What Every Utility Should Know

About Check 21

Presented byJim Mills

VP Business Development

Utility Payment Conference

Check 21

• What is Check 21?

• How does it work?

• Check 21 versus ACH

• Benefits of Check 21

• Getting started

Consumer Payment Survey

• Cash is the most widely used payment method for retail transactions

• Checks are still the most widely used method for Bill Payments

• Security and Ease of Use are the most common concerns of payment types

• 91% of Consumers have a checking account

Source: 2008 Survey of Consumer Payment Choices from the Federal Reserve Bank of Boston

Distribution for Non-Cash Payments

• Debit Card transactions now exceed Credit Cards• In 2006 30.6Billion checks were written & valued at

$41.7 Trillion• Return Checks Represent .05%• 40% of Bank Clearings Occurred via Electronic Check

Aren’t Checks Going Away?

“One-third of all non-cash US payments are made by paper checks.”

“Checks are still the most popular form of payment used by consumers to

pay bills”

“Businesses pay 74%

of their B2B payments

by check.”

Why was Check 21 Created?

– Over 30 billion checks are written per year in US

– September 11, 2001– Planes were grounded– Checks could not clear – $47B in Fed holdover

To Reduce Dependency on Physical Checks

The Check-21 Act’s Purpose

“Check Clearing for the 21st Century Act” or “Check-21 Act”PUBLIC LAW 108–100—OCT. 28, 2003 117 STAT. 1177 Public Law 108–100 108th Congress

“To facilitate check truncation by authorizing substitute checks, to

foster innovation in the check collection system without mandating

receipt of checks in electronic form, and to improve the overall

efficiency of the Nation’s payments system, and for other

purposes.”

“Old” Paper Process

Business receives checks

Paper checks are delivered to the bank

Paying bank

Collecting bank

Federal Reserve

Courier to FED

Check 21 Process

Business scans incoming checks

Check images transmitted to the bank

Paying bank

Collecting bank

Federal Reserve

Check images transmitted to bank

Images transmitted

to FED

Substitute checks, if required

10

Check 21 Has Exploded#

Item

s in

Mill

ions

Source: Federal Reserve, Viewpointe, The Clearing House and local / regional exchanges

Check Images

58 Million Check Images per Day

What is Check-21?

• Check-21 law Governs use of “Substitute Checks”• The Check Clearing for the 21st Century Act (Check-

21) was:– Introduced to Congress by Chairman Greenspan

on December 21, 2001, and enacted on October 28, 2004

• Other names that are similar but confused with the Check-21 Act: – Image Cash Letter– X.937 (ANSI X.9.100-180)– Image Exchange (Image Cash Letter)– Electronic Check (e-Check)– Check Conversion– Check Image

Check-21 Enacted

• Substitute Check standards for legal equivalence to the Original Check

• Mandated that parties cannot refuse a substitute check but parties are not mandated to create a substitute check

• All checks are eligible except foreign checks

• Provided warranties and indemnifications

• Expedited re-credit features (External Processing Codes in position 44)

– 4 = substitute check

– 5 = qualified return substitute check

Substitute Check (Image Replacement Document)

Contains an Image (Front/Back ) of Original Check

Contains Original MICR Information

This is a Legal Copy of your check, You can use it the same way you would use the original check.

