check Electronification
Industry Updates
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Non-cash transactions, billions
* Excluding ACH transactions originated as checks
** This number also includes a small number of POP transactions
*** “Total check written” may be processed via image exchange, IRD, paper, ARC
Consumers, businesses, and government are changing their payment choices – moving away from check to electronic alternatives, such as cards (credit and debit) and ACH
New products (e.g., ACH, stored value cards) are offering attractive alternatives
Continued strong growth in cards (debit and credit) will reduce check usage
The combined impact will result in check volume decline of 3–5% annually
Sources: NACHA, Global Concepts, Nielson, Federal Reserve, Tower, FDC, McKinsey, Team analysis2001 2005 2010
42.134.8
27.4
3.14.7
6.9 10.0 16.7
23.7 29.036.5
18.4
24.1
3.4
4.4
6.2
12.1
Checks written and processed as checks
Credit card
Debit card
88.2
99.7
115.6
Other
ACH*
-3
10
5
8
7
3
ARC**
Total checks written***
CAGR (%)
Drivers of change in industry: declining check usage
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Source: NACHA, Federal Reserve Bank, JPMC
0
5
10
15
20
25
30
35
40
Paper clearing
ARC
Image replacement document (IRD)
2004 2005 2006 2007 2008 2009 2010
Accounts receivable check (ARC) volume will continue to increase along with image exchange growth. As the numbers of checks written declines, ARC volumes will flatten out and begin to decline. ARC continues to be an attractive alternative to Check 21 clearing.
The number of image-enabled banks will grow over time as more large banks implement image and more small/mid-sized banks decide to outsource.
Back-office conversion took effect in March 2007 and emerged as an attractive alternative to Check 21 clearing.
IRDs diminish over time as financial institutions move to image exchange.
Fewer than 20% of checks will be cleared through conventional paper processing by the end of 2010 (down from more than 95% today).
Image exchange
Num
ber
of
item
s in
bill
ions
Projections
JPMorgan Chase is licensed under U.S. Patent Numbers 5,910,988 and 6,032,137.
Industry Updates
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Key messages Paper checks are being transitioned to electronic images of checks at an
unprecedented pace. Check images are currently collected in two forms: as substitute checks and as check images.
Substitute checks assist in evolving traditional paper check clearing to image-based clearing. As a precursor to full check image exchange, the number of substitute checks is a positive indication of the acceptance of image exchange.
Approximately 8.8 billion check payments totaling $12 trillion per year have already moved from the traditional paper-based clearing process to improved image-based
On an average day during June 2007, more than 6,400 institutions received 23.2 million check images for posting. These total 5.8 billion checks per year.
This Federal Reserve/Electronic Clearing House Organization (ECCHO) industry image clearing data reflects transactions settled through the Federal Reserve, National Clearing House Association (NCHA) and SVPCO (check and electronic clearing services) and does not include duplicate counting.
Trends: Federal Reserve / ECCHOCommunications Workgroup
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Trends: Number of images and substitute checks
Source: Transactions settled through the Federal Reserve, NCHA and SVPCO with no duplicate counting
Highlights:
•All checks were imaged before reconversion to substitute checks.
•Chart reflects volume received by DFIs for payment from other DFIs or an intermediary.
•Across the 13 month period Image-based clearing volume grew from 206.4 to 734.3 million / mo or by 256% with 66% of the volume cleared by image in June 2007.
•The annualized June ‘07 volume (8.8 billion items/yr.) is approximately 24% of total check volume cleared.
Jan
an
nu
alize
d =
6.4
billion
ite
ms p
er
year
0
100
200
300
400
500
600
700
800
Jun-0
6
Jul-0
6
Aug-06
Sep-0
6
Oct-0
6
Nov-06
Dec-0
6
Jan-0
7
Feb-0
7
Mar
-07
Apr-07
May
-07
Jun-0
7
# It
ems
in M
illi
on
s
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Trends: Number of R/Ts receiving image files
Source: Transactions settled through the Federal Reserve, NCHA and SVPCO with no duplicate counting
Highlights:
•Chart reflects the number of paying bank R/Ts receiving check images.
