Delivering on the ARC and Check 21 Promise

1. Delivering on the ARC and Check 21 Promise Tom Kettell Vice President, Marketing RDM Corporation

2. Monumental shift in thepayments landscape

3. Bank Lockbox Bank Lockbox Clients In-House Lockbox Internal Lockboxes and Third-Party Lockbox Providers Agent/Branch Deposits Point-of- Payment Collections, Drop Box Payments, Low-volume Lockbox, Route Collections Bank/Regional Sites Fed/Local/Regional Clearinghouse Paying Bank The Transformation fromPhysical to Virtual Physical Items

4. Electronic Bank Lock Box Agent/Branch Electronic Deposits Customer In-House Electronic Lock Box Bank/Regional Sites ARC System ECP/IRDs Fed/Local/Regional Clearinghouse Paying Bank Fed/EPN/ Visa Fed/ECCHO Optimized Items, ACH (POP/ARC) or IRD/ECP The Transformation fromPhysical to Virtual Physical Items

5. Channel Proliferation • Walk in payments – • Distributed Locations • Drop Box • ARC • Substitute Check • Image Exchange • Mail in payments – • Centralized Locations • Lock Box • ARC • Substitute Check • Image Exchange • Point of Purchase • Face to face • POP • Substitute Check • Image Exchange

6. ARC, Check 21, & Image Exchange ARC • Permanent rules established in March 2003 • Convert consumer checks received through U.S. Postal Service or drop box into ACH debit transaction • Business/Corporate checks are not eligible for conversion • Notice = Authorization • Major Adoption: 2.3 billion transactions in 2005est. Check 21 • Enacted in October 2004 • New legal instrument called a substitute check • All checks (except checks drawn on foreign bank) are • eligible • Foster innovation in the check payment system without mandating receipt of checks in an electronic format • Is not image share/exchange

7. CHECK CHECK Check 21–Example le CHECK PAYINGBANK INTERMEDIARY BOFD Compared to CHECK IMAGE INTERMEDIARY IRD PAYING BANK BOFD

8. So what is a Substitute Check?

9. CHECK CHECK Image Exchange–Example le CHECK PAYINGBANK INTERMEDIARY BOFD Compared to CHECK IMAGE IMAGE INTERMEDIARY PAYING BANK BOFD

10. Benefits of Check Electronification • Faster returns processing • Fraud reduction • Faster collection • Reduction of processing costs • Possible float gains

11. The Numbers

12. Source: 2004 Federal Reserve Payment Study FRB - Number of Checks Paid in 2000 and 2003

13. As Check Volume Declines the Number of Payments Increases Payments Growth Continues as Check Volumes Decline Source: 2004 Federal Reserve Payments Study

14. The Pricing Dynamic Source: Federal Reserve. Compiled by NACHA ­The Electronic Payments Association

15. Check Electronification is Growing Even as Check Volume Declines

16. ACH e-Checks Continue to Experience Double Digit Growth 2004 2003 2002 2001 Source: NACHA

17. Growth of ACH e-Check Entries Source: 2004 Federal Reserve Payments Study

18. Check 21 has Fostered Change and Significant Opportunities

19. In June 2005, processed 16.7 million items through Check 21 services - 75% deposited via ICL All were converted to substitute checks for presentment Peak day: 1.3 million items worth $12.8 billion ($10,000/check) FedReturn volume averaging 25,000 items/day Check 21 – First Nine Months Federal Reserve Experience

20. Industry Concerns Check 21 • Confusion between Check21 & Image Exchange • Multiple Collection Strategies to Consider • Pricing Questions • Unproven Process • Liability for Image Quality? Where should that be placed? • Other forms of non-cash payment may be less costly • Credit/Debit Cards • Automatic Debits & ACH • Returns Process with Substitute Checks is Still Being Refined

21. Check 21 - The Lighter Side

22. Suze Orman Speaks Out How the New Check 21 Law Affects You Check It Out: New Banking Law Soaks Consumers Any civics teacher looking for a glaring real-life example of Congress listening to lobbyists and forgetting about we the people need look no further than the new "Check 21" law that kicked into action in late October. In a big fat wet kiss to the banking industry, Congress has authorized electronic processing of all the personal checks you and I write, meaning banks no longer have to physically exchange checks with each other before they take the money out of our accounts. That cuts the processing time down from a few days to as little as a few hours. One industry group estimates the faster processing will save banks $2 billion a year in administrative costs. It's a lot cheaper to zap checks electronically to each other than to deliver them by train, plane, and truck. I'm all for efficiency, but surprise, surprise, there's absolutely no provision that requires one penny of that savings to be shared with consumers in the form of lower fees. Worse, there's a good chance this new bill is going to end up costing a lot of us a bunch of money. Because our checks are clearing so much faster, consumer watchdogs predict that there is also going to be a barrage of bounced checks flying through the system, further boosting the bottom line of the banks at the expense of our wallets.” “…banks no longer have to physically exchange checks with each other before they take the money out of our accounts.”

