national check payments certification check products copyright© 2013 by the electronic check...

National Check Payments Certification

Check Products

Copyright© 2013 by the Electronic Check Clearing House Organization

NCP 2014 ExamECCHO Training Series

Session 9

March 27, 20142:00 pm ET (1:00 pm CT; 11:00 am PT)

All sessions 90-min.

2National Check Payments Certification

NOTICESThis training course may provide an introduction to or summary of various aspects of check payments and the legal and rules framework for check image exchange. Responsibility for compliance with image exchange rules, and/or the legal, operational and regulatory requirements applicable to check image exchange, remains at all times with the financial institution participating in check image exchange and/or the individual or company using a check image exchange service.

This presentation and the information contained herein is not intended as legal or compliance advice or recommendation to any person or company. This document could include technical inaccuracies or typographical errors and individual users are responsible for verifying any information found in this presentation and related “live” webinar or webinar playback. Financial institutions should consult with their legal counsel regarding legal and operational requirements applicable to any check image exchange program they may offer or in which they participate.

These program training materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO.

Copyright© 2013 by the Electronic Check Clearing House Organization(Certain contributed content subject to third party copyrights)


Session Overview

• Types of Checks• Check Products• Remote Deposit Capture• Check Conversion

–Common ACH SEC Codes


Types of Checks• Check: Defined in Regulation CC as a negotiable demand

draft– Defined as item in UCC– Eligible for image exchange and creation as substitute checks

• Cashier’s Check: Direct obligation of bank• Certified Check: Ordinary check presented by drawer to

Paying Bank for “certification”• Government Check: Instrument payable on demand and

drawn by U.S. government on itself – Generally regarded as checks, even though they are not

drawn on bank


Types of Checks

• Money Order: Draft purchased from financial institution, post office or sales agent to pay a debt or transfer funds

• Traveler’s Check: Payable on demand and drawn on or payable at or through a bank– Requires, as a condition of payment, a countersignature

by person whose specimen signature appears on instrument

• Payable-Through Draft: Drawn on issuer, not bank– Not an order on the payable through bank to pay

instrument– Designates bank to present draft to drawee for payment


Types of Checks

• Warrant: Issued by state or local government agencies–Treated as checks if payable on demand–Registered Warrants: Promise to pay (not a check)

Example: State of California issued registered warrants several years ago to pay state’s obligations

• Remotely Created Check (RCC)–Holder of account authorizes payee to draw check on

account but does not sign check• Substitute Check

–Negotiable instrument created by Check 21 ActProperly prepared substitute check is legal equivalent of

original item for all purposes


Non-Cash Item

• Item that would otherwise be a check, except that–A passbook, certificate or other document is attached– It is accompanied by special instructions

Such as a request for special advice of payment or dishonor–Consists of more than a single thickness of paper

Except a check that qualifies for handling by automated check processing equipment or

– It has not been preprinted or post-encoded in magnetic ink with the routing number of the paying bank

– It is a Foreign item


Remotely Created Checks• Checks created “remotely” by a payee, under the authority

of the account holder

• Defined in Reg CC– Warranty by BOFD established in Reg CC– Claim process through rules and OC 3

• Banks and customers manage risk– BOFD know your customer

• Perception all RCCs are fraudulent– Publicized cases in recent years with significant enforcement

and judgment amounts– Examiners have issued updates to regulatory guidance for RCCs

over the years


Remotely Created Checks• Legitimate reasons to create RCCs

–Created for consumer and corporate accounts • RCC commercial uses may include:

–Pre-authorized draftsPay a creditorBill payment services

–ACH administrative returns–Purchase item via telephone or internet–Collect return check fees

• Benefits of Remotely Created Checks (RCCs)–Economical–Fast clearing–Convenient –Same day posting


Apply Your Knowledge

• Can the Drawer Customer make this “Rule 8” claim for the Unauthorized RCC?