•Many R/Ts through June 2007 were for individual institutions.
•The number of receiving R/Ts grew between June ’06 & June ‘07 from 4,342 to 9,483 or 118%.
•9,483 routing transit numbers represents more than 6,400 institutions or approximately 39% of all U. S. institutions are receiving check images.
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Jun-0
6
Jul-0
6
Aug-06
Sep-0
6
Oct-0
6
Nov-06
Dec-0
6
Jan-0
7
Feb-0
7
Mar
-07
Apr-07
May
-07
Jun-0
7
# o
f R
ecei
vin
g R
/Ts
Ima
ge
Re
ce
ivin
g R
/Ts
9,4
83
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Centralized• DDA• Customer information• Management reporting• Funds consolidation• Customer service• Pricing• Relationship management
Phone/IVR Payment in IVR Payment through call
center representative Recurring, scheduled and
one-time ACH and credit/debit card payments
Internet Registered or
unregistered Web pay One-time and recurring
ACH and credit/debit card payments
Electronic lockbox
In-person Overnight check
processing via UPS partnership
Card (credit, debit, ATM) processing
Kiosk solution in development
Check conversion
U.S. mail Retail lockbox Imaging Recurring debit enrollment Auto-enrollment of lockbox
customers into electronic channels
Conversion (ARC) Vanguard bank prepared for
image exchange
Payments and collections are becoming increasingly complex
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Image Deposit Solutions
Image Cash Letter
Remote Deposit
ACH
Accounts Receivable Conversion - ARC
Point of Presentment - POP
Back Office Conversion – BOC
Payment Transformation
•Image Cash Letter with ACH
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2) Capture items and associate each item with either an ARC or BOC standard entry class code depending on the items’ point of origin within your organization. Identify Opt-out items using the X9.37 file format indicator.
3) Retain and then destroy items according to ACH, Check 21, company, and/or bank guidelines.
7c) Non-convertible items are cleared via image exchange.
7b) Non-convertible items are cleared as substitute checks.
5) We perform OCR/MICR read on the items and flag suspect items for additional inspection prior to ACH clearing, printing substitute checks or exchanging images.
1) Receive checks at your in-house processing sites via mail, drop boxes, and/or walk-in payment centers.
6) Our ACH-eligibility engine optimally routes items based on MICR construction, ACH-eligibility tables, ARC opt-out, and historical clearing information.
4) Transmit items to the bank via a modified X9.37 image transmission.
7a) ARC and BOC-eligible items are cleared via ACH.
How does it work?
Client’s system and tasks
Bank provided system and tasks
ACH
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Image Cash Letter with ACH - Features
Reduce processing steps- eliminate need for pass two in processing
Reduce Programming- no in house decision process required Improved liquidity – Changes in business processes combined
with ACH clearing may further improve availability as items are processed the same day they are received by the Originator and 2-day end points are eliminated
Less Expensive – ACH clearing is more economical than processes that generate substitute checks for clearing
Lower return rates - Clients who have adopted other ACH conversion processes (e.g. Accounts Receivable Conversion) have experienced reductions in returned item rates by as much as 30 - 40% because electronic items are typically presented prior to paper items, and ACH rules allow an additional re-presentment of the item
Faster returns’ notification – ACH returns notifications are typically received within 2 business days’ from their submission, which can be faster than a similar check’s return timeframe
More electronic endpoints - ACH has more electronic endpoints (over 14,000) than Check 21 processes, which reduces your cost for clearing items and results in faster notification of returns
Potentially reduced transportation costs – Conversion and clearing of your items electronically may allow you to reduce deposit-related transportation costs
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Competitive interest rates — Earn competitive rates on balances maintained with us
More electronic endpoints — ACH has more electronic endpoints (more than 14,000) than Check 21 processes. More endpoints help reduce your cost for clearing items and result in faster notification of returns.
Improved collection rates — We employ some of the most advanced ACH-eligibility decisioning methodologies in the industry. This technology is used to decide the most effective means of clearing items.
