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Transcript of National Check Payments Certification Check Fundamentals and Check Processing Copyright© 2014 by...
National Check Payments Certification
Check Fundamentals and Check Processing
Copyright© 2014 by the Electronic Check Clearing House Organization
NCP 2015 Exam CycleCore Training Series
Session 1
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© 2014 by the Electronic Check Clearing House Organization(Certain contributed content subject to third party copyrights)
3National Check Payments Certification
NCP Exam Registration Reminder
Register with ECCHO
online at: store.eccho.org
View detailed exam info
at: www.eccho.org/ncpc
• Free study aids upon registration:– P.R.E.P. Guide: 300+ pages of information,
training guide, sample exam– Question of the Day: Summary available now
New daily question & detailed study answer delivered via email beginning January 2015
– NCP Roadmap – Direction on establishing study plan
– JumpStart Reading Program – Links to all references
• Exam Fees: $400 ECCHO member $500 non-ECCHO member
– Not sure about membership?Check current status at:
http://www.eccho.org/membershipso Enter name in search box on left
4National Check Payments Certification
Session Topics
• Check Basics–Definitions–MICR line
• Need for Rules–Paper vs. Image Exchange
• Check Payments System Overview• Other Payment Systems
Check Basics
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General Check Definitions• Section will cover common definitions related to the check including:
– Bank (general definition)Depositary BankCollecting BankPaying Bank (also called “Drawee” in the UCC)
– Drawer– Payee– Amount
Courtesy AmountLegal Amount
– MICR lineSelected MICR line fields
• Other definitions discussed in subsequent sessions related to specific topics
• For additional definitions, see 2015 NCPC P.R.E.P. Guide section titled “Glossary of Terms and Common Acronyms” – Available upon registration to all 2015 NCP exam registrants
7National Check Payments Certification
Bank
• Bank: Reg CC definition – Expedited Funds Availability (EFA) Act uses the term depository institution –Reg CC uses simpler term “bank”
Definition includes ALL depository institutions as defined by both the: o FDIA – Federal Depositary Insurance Acto FCUA – Federal Credit Union Act
– Includes:Insured commercial bank;Insured credit union;Mutual savings bank;Savings and loan association; orAgency or a branch of a foreign bank as defined in the
International Banking Act
8National Check Payments Certification
Blank Check Example
Basic Consumer Check
9National Check Payments Certification
Parts and Parties to the Check• Paying Bank: Bank by which check is payable, to which it is sent for
payment or collection– Federal Reserve Bank (FRB) / Federal Home Loan Bank (FHLB) by which check
is payable; or– Bank through which a check is payable, if check is not payable by a bank; or – State or unit of local government on which a check is drawn and to which it’s
sent for payment or collection
• Drawer: Person ordering payment; Person signing the check• Drawee: Bank / person ordered to pay the check• Depositary Bank: First bank to which check is transferred even though it
may also be Paying Bank of payee (Reg CC definition)– Depositary Bank or Bank of First Deposit (BOFD) and Paying Bank may be the
same bank for on-us items
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Parts and Parties to the Check
• Correspondent Bank: May conduct business transactions, accept deposits and gather documents on behalf of other financial institutions (respondents)
• Collecting Bank: Any bank handling a check for forward collection, except the Paying Bank
• Amount – UCC 3-104 requires a fixed amount for the item to be a negotiable instrument– Amount should appear twice on the check to help inhibit check
fraud– Both in numbers and words
Courtesy amount (or convenience amount) – Amount in numbersLegal amount – Amount in words
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Processed Check – Front
12National Check Payments Certification
Processed Check – Back
Indorsers Depositary BankD
O N
OT
WR
ITE,
STA
MP
OR
SIG
N B
ELO
W T
HIS
LIN
E
EN
DO
RS
E H
ER
E
13National Check Payments Certification
What is MICR?