23. Check 21 - Lessons Learned • Supporting infrastructure works • Some challenges, but electronic file movement and substitute check printing has been successful • The need for substitute check printing and transportation will delay the full realization of the cost efficiencies associated with image clearing • Many financial institutions will continue to rely on paper presentments until they can reengineer back office processing • Controls in Place for Double Posting • Duplicate Items – Safeguarding from the double post • Updating procedures and best practices to reduce double postings • Corporate • Financial Institutions • Fed

24. Image Exchange The Future of e-Check Payments?

25. Image Share/Exchange • Design • Development • Testing • Agreements • Pilots • Operating Rules • Lessons Learned • Validate Assumptions • Vet out Risks • Modify Controls First Comes the Plumbing

26. Image Share/Exchange • Product Offerings • Image Receive • Image Send • Return Integration • Exceptions Management • Controls • Settlement • Reporting • Pricing • Deadlines • Availability • Support Then Comes Product

27. Half of Banks Choose Image Exchange Even at 10% Cost Premium Banks Who Would Choose Image Exchange if... Source: Global Concepts, Inc.

28. Billers Will Stay with ARC Until Image Exchange is Cheap / Available Billers Who Would Choose Image Exchange if... Source: Global Concepts, Inc. Note: 34% of Billers “Don’t Know” at what point they would choose 100% image exchange. It’s still a relative unknown.

29. The Payments Convergence

30. Business Case for The Payment Convergence • Can you achieve 100% electronification • Will Image Share/Exchange ever become ubiquitous? • When will critical mass be achieved? • Payback period (in a declining check volume market) • How do you value float (Fed Funds, Prime Rate or Cost of Funds)? • Assumptions: Are they accurate? How do you validate?

31. Business Case for The Payment Convergence – cont. • Reduced banking fees, accelerate availability, and reduce operational costs • Must stage benefits according to when products evolve • Concentration of funds / process (reduced endpoints) • Returns automation/consolidation • Concentration allows you to leverage remaining volume for discounts • Substitute Checks are expensive • Are a means to an end!

32. Source: The Forrester Group The Future of Check Clearing • The Projection • ACH check electronification and Image Exchange will run parallel and at par in the short term • 6 to 10 years from now, Image exchange will generate the most activity significantly reducing paper checks • ACH and Check 21 combined, accelerate check electronification

33. Remote Capture, Electronic Deposit . . . … going beyond an automated drop-box . . .

34. Impacts of Check Electronification • Increase funds availability, better cash forecasting • Electronically deposits all checks to company’s account next business day, providing faster collection and faster notification of returned entries • Reduced number of return items • Electronic debits typically post before checks, resulting in more items clearing on first presentment • Automate and accelerate return item processing • ACH provides early notification of return items, carrying deposit location identifier • Immediate or delayed re-presentment of returns • Does not require consumer behavioral change • Reduce or eliminate local depository accounts • Fewer accounts to reconcile, reduced bank fees, elimination of cash concentration costs • Simplification of reconciliation of remaining accounts • Reduce labor and check processing costs • Eliminate check deposit preparation • Decrease deposit transportation charges and check float

35. Case Study | U.S. Treasury The U.S. Treasury’s Financial Management Services division and the Federal Reserve Bank of Cleveland needed a paper check conversion solution that could be deployed to all agencies • Had to support a highly distributed network of approximately 200 agencies ranging in size from 1 to 1000s of locations. • Had to be scalable (future volumes could be large) • Had to be robust (e.g. Army installations) • Had to be flexible (Variety of agency specific needs) • Had to be secure (Government – Army, Air Force, IRS, etc) • Had to be very easy to use (remote locations, minimal training)

36. Case Study | U.S. Treasury Germany, Belgium, Bosnia, Kosovo Military Bases Singapore, Korea Military Bases Qatar, Kuwait Military Bases United States Patent &Trademark Offices IRS DECCA (Military base stores) & other agencies

37. FRB Dallas Archival ACH Processing Verification Database Local Verification Update From Main Database in Dallas Daily https Transmissions Images & Transaction Data Case Study | U.S. Treasury

38. Case Study | Municipality • Tax payments, user fees, recreation registrations, fines, publications • Can have consistent or different rules bases across all offerings of the municipality • Benefit from later cut-off times allowing capture in evening (e.g. recreation, outdoor events) • Benefit from time savings in taking deposits to bank • Need for multiple ways to accept payments – including remote channels

39. Case Study | Insurance Company • Significant volume of walk-in payments at multiple branch locations • 16% - 17% of all payments are walk-in or mailed to the branch location • Desire to improve the check handling efficiencies at the branch location • Desire to improve float position • Desire to reduce deposit accounts • ACH non-eligible (business checks, money orders, convenience checks) and cost structure for equipment for large number of locations caused challenges for ARC-only

40. Comprehensive Check Electronification Platform Planning for the Payments Convergence • Off-Premise cash letter (customer lockbox) • Distributed payment capture (drop box) • Person present • Two models to choose from • ASP model – faster time to market with little to no capital investment • Enterprise model – longer implementation times and requires large capital investment and on-going management • Supports ACH, Paper Draft (traditional and substitute check), and Image Exchange initiatives • Consistent rules base across multiple touch points of presentment • Provides a consistent customer experience • Basic remittance capabilities – scanning remittance coupons for decisioning • Can scan multiple coupons and multiple checks

41. ODFI Modem Banks Retail POS locations(terminal-based) Lockbox Planning for the Payments Convergence Internet (ISP) https

42. Delivering on the ARC and Check 21 Promise Tom Kettell Vice President, Marketing RDM Corporation www.check21solution.com