Rule 8 Claim

Intermediary / Collecting Bank Paying Bank

Payee / Company

Creates RCC with permission of

Payee to Pay Late Utility Bill to

Avoid Late Fee

IMAGEIMAGE

Deposit Statement

Note: Banks are all ECCHO Members

Remotely Created

Check (RCC)

Bank A – Has Authorization

(BOFD)

Unauthorized Remotely

Created Check

Drawer Customer


Apply Your Knowledge

• Unauthorized RCC: What two ways may be used to handle under ECCHO Rules?

Rule 8 Claim

Intermediary / Collecting Bank Paying Bank

Merchant Creates and

Deposits the RCC

IMAGEIMAGE

Deposit Statement

Note: Banks are all ECCHO Members

Remotely Created

Check (RCC)

Bank A (BOFD)

Unauthorized Remotely

Created Check

Drawer Customer

Unauthorized RCC

Adjustment

Adjustmentto

Bank A

Check Products


Check Products

• Lockbox Services• Account Reconciliation Products (ARP) • Controlled Disbursements• Image Cash Letter (ICL)• Remote Deposit Capture


Lockbox

• Lockbox Services–Bank or third party receives mail at a specified

post office box–Processes enclosed remittances–Deposits to Payee’s account–Benefits:

May allow for faster collectionInformation vehiclePayments concentration


Lockbox

• Types of lockbox services–Retail Lockbox – Characterized by large number

of relatively small dollar remittances usually from consumers

–Wholesale Lockbox – Characterized by small to moderate number of large dollar remittances usually from businesses


Account Reconciliation (ARP)

• Account Reconciliation Products (ARP) –Product dates back to when banks offered to reconcile

customer bank statement Initially banks offered fully reconciled statement of checks

paid and deposits madeThen banks sorted paid checks in check number orderNext customer notify banks of checks written and banks

supply statement listing activity, including checks outstanding

–Goal of productIncrease amount of information availableDecrease amount of work in company’s accounting dept.


Account Reconciliation (ARP)• ARP Services Provide Wide Range of Reporting

– Access to reports through automated means– Offered for multiple accounts / Schedule defined by customer

Daily, weekly, monthly• Range of Reconciliation Products

– Full ReconciliationCustomer provides bank data on checks issuedBank matches data against checks clearedCustomer receives reconciliation reports including checks paid,

outstanding items and exceptions – Partial Reconciliation

Customer receives report of items paid sorted by customer’s instructions– Deposit Reconciliation

Allows customer to maintain one accountHave deposits from multiple business locations


Account Reconciliation (ARP)• Positive Pay

– Automatically matches each check presented against list of checks issued

– Payee Positive Pay matches payee name from issue file to payee name on check

• Reverse Positive Pay– Bank sends that file to the company, where the company compares

the information to its internal records• Positive pay type services excellent fraud deterrent products • CD-ROM Products

– Banks may provide customers with check images via CDUsed by customers with large check volumes

– Banks index images for retrieval process– Service eliminates need to store paper checks

Reduces difficulty in retrieving checks for research


Controlled Disbursement

• Previously known as Remote Disbursement–Numerous changes to payment system and

regulations have impacted Controlled Disbursement

• Today – with increased speed of clearing checks, customers use Controlled Disbursement services to “control” information about amount to fund on each day



• Product provides customer with information early each day of total amount of checks that will clear–Customers fund account for amount of checks posted

that day–Early notification of day’s funding requirement

eliminates idle balances–Customers can invest surplus funds or obtain additional

funds, if needed–Money markets active and investment rates attractive in

morningShort term investment rates generally move downward late in

morning



• Benefits of Controlled Disbursement include–Reduction of idle balances–Timely notification of daily funds need–Increased interest income from short term

borrowing–Reduced borrowing costs

• Key benefit – Potential fraud reduction–Early information–Know what items are coming in to be posted

today against your account


Image Cash Letter

SENDING BANKTRUNCATING BANK

(BOFD) RECEIVING BANKCUSTOMER

IMAGECASH LETTER

DEPOSITCHECK

STORE CHECKS

Truncation: Stop processing of physical paper item(s) and forward electronic image(s) and MICR data

PAYING BANK

Image Cash Letter: Digital images of paper cash letter; includes both the MICR data record and the transmitted check images

Forward Collection

IMAGECASH LETTER


Image Cash Letter (ICL)