• Magnetic Ink Character Recognition (MICR)–1956–Descriptive information comprised of numbers and
symbols–Magnetic ink printed characters that can be
recognized at high speed by automated processing equipment
–E-13B Font – Used in magnetic ink printing in USA, Canada and several other countriesConsists of ten numeric characters and four symbols
–MICR line at the bottom of physical check
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123.45 One hundred twenty-three and 45/100
– External Processing Code FieldOptional
Account Number and
Serial Number
12-5-09
Payee’s Name
Drawer’s Signature
ABA Routing Number- 9 digits, no spaces- bounded by transit symbols
DRAWER NAMESTREET ADDRESS
CITY, STATE
MICR Line of a Check
• Six-inch check–Generally used for consumer checking accounts
10 DIGITS
1 digit
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MICR Line
• Key Fields – Six-inch check–Amount
10 digit field–On-Us
Drawer’s account number Check serial number
–Routing NumberABA assigned routing number for Paying Bank
–EPC – External processing codeOptional, single-digit field
o Provides information for handling or routing of check/check data to financial institutions and other processors
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123.45
Aux On Us Field: Can optionally include serial number or other transaction or product code
12-5-09
One hundred twenty-three and 45/100Payee’s Name
MICR Line of a Check
• Large check (longer than six inches)–Generally used for business checking accounts
Drawer’s Signature
17National Check Payments Certification
MICR Line
• Key Fields – Business-sized check–Same fields as smaller six-inch check–Includes Aux On-Us (optional field)
To the left of the Routing Field on the MICR line–Used on commercial checks for
Consecutive serial numbers; orAccount control information; orProduct codes/information
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Routing Number
• Used for all financial institutions in the U.S.• Each FI has a unique number
–Some have more than one• Two forms are currently used:
–MICR form–Fractional form
• Both forms appear on most checks, although only MICR form is used in automated item processing
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Routing Number – MICR Form• Called the ABA Routing Number
–May be referred to as:ABA NumberRouting Transit (RT)Routing Transit Number (RTN)
– First two digits designate Fed District location of Paying Bank and Type of Institution– 3rd and 4th digits represent specific Fed bank or branch serving paying institution– 5th through 8th digits are ABA number for paying institution– 9th digit is RT number validation (Check digit)
Federal Reserve Routing Symbol (4 digits)
ABA Institution Identifier (4 digits)
Check digit (1 digit)
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Routing Number – Fractional FormNumerator includes a city (1-49) or state (50-99) prefix followed by the ABA institution identifier
• Denominator is the Federal Reserve Routing Symbol
• ABA and Federal Reserve numbers match corresponding numbers in MICR form without leading zeros
• Additional letters or numbers may be printed if paying bank wants
• May be printed in one of two forms as shown91-03/1221
91-03 1221
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Example: Fractional RT
• ABA routing number: 122100037
• In MICR form, shownon check’s MICR line:
91-03/1221
22
Example – Fractional RT
122100037
91
0003
1221
• To convert to fractional form• ABA routing number: 122100037
– Drop check digit - last number in ABA routing number
– Pick-up city or state prefix Assigned by ABA
– ABA institution identifier Drop leading zeroes Separate with dash “ – “
– Federal Reserve routing symbolSeparate with slash “/ ”
12210003
91-91-0391-03/1221
91-03/1221
Need For Rules
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Clearing Paper ChecksUCC & Reg CC Provisions[Statutory and Regulatory]
BOFD
UCC, Reg CC & Payee’s Deposit
Agreement
Paying Bank Drawer
Payee (Merchant)
UCC, Reg CC & Check Writing
Agreement
UCC & Reg CC & Correspondent Agreement
Paper Check
Paper Check
Paper Check
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Paper Check Law
• Applicable Laws and Regulations–Impose warranties on financial institutions when
transferring and presenting checks–Together with case law form boundaries for
most aspects of check processing• Complemented by large body of court
interpretations–Provide guidance and understanding in check
payment disputes
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Recognized Role of Rules
• UCC [4-103(b)]–Recognizes role of check clearinghouse rules and
Federal Reserve Operating CircularsMay set forth additional provisions for paper check
collection by financial institutions• Reg CC [229.37]
–Recognizes role of check clearinghouse rules and Federal Reserve Operating CircularsMay vary some provisions of laws and regulations
oHowever may not fail to act in good faith or exercise ordinary care
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Not Covered Under UCC or Reg CC
Key Considerations:– Are the images authorized payments?– When does legal presentment occur?– Can the images be dishonored?– Who is responsible for duplicates?– Who is responsible for data security?– What are the rights of the payee and drawer?
