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Check Facts. 1979: 85% of all cashless transactions involved checks 2000: 60% of all cashless transactions were by check 2000: Volume is huge. 50 billion checks written in the United States $8 billion per year spent on check processing and transportation. Check 21 Act Overview.
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Check Facts • 1979: 85% of all cashless transactions involved checks • 2000: 60% of all cashless transactions were by check • 2000: Volume is huge. 50 billion checks written in the United States • $8 billion per year spent on check processing and transportation
Check 21 Act Overview • New federal law • Takes effect 10/28/2004 • Designed to increase the efficiency of the check processing system and reduce costs and make it less susceptible to 9/11 type delays • Will affect all financial institutions and their customers, as well as investigators and prosecutors
The Check 21 Act -- Overview • Check 21 allows (but does not require) any party in the chain to truncate any check (business or commercial) and convert it to an image • “Truncate” means to remove an original paper check from the check collection or return process
Overview • What happens next? • It depends . . . • If the next party in the chain agrees, an image can be sent • If the next party doesn’t agree to accept an image, a “substitute check” is created and transmitted
On checks customers write • The payor bank: • May get the original check back; • May get a copy of an image • May get a substitute check
Substitute Check • a paper reproduction of the original check that- (A) contains an image of the front and back of the original check; (B) bears a MICR line containing all the information appearing on the MICR line of the original check. Will show the routing number of the truncating bank and the number of the bank creating the substitute check.
Substitute Check • A substitute check that meets all the criteria in the law is the legal equivalent of the original for all purposes under state and federal law. • In any given case, a substitute check may be all that’s available for investigation and prosecution . . . • Under the new federal law, party must accept a substitute check.
Substitute Check • When some other party in the chain truncates a check a customer has written – and it can be any bank in the chain – a substitute check will be the only paper form of the check anyone can insist upon receiving.
Net result . . . • Whether customers can get all their original checks back is out of the paying bank’s control (the party that truncates keeps the original and can destroy it after a period of time). • The length of time the original must be kept is NOT set by law. It will be set by clearinghouse rules and other agreements.
If people insist on paper . . . • If a party needs to have an image reconverted to a substitute check, you’re back to paper; • With a substitute check, you have most of the inconveniences of dealing with the original, plus some of the security features are lost
Check 21 • Doesn’t mandate truncation; it permits it • Doesn’t require any party in the chain to accept an image, but allows them to do so by agreement • Lays the groundwork for image presentment and exchange – and that’s where the REAL benefits will be seen for fraud prevention/reduction
Check 21 • If image exchange and presentment catches on, checks can move through the check collection and return system more quickly and fraud will be caught, in many instances, at an earlier point in time – hopefully before losses occur.
Impact of Check 21 • If parties insist on a substitute check, the upside of the new law will be minimal – we’ll only see the downside to the greatest extent. • If parties engage in image presentment and exchange, there are some major benefits. • Paper moves slowly. Digital information moves instantly and is easier to process store, search, retrieve.
F R A U D • Substitute checks could be altered, counterfeited, duplicated • Some of the characteristics of a physical check that aid investigators are obviously lost when it’s converted to a copy (ability to do ink analysis, some aspects of handwriting analysis, etc.) • Security features embedded in paper checks will not survive imaging (such as paper-based watermarks, micro-printing)
Paper check security features • Who looks at them? • Who really benefits from them? • How often are they really used? • How often is ink analysis or handwriting analysis, or fingerprint retrieval from a bad check actually used in investigation/prosecution?
Some security features still work • Toner anchorage • Chemical reactive paper • Other measures to protect against alteration
New security options • Seal encoding – invisibly stores data within issuing bank’s logo or in other area. Designed for digital reading. • Electronic positive pay – can OCR payee and check signature • Digital watermarks – being explored for use by Treasury • Digital bar codes
What’s the problem? • When we’re processing paper checks, banks often don’t learn whether the check is good or not until AFTER they’ve already given funds availability. • Counterfeit payroll checks • Counterfeit cashier’s checks • Bogus checks used in connection with new account fraud • Image presentment/exchange will help reduce that disconnect and protect customers and financial institutions.
With image exchange/presentment • Checks can be truncated at the point of deposit; • Images can be transmitted immediately; • Software can be used to determine if the check has an obvious problem (nonexistent account, closed account, etc.)
Thumbprint signatures • Typically not image survivable • If on merchant checks, no control over whether the item will be truncated • When cashing on-us items for noncustomers, banks might want to consider segregating items and delaying destruction
Challenges and decisions • We’re all in this together • The law takes effect 10/28/04, whether we like it or not • Although there are issues that will arise from not being able to obtain original paper checks, there are also some aspects of fraud prevention that will be enhanced by use of images
Challenges and decisions • What is a feasible length of time for truncating financial institutions to retain images? • What challenges do law enforcement and prosecutors see stemming from the new law? • Truncating financial institutions will need to secure the originals to keep them from being used twice.
Things to think about • The fact that Check 21 doesn’t include standards for imaged items; • The fact that some types of ink, some types of checks, don’t image well;
How will it all shake out? • Remains to be seen. • Probably will be fraud schemes we haven’t even contemplated yet. • Image presentment and exchange – like the early days of fax machines. The more people who had one, the more valuable one was. • Stay tuned . . .