• Image Cash Letter (ICL)–File containing digital images of paper cash

letter–Includes MICR data records, indorsement

records and check images–Electronic cash letter structure with same

general information as paper cash letter–Formatted to industry standard X9.100-187

Contains and transports image and MICR data captured from paper check


Image Cash Letter (ICL)• Used to transmit checks between:

– Customers and banks– Banks and Federal Reserve

• May be offered as a product by banks to corporate / correspondent bank customers for delivery of check deposits to banks– ICL: Typically used for significant volume of checks

Sent to/from banks and processors– RDC: Typically used for smaller volumes of checks

Banks may used same terminology– Terminology – ICL originally used to differentiate between paper and

image cash lettersBanks have expanded usage Some banks used to define a specific product/service offeringSome use term generically


Image Cash Letter (ICL)

• Ideal for companies with centralized in-house receipt processing–Examples:

In-house lockbox at utility companyCorrespondent bank with in-house check processing

operations–Customer has ability to capture/transmit MICR data

and check imagesBanks offering product may:

o Require customer to create formatted file or o Provide customer with software to reformat o Accept the data for the bank to reformat


Image Cash Letter (ICL)• Benefits to customer

– Reduced transportation costs– Reduce or eliminate trips to deposit checks– More efficient back-office processing– Later deposit cutoff time allowing more checks deposited on day of

receipt – Faster return processing and notification due to faster initial

deposits and clearing– Secure, private and safe electronic connections with banks

• Cost savings to the customer– Consolidation of operations– Consolidation of reconciliation– Larger balances in centralized account– Elimination of multiple accounts and need to concentrate funds


Remote Deposit Capture

Customer pays Merchant with a paper check

1Merchant scans paper checks to create image file

2Merchant sends electronic file to bank for processing

3

• Branch Capture: Image capture of paper checks at a branch location (or capture at image-enabled ATMs)

• Corporate/Merchant Capture: Image capture of paper checks at a corporate customer’s location; Paper retention / destruction by customer

• Consumer Capture: Image capture of paper checks at a consumer customer’s location; Paper retention / destruction by customer


Remote Deposit Capture• Overview/Purpose:

– Remote Deposit Capture (RDC): Process of scanning and transmitting checks to service provider/financial institution to electronically capture deposit for clearing and posting

– Purpose: To speed up / electronify the deposit process by truncating paper early in collection process (at customer site)

• Financial Institution decisions may include:– Image vs. ACH– Vendor choice– Support for required training

• Customer Requirements can include:– PC with Internet connection– Check scanner– Service provider/depository bank– Mobile device


Remote Deposit Capture• General Benefits

– Reduced transportation time and costs– Increased processing efficiencies– Potential for consolidating relationships

• Benefits for Corporate Customers And Merchants– Accelerated clearings and better deposit availability– Convenience and enhanced cash flow– Reduced return item risk

• Benefits For Financial Institutions– Opportunities to expand customer footprint– Ability to offer new products– Customers with multiple locations can consolidate deposits into

one account– Customer can make deposits 24 hours a day


Remote Deposit Capture

• RDC Controls–Establish procedures to properly separate,

handle and secure physical checksAvoid accidentally reimaging the checksAvoid sending imaged check out in a paper cash

letterAvoid having checks stolen and mishandled

–Retention of original truncated checksCorporations need to decide which checks to keep

and retention period(s) based on risk tolerance


Remote Deposit Capture• Potential Risks

– Introduces new risks such as presenting duplicate items– Warranties protect against duplicates

ECCHO Rules, Reg CC, Federal Reserve’s OC3 and Regulation J– Similar risks for both merchant and consumer capture

• Risk Mitigation– Bank should have RDC customer agreements

Follow FFIEC Guidance– Follow “Know Your Customer” guidelines– Teller procedures to examine checks for stale dates or stamps or

other information indicating item previously “franked” or indorsedTeller training

– Utilize technology for duplicate detection and prevention


Remote Deposit Capture• Repair Considerations

– Must accurately represent entire MICR line• Issues

– Even with enhanced MICR reading software, manual keying by operators will occur