BOFD Paying Bank
DrawerPayee
(Merchant)
IMAGE
What Rules or Agreements Apply?
Remote Deposit
IMAGE IMAGE
What Rules or Agreements Apply?
What Rules or Agreements Apply?
Clearing Images
28National Check Payments Certification
UCC Updates
• UCC anticipated electronic check truncation/ image exchange –1990 revision (§4-110) permits electronic
presentment of items pursuant to an agreement for electronic presentment
–Agreement may be in the form of: Check clearing house rules and/or Federal Reserve regulation or Operating Circular
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What Did Check 21 Do?
• Designed to encourage check truncation by removing key barrier to truncation–No longer required to obtain agreements from all
parties to the transactionProvides for replacement of paper check with substitute
paper checkAllows unilateral decisions to truncate checks
• Does not mandate the receipt of electronic (image) transactions–Only applies to the substitute check
• Encourages image exchange–Use image technology to create substitute check
30National Check Payments Certification
Paper Check vs. Images
• Regulations vs. Rules–UCC and Reg CC provide statutory and
regulatory definitions for a paper check, – but. . .
• No default definition of image in current check law
• Where is the image of a check defined?
31National Check Payments Certification
Need for Rules
• There Are No Laws To Cover Exchange of Check Images–Exchanging images in the absence of
agreements exposes financial institution to an indeterminately large amount of riskPotential for consequential damages
• Check Image Exchange–Need agreements for exchanges through:
Federal Reserve or Private sector
32National Check Payments Certification
Exchange Channels and Rules
• Warranties/Indemnities Come From Different Sources– Federal regulations– State Laws– Rules and agreements
• To determine what rules apply, is the item:– Original physical check, a substitute Check (IRD), or an image
• For images, determine the presentment/clearing channel– Through the Fed – Reg J and OC3 apply– Through a clearinghouse – clearinghouse rules (i.e. ECCHO)– Direct bank to bank (Clearinghouse rules or agreements)
• Generally, warranties start at first bank that deals with substitute check or image
33National Check Payments Certification
Check Rules and Regulations
• Federal Reserve Regulations–Regulation J
Subpart A: Collection of Checks and Other Items by Federal Reserve Banks
• Image Rules–FRB Operating Circulars
OC 3: Collection of Cash Items and Returned ChecksOC 5: Electronic Access
–Private sector clearing house rules (such as the ECCHO rules)
• Rules and regulations will be discussed in detail in other sessions
34National Check Payments Certification
Check Rules and Regulations
• Uniform Commercial Code (UCC)–Developed with efforts towards uniform laws for sales
and other commercial transactions in all 50 states–Detailed Code Addressing Most Aspects of
Commercial LawSet of standardized state laws that govern financial
contractsEstablishes general duty standards for parties to act in
Good Faith and exercise Ordinary Care–Organized as Articles
Each deals with a different subject areao Article 3 covers negotiable instrumentso Article 4 cover bank deposits and funds transfers
35National Check Payments Certification
Check Rules and Regulations
• Code of Federal Regulations (CFR)–Codification of the general and permanent
rules published by the executive departments and agencies of the Federal Government
–Title 12 - Banks and BankingPart 229-Availability of Funds and Collection of
Checks (Regulation CC)–Reg CC implements legislation relative to:
Funds availability (EFAA)Substitute checks (Check 21 Act)
36National Check Payments Certification
Eliminating Barriers to Image
• Prior to Check 21–Number of barriers made transition from paper
checks to electronic check payments slowDifficult to accept and implement
–To truncate paper check and replace with image, all parties with interest in check had to agreeWith thousands of FIs and millions of customers,
task was impossibly large
37National Check Payments Certification
Image Exchange
• Today – Items defined as “checks” under Reg CC and “items” under UCC eligible for image exchange– Covered by Fed OC3 and private sector rules such as
