Check Clearing for the 21st
Century Act
Presented by Jennifer Ford
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
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)
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)
Paper Checks on the Decline
32.849.5 42.5
0
2040
60
1979 1995 2000
Year
Vo
lum
e p
er
bill
ion
Check
Retail ElectronicPayments
Debit Card
Costs due to Shift
Fed Check Processing Costs per check
1995 2000 2005 2010 2015
0.04
0.056448
0.079305376
0.111418343
Fed Check ProcessingCosts per check
Cost of processing paper checks will rise exponentially
Less checks, higher costs per check
Processing Checks Today
Intermediary Paying Bank
Branch
Operating Center
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
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
Substitute Checks / IRD
New instrument created from electronic check image
Legal equivalent of original checkConforms to industry standards: machine
readable and would bear MICR lineProcessed 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
Substitute Checks / IRD
Front
This is a legal copy of yourcheck. You can use it the same way you would usethe original check.
*123456789*01/04/2002
123456789012345
[053000183] 01/03/20021800539446
VOID – IRD TEST SAMPLE
Do not endorse or write below this line.
>031000011< 01/02/2002
7815830233
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[053000183] 01/03/2002
1800539446
*123456789* 01/04/2002
123456789012345B
ack
After Check 21
Paying BankIRDImage Intermediary
Branch
Operating Center
Image
Imageor
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
Larger Banks Have an Advantage
Unit Cost to Process Checks
0
0.02
0.04
0.06
0.08
0.1
0.12
1Co
st
to p
roce
ss
eac
h
che
ck
Current
Current withIRD
Day 1 with IRD
Day 1 and Day 2
Market Share in Atlanta Fed DistrictWachovia Bank National Assn.
Bank Of America NA
SunTrust Bank
Branch Banking & Trust Co(BB&T)Southtrust Bank
Regions Bank
AmSouth Bank
Washington Mutual Bank FA
National Bank Of Commerce
Branch B&T Co Of Virginia
Capital One FSB
First-Citizens Bank & Trust Co
E*Trade Bank
Capital One Bank
RBC Centura Bank
Colonial Bank
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?