– Consider how MICR repair will be handled by merchants using RDC applications

– Make sure this is covered in agreements• RDC Agreements

– Bank pass back risks that are out of financial institution’s control back to customerDestruction of checksWarranty claims (encoding errors)Indemnity claims (better image or original item)


FFIEC Guidance

• FFIEC – Federal Financial Institution Examination Council Guidelines issued January 2009– Examination manual issued February 2010

• Addresses necessary elements of RDC risk management process in electronic environment– Focuses on:

• RDC deployed at customer location• Mobile banking• Automated clearing house (ACH) check conversions

– Review and understand FFIEC Guidance regarding agreements

Check Conversion

35

ACH “Check Conversion”

• Electronic debit to a consumer’s checking account that is initiated via check–Converted to an ACH transaction and processed

using the ACH Network–Governed by Reg E and NACHA Rules and other law–May be governed by check law (RCK)

• Examples covered in this section include:–ARC: Accounts Receivable Entries–BOC: Back Office Conversion–POP: Point-of-Purchase–RCK: Re-Presented Check Entries



Eligible for “Conversion”• Contain pre-printed serial number• Must not have been previously negotiated or voided• Have RT, account number and check serial number encoded

in magnetic ink• Must not contain Aux On-Us field• Amount of $25,000 or less

– Less than $2,500 for RCK• Be completed and signed by the consumer

– Required for ARC and BOC– POP: Check becomes “source document” / Returned to customer

• RCK – if previously presented:– No more than twice in paper form (if initial RCK); or– No more than once in paper; once as RCK if reinitiated as RCK– Two representments allowed; three total presentments


Ineligible for “Conversion”• Contain Aux on-us field in MICR line• Check payable to a person other than Originator (3rd party

check)• Draft that does not contain the signature of receiver (demand

draft / remotely created check)• Obligations of financial institution

– Travelers check, cashiers check, official check, money order• Check provided by a lender to access:

– Credit card account– Home equity line or other form of credit

• Checks drawn on an investment company• Government checks (state or local)• Check drawn on US Treasury, Federal Reserve Bank or FHLB• Checks in foreign currency

38

Notice Language

• “When you provide a check as payment, you authorize us either to use the information from your check to make a one-time electronic fund transfer from your account or to process the payment as a check transaction. For inquiries, please call <retailer phone number>.”–Note: Need <retailer phone number> for BOC only

• Notice language comes from Reg E


39

Accounts Receivable Entries (ARC)• Enables Originator to convert checks received via U.S. mail or

dropbox– Single-entry ACH debit for payment of goods or services

• Originator retains the check– No destruction timeframe

• Authorization: Prior to receiving check, Biller must provide notice to customer that receipt of check will be authorization for ACH debit– Check will be used as source document – MICR line information captured using MICR reader

Dollar amount can be key-entered• Retention: Check is retained by biller

– Secure storage until destruction– 2 year retention of copyNational Check Payments Certification


Utility Company(Mail or Drop Box)

ODFIOriginating Depositary

Financial Institution

MICR Data Sent to ODFI

Accounts Receivable Entries (ARC)Customer /Receiver

notified future utility bill payments may be coverted to ACH.

Customer mails the

next monthly bill payment to Utility Company/Drop Box

Checks Scanned / MICR Data Captured

ACH Debit ACH Debit

RDFIReceiving Depositary Financial Institution

ACH Network Operators(Fed or EPN)

Customer / Receiver

http://images.google.com/imgres?imgurl=http://wits.files.wordpress.com/2007/08/big-cloud.jpg&imgrefurl=http://witsblog.org/2007/08/20/cloud/&h=852&w=1280&sz=135&hl=en&start=3&tbnid=GnicSZoeMmovRM:&tbnh=100&tbnw=150&prev=/images?q=cloud&gbv=2&svnum=10&hl=en


Back Office Conversion (BOC)

• Allows Originators to convert checks to ACH debits during back office processing

• Checks accepted at point-of-sale, or manned bill payment locations– Creates single-entry ACH debit

• Authorization obtained via notice and receipt of check– Notice prior to the receipt of each check– Posted in prominent and conspicuous location AND – Copy of notice provided to Receiver at time of transaction