ECCHO’s rules• US savings bonds now transmitted via image exchange• Noncash items not eligible for exchange
– ECCHO Rules permit “imperfect image” to be exchanged• Foreign items currently not eligible
– Canadian items for image exchangeECCHO-hosted subcommittee discussing topic
o Canadian Payments Association (CPA) and Canadian banks participating Updates being discussed for ECCHO Rules
o Goal: Facilitate image exchange of Canadian items within U.S. prior to delivery to Canadian financial institution
Check Payments System
39National Check Payments Certification
Check Collection Process
Corporate Payor
Clearing Banks /Correspondent
Paying Bank
FederalReserve
Bank of First Deposit(BOFD)
On-Us Items
Individual Payee
Merchant or
Corporate Payee
Individual Payor
or
“Day in the Life of a Check” Forward Collection
Image
Image
Image Image
Image Image
Image
40National Check Payments Certification
Clearing Payments
• Various channels to move payments through system to final collection–May use clearing bank, correspondent or Fed
to present to Paying Bank–Depositary Bank wants to collect funds quickly
and at reasonable cost• Depositary Bank collects funds it has
provisionally credited to its depositor’s account
41National Check Payments Certification
Clearing Payments
• Clearing – Exchange of payment instruction data between financial institutions –Moves checks from banks where they are
deposited to banks where they are drawn• Clearing process includes:
–Data collected from multiple transactions–Sent to FIs core processing system–Affects accounts of the FI’s customers
42National Check Payments Certification
What is Settlement?
• Settlement – Exchange of value between financial institutions for payments–As shown in previous example:
“Clearing” involved exchange of payment instructions (data) between two financial institutions
–Settlement: Exchange of fundsSeparate event based upon agreement between
the two exchanging parties
43National Check Payments Certification
Settlement – Federal Reserve
• Settlement typically occurs at the Federal Reserve Bank
• All banks designate accounts for settlement at the Federal Reserve Bank–May have own Fed account–May use that of a correspondent
Some banks utilize both and designate which types of settlement occurs at each account
44National Check Payments Certification
FRB National Settlement Service
• Owned and operated by Federal Reserve Banks • Service is offered to depository institutions that:
–Settle for participants in clearing houses–Financial exchanges–Other clearing and settlement groups
• Settlement agents electronically submit settlement files to Federal Reserve Banks–Files are processed on receipt–Entries are automatically posted to depository
institutions' Federal Reserve Bank accounts
45National Check Payments Certification
Designated Settlement Accounts
Federal Reserve
Bank A’s Fed Account
Bank Bs Correspondent Account at
Bank A
Wires, TT&L, Treasuries
Checks, Credit Cards, ACH
+/- $ +/- $
46National Check Payments Certification
Settlement – Clearing House
Data Data
Clearing House
• Each member financial institution presents payment instructions to clearing house―Clearing house facilitates presentment to each paying
bank for “clearing” ―Settlement occurs as a separate event
Data Data
47National Check Payments Certification
Gross vs. Net Settlement
• Gross Settlement–Exchange of value for a single payment
• Net Settlement–Exchange of value for multiple payments–“Net effect” of all payments is settled to each
financial institution
48National Check Payments Certification
Gross Settlement• For the value of a single payment; one financial institution
receives credit and other receives debit• DFI sending wire receives a debit on FRB books; DFI receiving the
wire receives the credit
Federal Reserve
Debit Bank A’s Account on Books of the Federal Reserve
Credit Bank B’s Account on Books of the Federal
Reserve- $ +$
Bank B’s Fed Account
Bank A’s Fed Account
49National Check Payments Certification
Net Settlement• Multiple payments are grouped together
– Net effect settled to the designated account on books at Federal Reserve
Federal Reserve
Bank A’s Account
All debits / credits are combined for single bank; Net effect reflected ondesignated settlement account at the Fed