Zero administrative returns (ZAR) — Administrative returns are corrected and sent again for payment
Preemptive processing intelligence (PPI)
Ineligible item database logic ensures clearing as a check via image exchange or image replacement document (IRD)
Notification of change (NOC) database enables repetitive payment processing edits to ensure ARC processing
Clients exceeding their ACH credit limits will have ACH-eligible items over the limit dynamically re-routed and cleared through Check 21 channels
Fatal returns are added to the NOC database to ensure check clearing decisioning on future presentments
Image Cash Letter with ACH — benefits (continued)
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Image Cash Letter Making the Business Case
Cost Savings and Efficiencies – Elimination of courier costs associated with transporting checks
to the bank. Elimination of risk associated with transporting original items Reduction of deposit preparation costs including encoding. Faster research of deposited checks using images Eliminate pass two in processing, no check encoding Decision engine no longer resides in house for maintenance
and updates
Reduction in Bank Fees Exchange paper fees (that continue to increase as ICL erodes
the paper scale) for lower image fees Reduction in MICR reject and deposit adjustment fees
Optimize Availability Image Cash Letter allows for later deposit deadlines, providing
an extended internal processing deadline Reduction/Elimination of holdovers
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Image Cash Letter: Customer responsibilities
The customer captures check images and MICR data to prepare an electronic deposit file to transmit to Bank.
Customer is responsible for:
Check imaging and MICR capture
Imaging and MICR quality
Recording the dollar amount for each check in the electronic file
Balancing the deposit
Preventing double presentment of the same check
Accurately preparing the ANSI DSTU X9.37 file according to Bank’s industry standard specifications
Setting up and maintaining connectivity and transmission capability, including adhering to security, encryption and authentication standards
Disposition of original checks
Producing a better copy of the check, or the original check, if needed
•Image Deposit Direct
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With Check 21 legislation enacted, your companies can image all checks delivered through the mail, dropped off, or presented in-person and deposit the checks electronically with the bank.
Companies may capture the payment amount of each check and associated transaction data for integration with your accounts receivable system and be able to
Image all checks using web-based software and a compact check scanner
Enter associated transaction data (amount, customer information) Submit the deposit electronically to the bank
View checks and associated documents via the Internet for research purposes
After Check 21 —Personal checks, commercial checks, and money orders via substitute checks and image
exchangePay to $
MONEY ORDER
Remote Deposit / Distributed Capture
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Remote Deposit / Distributed Capture
JPMorgan Chase is licensed under U.S. Pat Nos. 5,910,988 and 6,032,137.
• Items are scanned, and each check may be marked, so it cannot be reused.
• The checks are shredded according to ACH, Check 21, Company, and/or Bank guidelines.
• Items are cleared via image exchange.
• Items are cleared as substitute checks.
• Full OCR/MICR read comparison flags suspect items for additional inspection and virtual MICR repair prior to printing substitute checks or exchanging images.
• Web-accessible image archive makes source documents available for 25 months.
• Checks and mail orders are received at your customers’ in-house processing sites, dropboxes, and/or walk-in payment desks.
• Decision Engine optimally routes payment items based on MICR construction, ACH-eligibility, ARC opt-out, and other historical information.
• Converted checks sent as ACH
ACH
How It Works -
•ARC, POP, BOC
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ACH Conversion vs. Check Clearing Channel Improved liquidity – Changes in business processes combined with
ACH clearing may further improve availability because items are processed the same day they are received and two-day end points are eliminated
Lower return rates - Clients who have adopted other ACH conversion processes (e.g. Accounts Receivable Conversion) have experienced up to a 30% to 40% improvement in return item rates because electronic items typically present prior to paper items, and ACH rules allow an additional re-presentment of the item
Less expensive than traditional check clearing – ACH clearing is typically less expensive compared to traditional check clearing (e.g. ACH fee vs. Check Clearing + Encoding + Transportation)
Faster returns’ notification – ACH returns notifications are typically received within 2 business days from their submission, which can be faster than a check’s return timeframe
More electronic endpoints - ACH has more electronic endpoints than Check 21 processes, which reduces your cost for clearing items and results in faster notification of returns
Potentially reduced transportation costs – Conversion and clearing of your items electronically may allow you to reduce deposit-related transportation costs
ACH vs. Check
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How is the check presented?