• Retention: Check is retained by biller– Retains source document for back office processing– Secure storage until destruction

2 year retention of copy


Back Office Conversion



ACH Debit ACH Debit



MICR Information Captured in Merchant’s Back office and sent to ODFI

Check presented in person at

merchant locationReceipt goes

backto Customer

Merchant/Originator

Consumer/Customer

NOTICE must be posted /

visible


http://images.google.com/imgres?imgurl=http://www.nomusicday.com/images/notice02.gif&imgrefurl=http://www.nomusicday.com/home.html&h=530&w=400&sz=37&hl=en&start=5&tbnid=uqLYwaIA_5c-9M:&tbnh=132&tbnw=100&prev=/images?q=notice&gbv=2&svnum=10&hl=en


43

Point-of-Purchase Entries (POP)

• Convert check received for goods or services at point of purchase or manned bill pay location

• Single-entry ACH debit transaction• Authorization: Originator obtains customer’s

written authorization–Customer may not revoke authorization–Copy of authorization, voided check, and receipt

must be given to customerShould indicate check will not be processed

• Retention: Originator keeps copy of authorization– 2 years following settlement date



Authorization Signed

“Check” and Receipt

handed back to Customer

Electronic Network

Point-of-Purchase Entries (POP)



ACH Debit ACH Debit



Check presented in person at

merchant location

Merchant/Originator

NOTICE must be posted /

visible

MICR Information Captured at Merchant’s

Cash Register

Sent to ODFI

http://images.google.com/imgres?imgurl=http://www.oag.state.tx.us/newspubs/releases/2006/010906receipt.jpg&imgrefurl=http://www.oag.state.tx.us/oagnews/release.php?print=1&id=1398&h=660&w=300&sz=34&hl=en&start=4&tbnid=V6uZSnSSVx7sbM:&tbnh=138&tbnw=63&prev=/images?q=receipt&gbv=2&svnum=10&hl=en




http://images.google.com/imgres?imgurl=http://www.oag.state.tx.us/newspubs/releases/2006/010906receipt.jpg&imgrefurl=http://www.oag.state.tx.us/oagnews/release.php?print=1&id=1398&h=660&w=300&sz=34&hl=en&start=4&tbnid=V6uZSnSSVx7sbM:&tbnh=138&tbnw=63&prev=/images?q=receipt&gbv=2&svnum=10&hl=en


Re-Presented Check Entries (RCK)

• Single-entry ACH debit entry replacing paper check after paper check returned for insufficient (NSF) or uncollected (UCF) funds–Consumer checks only, under $2,500

• Covered by NACHA rules and check law–UCC and Reg CC

• Number of Presentments–RCK entry can be presented one or two times

If only one previous check presentmento RCK entry can be transmitted twice

If two previous check presentmentso RCK entry can be sent only once



• Authorization–Originator must provide notice of RCK policy to

check writer before receiving check–Notice must clearly and conspicuously state

terms of RCK policy • Notice plus receipt of consumer’s

check constitutes authorization –Copy of check must be retained for 7 years

under check law



NSF check converted to

RCK

Bank of First Deposit / ODFI Paying Bank/RDFI

RCKto

Paying Bank


Merchant/Originator

NSF

Customer purchases goods and pays with

a check

(1)

(2)

(3) (4)




ACH Returns• ACH entry that RDFI is unable to post may be returned

– Reason for return, return codes and return deadlines listed in NACHA rules for all SEC codes

• For ARC, BOC, POP, RCK entries listed this section:– May be returned for any valid return reason– Timing: Generally, return must be available to ODFI no later

than opening of business on 2nd banking day following settlement date

– Extended Return Timeframe60-day extended return timeframe Written Statement of Unauthorized Debit (WSUD) required

• Common return reasons for e-check conversion SEC codes listed on next page

49

Return Time FramesReturnCode

Reasonfor

Return Description DeadlineWSUD Req?