“4” in position 442D Barcode Optional Security Feature

Image Quality Assessment & Usability

(IQUA)Too Light Oversized

Too Dark Undersized

Torn or folded corners Has a piggyback document

Torn or folded edges Excess spot noise

Horizontal Streaks Frame error detection

Blow the minimum size Rear image mismatched

Above the maximum size Strip Detected

Excess skew Upside down

ACH TRANSACTION TYPES

• CCD - Cash Concentration and Distribution

• PPD - Prearranged Payment and Deposit

• ARC - Accounts Receivable Entry

• POP - Point of Purchase

• BOC - Back Office Conversion

• RCK - Re-presented Check Entry

• Tel - Telephone-Initiated Entry

• Web - Internet-Initiated Entry

Check Conversion and Check-21 ComparisonARC POP BOC Check-21

USE Check Payment by mail or lockbox

In Person Payment at Point of Sale

In person payment converted in back office

Substitute Check permitting truncation and electronic clearing

Eligibility Checks with non aux on-us

Checks with non aux on-us

Checks with non aux on-us

All US checks

Dollar Limits < $25,000 < $25,000 < $25,000 No Limit

Authorization/ Notification

Notification and Opt-out Option

Authorization Signature at POS

Notification POS sign, handout, receipt

None

Check Conversion and Check-21 Comparison

ARC POP BOC Check-21

Original Check Requirements

Mailed or Drop box

Voided at POS Destroyed within 14 days

None

Individual Opt-out

Yes- must give option

Yes- must give option

Yes- must give option

None

Typical Clearing Times

Next Day or Same Day

Next Day or Same Day

Next Day or Same Day

Next Day or Same Day

Typical Return Item Notification Times

2 days 2 days 2 days 2 days

Dispute Timeframes

60 days 60 days 60 days 45 days from Statement

Pros’ and Con’s Check-21 vs. Paper Check Handling

Pros Cons

Reduced Labor Cost to Process

Customer Gets a Check Image Back and Not the Original Check

Eliminate or Reduce Courier Fees

Small Risk of Double Posting or Poor Image Quality

Reduced Bank Fees The Need for Archived Images

Improved DSO - Potential For Intraday Posting

Necessitates Shredding (Destroying) Checks

Expedited Returns

Less Capital Expense for Processing Equipment

Faster, Cheaper, Better – No Brainer

Pros’ and Con’s Check-21 cont…

Pros Cons

Check Are Widely Understood

Paper Handling is Expensive

Document Contains Rich Information

In the Days of Float: Knowing the Funds Availability Schedules

Widely Accepted Checks re More Easily Counterfited

90% of Checks Cleared with Check-21

Variations in X.937 Interface Standards

Opportunity for Same Day Settlement

Check Law Requires 7 Years Image Storage

No Opt-Out Requirements

Unlimited Dollar Amount

Depending Upon Your Bank Check-21 Can Cost Less per Transaction and Bank Fees May Be Lower

Pros’ and Con’s ACH Check Conversion

Pros Cons

Predictable Next Day Settlement for Debits

Complicated Regulations

Wide Acceptance Among Financial Institutions

Strict Rules and Regulations

More Secure Against Fraud Than a Check

ODFI Required for Origination and Detailed Contractual Agreements

Low Opt-Out Rates $25,000 Limit and No Business Checks

Image Retention Only 2 Years

Can be Confusing for End Customers, Limited Detail on Bank Statements

Benefits of Check-21

• Eliminate daily trips to the bank

• Faster funds availability• Later cutoff times • Reduce errors and

deposit prep time• Identify fraud sooner• Eliminate accounts at

multiple banks by consolidating electronically

• Consolidate deposits from multiple locations

Getting Started

(4) Update A/R

(3) Send files to bank

(2) Scan using Check 21 software & scanner

(1) Receive payments

Distributed Environment

Central Office

Deposits from multiple sites are consolidated at the Central Office

A single ICL file is sent to the bank

THANK YOU

REFERENCES

References • Argento, M. D., Stanton, J. R., Bachelder, E. L., & Stewart, D. C. (2007, December). The 2007

Federal Reserve Payment Study. Federal Reserve Bank of Boston.

• Check Clearing for the 21st Century Act, Public Law 108-100 117 Stat. 1177 U.S.C. § H.R. 1474 (Oct 28, 2003).

• The Continuous progress of Check-21-enabled Services. (2010, July). Retrieved from Federal Reserve Bank of Atlanta website: http://www.frbservices.org

• ECCHO. (n.d.). ECCHO [Substitute Checks: Development of Processing and Quality Standards]. Retrieved August 10, 2010, from http://eccho.org/ check21_resource.php

• Foster, K., Meijer, E., Schuh, S., & Zabek, M. (2010, January). The 2008 Survey of Consumer Payment Choices. 2008-2010 Federal Reserve Bank of Boston.

• Johnson, D. (2008, January). Check Conversion and Check-21 Comparison Grid. Ithaca NY: RP Solutions.

• Rasche, C. (2010, May). First Federal weathers CHeck-21 ripple effect on check adjustments (Federal Reserve Bank of Atlanta, Ed.). Retrieved from http://www.frbservices.org/

• RP Solutions. (2009). ExpertRPS (Version 2.04) [Computer software]. Duplicate Check Detection Screenshot, IQUA Screenshot: RP Solutions.

• Sabasteanski, C. (2004, March). Transformation in the Check Industry. FISC Solutions.

• 2002 Electronic Payments Review and Buyers Guide: Vols. Pages 10-21. - Understanding the ACH Network: An ACH Primer. (2002). (Original work published 2002)