Authorization/ NotificationRequirements
What happens to the source document (check)?
Does an image have to be maintained?
Opt-Out Options Legal Framework
Accounts Receivable Conversion(ARC)
Mail or dropbox Authorization: Completed and signed check with a pre-printed serial number
Notification: Language printed on a bill or statement received prior to every paymentand/orClear and conspicuous signage at the dropbox
ACH Rules no longer explicitly require an Originator to destroy the source document. Although an Originator may use its discretion , originators are encouraged to establish policies and procedures to destroy ARC source documents as soon as is reasonable to protect against fraud
Yes, the Originator maintains a copy of the front of the check for 2 years and provides a copy to the RDFI upon request
Check writer can notify biller directly and all future checks will not be converted
NACHA Rules, EFTA/Regulation E
Point of Purchase(POP)
Point of Purchase
Authorization: Signed at time of purchase
Notification: Language printed on the transaction-specific receipt provided to the check writer
Clear and conspicuous signage at the check-out
Check is stamped “VOID” and returned to check writer after account information is captured at the point of purchase
No, the Originator does not have to maintain a copy of the check, but the Originator does maintain the signed authorizations for 24 months
Single opt-out option at the point of purchase –
Originators may request an alternative form of payment
NACHA Rules, EFTA/Regulation E
Back Office Conversion(BOC)
Point of Purchase
Authorization: Completed and signed check with a pre-printed serial number
Notification: Language printed on the receipt provided to the check writer
Clear and conspicuous signage at the check-out
No requirement to destroy the source document Although an Originator may use its discretion , originators are encouraged to establish policies and procedures to destroy BOC source documents as soon as is reasonable to protect against fraud
Yes, the Originator maintains a copy of the front of the check for 2 years and provides a copy to the RDFI upon request
Check writer has a one-time opt-out option at the point of purchase for the check writer.
Originators may request alternative form of payment.
NACHA Rules, EFTA/Regulation E
Check 21: Image Replacement Document
Mail, drop-box, or point of purchase
No authorization or notification requirements
No requirement to destroy
A copy/image of the IRD available from truncating FI is available for 7 years
No No opt-out Check 21,Regulation CC,U.C.C.,Clearing House Rules,Fed Operating Circular
ACH — Differences among ARC, POP, BOC, and Check 21
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Accounts Receivable Conversion (ARC) – What happens with ARC?
NOTICE"When you provide a check as payment,
you authorize us either to use information from your check to make a one-time electronic funds transfer from your account or to process the payment
as a check transaction. When we use information from your check to make an electronic funds transfer, funds may be withdrawn from your account as soon as the same day your payment is received, and you will not receive your check back
from your financial institution For inquiries, please call <retailer phone
number>.."
Receive checks at
drop-boxes or through the
Maintain the front image
of each source
document
Image items and transmit
files to the bank for
settlement
Post notices on drop-boxes or
on bills/ statements.
Take checks to the back office
1. Post notice to check writers at drop-boxes and on statements regarding check conversion prior to each check conversion taking place
2. Check writers drop off payments in dropboxes (in or outside store) or post them
3. Originator or third-party receives payment, opens mail, and processes item
4. Scan items and transmit NACHA file to the bank
5. Maintain a copy/image of the front of each check for 24 months6. Maintain an opt-out process for clients who wish to opt-out of check conversion (Opt-outs
may be MICR-based or other related information such as account number)
ARC Process Overview
NOTICE
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Generate Authorization and/or receipt
and have check writer sign the authorization
ACH originator maintains
signed receipt-
authorization for 24
months
Post notice regarding check conversion and receive check at the point of sale
Scan and void check
VOID
Return voided check and copy
of the authorization
and/or receipt to the client
VOID
1. Post notice to check writers that their personal checks presented at the point of sale will be converted to ACH transactions
2. Scan the check at the point of sale
3. Void the check and obtain the check writer’s signature on an EFT authorization
4. Return voided check along with a copy of the authorization and/or receipt
5. Maintain the signed authorizations for 24 months
POP Process Overview
Point of Purchase (POP) – Today, what happens with POP?
