Check Clearing for the 21 st Century Act Presented by Jennifer Ford

1. Check Clearing for the 21stCentury ActPresented by Jennifer Ford

2. Introduction • Who uses Internet Banking to pay bills? • Can you see an image of the checks you wrote? • Internet Banking and Check 21 are related because many of us wouldn’t have access to images if it weren’t for Check 21

3. Current Banking Environment • An estimated 42.5 billion checks are processed in the U.S. every year • Banks spend $6-8 billion per year to process checks • Strong reliance on air and ground traffic for physical transportation of millions of paper checks between banks every day • Events of September 11th underscored the vulnerability of the current U.S. payment system ($47 billion in check float)

4. Shift from Paper to Electronic • Paper checks increasingly converted into electronic transactions • Processing volume expected to decrease by more than 5% per year from 2002-2006 (then 9% every year thereafter)

5. Costs due to Shift • Cost of processing paper checks will rise exponentially • Less checks, higher costs per check

6. Processing Checks Today Intermediary Operating Center Paying Bank Branch

7. What is Check 21? • Legislation sponsored by the Federal Reserve Bank • Facilitate check truncation (remove original paper) • Foster innovation in the check collection system without mandating receipt of checks in electronic form • Improve the overall efficiency of the U.S. payments system • Signed into law on October 28, 2003 and will become effective on October 28, 2004 • Legislation states that an Image Replacement document (IRD) is a legal substitute document for a check

8. Background • In 2000 – Fed Reserve Board Staff began investigating a concept of Default Check Truncation Rules – now Called Check 21 • Enable bank to substitute machine-readable copy of check (“substitute”) for the original • Substitute checks would be legal and practical equivalent to original* • ECCHO (Electronic Check Clearing House Org.) and other banking organizations monitored the process and provided input • All segments of the banking industry strongly supported the act and have worked together to achieve passage

9. Substitute Checks / IRD • New instrument created from electronic check image • Legal equivalent of original check • Conforms to industry standards: machine readable and would bear MICR line • Processed the same as original checks – not significantly affecting operations of bank that do not participate • Minimizes the impact of check imaging on institutions and those customers who wish to continue to receive paper

10. ENDORSE HERE: FOR DEPOSIT ONLYFIRST UNION NATIONAL BANKACCOUNT 1234567890123NORTH POLE, INC. *123456789* 01/04/2002123456789012345 [053000183] 01/03/20021800539446 >031000011< 01/02/20027815830233 DO NOT SIGN / WRITE / STAMP BELOW THIS LINEFOR FINANCIAL INSTITUTION USAGE ONLY Back  Do not endorse or write below this line.  Substitute Checks / IRD *123456789*01/04/2002123456789012345 This is a legal copy of yourcheck. You can use it the same way you would usethe original check. Front [053000183] 01/03/20021800539446 VOID – IRD TEST SAMPLE 0145 B0000029545B

11. After Check 21 Image or Image IRD Operating Center Intermediary Image PayingBank Branch

12. What’s Wrong with Check 21? • Standards for IRD but not for actual Images • Customer’s haven’t been informed of how it will impact them My opinion: • Smaller banks may fail if they don’t invest in technology to take advantage of Check 21

13. Larger Banks Have an Advantage

14. Conclusion • Watch for possible increased bank failures due to this new technology • Banks with image-enabled systems will lower costs and therefore have an advantage • Questions?