Net settlement: Settle between participating banks in a clearing network
+/- $
Bank B’s Account
Bank C’s Account
Bank D’s Account
+/- $ +/- $ +/- $
50National Check Payments Certification
Float Overview
• Float–Time between the deposit of a check and final
collection and funds availability to the customerDollar value of cash balances created by the time
lag in processing unpaid checksoChecks outstanding in the process of collection
Conditional credits in a depositor's checking account until the checks are collected/paid
51National Check Payments Certification
Float Overview
• Float–Banks receive checks for deposit and
provisionally credit the account of the check depositor
–Timing of clearing (collection / settlement of funds from bank upon which check is drawn)Check clearing results in checks in the process of
collection appearing briefly in the accounts of both Depositary Bank and Paying Bank
52National Check Payments Certification
Types of Float
• Bank Float (Incurred float)–Non-earning asset created through delay in the collection
of deposited funds–Correlates to calendar days elapsing between posting of
customer ledger credit and bank receipt of usable funds• Customer Float (Allocated float)
–Sum of dollars credited to a demand deposit account but not available for immediate withdrawal/earnings credit
–Correlates to calendar days elapsing between posting of customer ledger credit and funds made available to customer
53National Check Payments Certification
Positive and Negative Float
• Negative float occurs when:– Customer Float billed is greater than Bank Float
incurred
• Positive float occurs when– Bank Float incurred is greater than Customer
Float billed
Other Payment Systems
55National Check Payments Certification
Multiple Channels / Options
• Check Can Be Cleared via Multiple Channels–As a physical check –As an image–Convert image to substitute check (IRD)– As an ACH debit (if check is eligible for
conversion)ARC – Accounts Receivable entryPOP – Point of Purchase entryBOC – Back Office Conversion entry
56National Check Payments Certification
Automated Clearing House (ACH)• Funds transfer system governed by NACHA Rules
– Provides for inter-financial institution clearing of electronic entries for participating financial institutions
– Generally considered “batch and forward” next day payment system where: Day 1: Files originated / Day 2: Files settled
ORIGINATOR ODFIOriginating DFI
ACHOPERATORS
RDFIReceiving DFI
RECEIVER
57National Check Payments Certification
Ineligible Items – ACH
• Following Do Not Qualify for Conversion to ACH Transactions–Checks containing Aux on-us field–Greater than $25,000–Third-Party checks/share drafts/money orders–Demand drafts/3rd party drafts with no signature–HELOC checks–Money Market Checks–FI Obligations
Traveler’s checks, official checks, cashier’s checks–State/local Gov’t checks–Checks/money orders in a foreign currency
58National Check Payments Certification
Other Payment Systems
• Debit Card – Generally use the shared ATM networks that offer payment services associated with a financial institution’s DDA systems
• Credit Card –Issued by a company to allow the user to purchase goods and services from merchants who accept the card
• Wire – Electronic payment service for transfer of funds–Characteristics include:
Large dollar transactionsImmediate availabilityIrrevocable payments
59National Check Payments Certification
Questions
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60National Check Payments Certification
Recommended Resources
• Uniform Commercial Code (UCC)
–Article 3 – Negotiable Instruments–Article 4 – Bank Deposits and Collections
• CheckImage Central Website: www.checkimagecentral.org
–White paper on “Need for rules”:– http://www.checkimagecentral.org/pdf/RoleOfPrivateSecRulesAndFRSRules.pdf
• ECCHO website: www.eccho.org
• Federal Reserve website: www.frbservices.org
61National Check Payments Certification
Recommended Resources
• ECCHO website: www.eccho.org
• Federal Reserve website: www.frbservices.org
• Uniform Commercial Code (UCC):www.law.cornell.edu/ucc –Article 3 – Negotiable Instruments–Article 4 – Bank Deposits and Collections
Thank You!
Check Fundamentals and Check Processing
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