R07 Authorization Revoked

For TEL, WEB entries: Customer who previously authorized an entry claims authorization has been revoked from the Originator by the Receiver 60 Days YES

R10

Customer Advises Not Authorized, Improper, ineligible, or part of an incomplete transaction

For ARC, BOC, POP, TEL, WEB entries: Transaction not authorized, wrong amount, debit date before authorization, incomplete transaction, or improper source document 60 Days YES

R37 Source Document Presented for PaymentSource document to which the ARC, BOC, or POP entry relates has been presented for payment. 60 Days YES

R38 Stop Payment on Source Document

ARC and BOC only. A stop payment order has been placed on the source document related to the ARC or BOC entry. 60 Days NO

R39Improper Source Document / Source Document Presented for Payment

RDFI determines the source document used for the ARC, BOC, or POP entry is not an eligible check or the source document was also presented for payment. 24 Hrs NO

R50 State Law Affecting RCK Acceptance

RCK only - RDFI is located in a state that has not adopted UCC 4 (1990) that requires cancelled checks be returned to the receiver.

Transmitted to RDFI's ACH Operator by midnight of the 2nd banking day following the banking day of receipt of presentment notice NO

R51

RCK Item is Ineligible, Notice Not ProvidedSignature Not GenuineIten Altered or Amount Not Accurately Obtained

RCK only - Item related to the RCK entry was not eligible, or Originator did not provide notice, or signature on the item was not genuine, or the item has been altered, or the amount was not accurately obtained from the item. 60 Days YES

R52 Stop Payment on RCK Item RCK only - Stop payment on item related to RCK entry. 60 Days NO

R53RCK Item and ACH Entry Presented for Payment

RCK only - both the item related to the RCK entry and the RCK entry have been presented for payment. 60 Days YES

RCK Entries:


Questions

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Quiz Questions

• Available online with session handouts• Review each question carefully

–Answer based on what’s been presented–Use additional recommended resources as needed

P.R.E.P. GuideQuestion of the DayOther online exam resources

–Answer Key included–Will review at start of next session

• Save weekly Quiz Handouts–Review Questions and answers–Will reference in Series Review sessions


Recommended Resources• FFIEC References:

– FFIEC - Retail Payment Systems Feb-2010: http://ithandbook.ffiec.gov/it-booklets/retail-payment-systems.aspx

– FFIEC – Supplement to Authentication in an Internet Banking Environment – Oct-2005: http://www.ffiec.gov/pdf/Auth-ITS-Final%206-22-11%20%28FFIEC%20Formated%29.pdf

– FFIEC - Supervisory Guidance for Remote Deposit Capture 1/14/2009: http://www.ffiec.gov/pdf/pr011409_rdc_guidance.pdf

• Regulation CC (12 CFR – Part 229): http://www.ecfr.gov/cgi-bin/text-idx?SID=0ed75d38896a339d9b5189ceb4ebe8b9&node=12:3.0.1.1.10&rgn=div5

• P.R.E.P. Guide EXHIBIT 4: ACH Check Conversion and Selected SEC Codes Overview

http://ithandbook.ffiec.gov/it-booklets/retail-payment-systems.aspx



http://www.ffiec.gov/pdf/Auth-ITS-Final%206-22-11%20(FFIEC%20Formated).pdf



http://www.ffiec.gov/pdf/pr011409_rdc_guidance.pdf



http://www.ecfr.gov/cgi-bin/text-idx?SID=0ed75d38896a339d9b5189ceb4ebe8b9&node=12:3.0.1.1.10&rgn=div5




Next Session

• Session #10: April 3– 2:00 pm ET (1:00 pm CT / 11:00 am PT)– All sessions – 90-minutes

• Topic: “Fraud, Risk and Risk Mitigation”– Will discuss:

Types of fraudFraud detection and preventionFFIEC Guidance

Thank You!

Check Products

Electronic Check Clearing House Organization3710 Rawlins Street; Suite 1075

Dallas, Texas 75219

NOTICEThis NCPC Program document contains copyrighted materials of its publisher.

These program training materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO.

Ellen Heffner, NCPDirector and Education Manager [email protected]

Phyllis Meyerson, AAP, CCMExecutive Vice President

pmeyerson@ eccho.org214-273-3202

national check payments certification check products copyright© 2013 by the electronic check...

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