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Back Office Conversion (BOC) – What happens with BOC?
NOTICE"When you provide a check as payment,
you authorize us either to use information from your check to make a one-time electronic funds transfer from your account or to process the payment
as a check transaction. When we use information from your check to make an electronic funds transfer, funds may be withdrawn from your account as soon as the same day your payment is received, and you will not receive your check back
from your financial institution For inquiries, please call <retailer phone
number>.."
Receive checks at
points of sale and verify customers’ identities
Maintain the front image
of each source
document
Image items and transmit
files to the bank for
settlement
Post notices at the point of
sale
Provide receipt of transaction and notice of each
conversion to your customer
NOTICE"When you provide a check as payment, you authorize us
either to use information from your check to make a one-time electronic funds transfer from your account or to process the payment as a check transaction. When we use information
from your check to make an electronic funds transfer, funds may be withdrawn from your account as soon as the same day your payment is received, and you will not receive your check back from your financial institution For inquiries, please call
<retailer phone number>.."
Take checks to the back office
1. Post notice to check writers their personal checks presented at the point of sale will be converted to ACH transactions
2. Verify the check writer’s identify, process the transaction, and maintain the check at the register
3. Along with the transaction receipt, employees give the check writer a notice indicating their item will be converted to an ACH transaction
4. Take items to the back office
5. Scan the items and transmit information to the bank
6. Maintain a copy/image of the front of each check for 24 months
7. Maintain a customer service number check writers may call with check conversion questions
BOC Process Overview
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• Some retailers will adopt BOC with a verification service at the point of sale where transactions are for larger dollar amounts
• Other retailers will use BOC without a verification or guarantee service as their lower dollar transactions do not justify investment in check verification technology at the point of sale
• Walk-in payment providers (utilities, telecom, insurance, and other industries) will adopt in their service centers where payments are accepted at a point of sale
• Public Sector (municipal, county, state, and federal) will adopt the technology within their service centers where payments are accepted at a point of sale
Adoption Examples
Who will adopt Back Office Conversion?
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ACH Ineligible Items
The following items are deemed ineligible for conversion by the NACHA Rules: Checks or share drafts that contain an Auxiliary On-Us Field in MICR line Checks or share drafts that are for an amount greater than $25,000 Third Party checks or share drafts Demand drafts and Third Party drafts that do not contain the signature of the
Receiver Checks provided by a credit card issuer for purposes of accessing a credit account Checks drawn on home equity line of credit Checks drawn on an investment company as defined in 1940 Investment
Company Act Obligations of FIs (travelers checks, cashier’s checks, official checks, money
orders, etc.) Checks drawn on the U.S. Treasury, a Federal Reserve Bank, or a Federal Home
Loan Bank Checks drawn a state/local government that are not payable through a
participating DFI Check or share drafts payable in a medium other than U.S. Currency Checks or share drafts that do not contain a pre-printed serial number Checks or share drafts that are not completed by the Receiver (ARC only) Checks or share drafts that have been previously negotiated, voided, or provided
by the Receiver for use in any prior POP entry (POP only)
ACH Ineligible Items
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JPMorgan Chase is licensed under U.S. Patent Numbers 5,910,988 and 6,032,137.
This document contains information that is the property of JPMorgan Chase & Co. It may not be copied, published, or used in whole or in part for any purpose other than as expressly authorized by JPMorgan Chase & Co.
This presentation contains projections and certain of the statements and data contained in this presentation are, by their nature, forward-looking. Past performance is not a guarantee of future results and the actual results for your organization may differ materially. Additionally, this presentation contains projections, statements and data provided by third parties, including the Federal Reserve. JPMorgan Chase does not warrant or guarantee the accuracy or completeness of such projections, statements or data. If you have any questions, please contact your customer representative.