National Check Payments Certification...negotiable instrument –Negotiable instrument is a draft...

National Check Payments Certification

Check Payments – The Basics

NCP 2019 Exam CycleCore Training Series

Introduction to Check Payments

Copyright© 2018 by The Clearing House Payments Company L.L.C.

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

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 electronic check exchange program they may offer or in which they may participate.

These materials may not be reproduced or published, in whole or in part, without the express permission of The Clearing House Payments Company L.L.C.


(Certain contributed content subject to third party copyrights)

National Check Payments Certification 2

Topics – This Session

• Acronyms and Terms• Negotiable Instrument • Parts of a Check• Is this a Check?• Check Processing Overview• Exceptions and Check Fraud• Other Payment Systems


NCP Exam – Recommended Training

P.R.E.P. Guide

Question of the Day

Instructor‐Led

Training

Training Reviews

Study & Prepare

Recommendations for NCP Exam

Study

• For NCP training options, click here www.eccho.org/ncpc_trainingto see the list of trusted partners


Acronyms & Terms• ANSI X9: American National Standards Institute

– Payments‐related standards group that serves as administrator/coordinator of US private sector voluntary standardization system

– Facilitates development of American National Standards (ANS) by accrediting the procedures of standards developing organizations

• BOFD: Bank of First Deposit; the depositary bank– First bank to which check is transferred; may be the paying bank or

payee• Check:Written order directing a bank to pay money as

instructed– Negotiable instrument or an unconditional promise to pay– Designed to transfer the amount of money for which it is written;– On or after the date specified on the check;– To specific payee or to the bearer;– Includes a substitute check and an electronic check/electronic

returned check


Acronyms & Terms• Collecting Bank: Bank handling an item for collection except the payor bank

• DFI: Depository financial institution – State or nationally chartered bank, state or federally chartered savings and loan association, a savings bank, or credit unionCompare to depositary financial institution (see BOFD definition)

– Note: Term “bank” is used throughout NCP program to refer to any DFI; includes banks as well as credit unions

• Drawee: Person ordered in a draft to make payment– “Person” in UCC is used to mean an individual, public corporation, or any other legal or commercial entityUCC defines “bank” as a person engaged in the business of banking


Acronyms & Terms• ECCHO: Electronic Check Clearing House Org

–A service of The Clearing House–Maintains national set of Operating Rules for private sector image exchange between ECCHO members;

–Manages the NCP accreditation programDelivers the annual NCP examProvides the exam prep Core Curriculum

• Fed OC 3: Federal Reserve Operating Circular 3–Governs the collection of cash items and returned checks through the Federal Reserve Banks

–References Regulation J and Regulation CC for related warranties


Acronyms & Terms• Intermediary Bank: Bank to which an item is transferred in course of collection except the depositary or payor bank

• MICR: Magnetic Ink Character Recognition– Descriptive information comprised of numbers and special symbols printed in magnetic ink at bottom of a physical checkDesigned to be recognized at high speed by automated processing equipment

• Payor Bank: Bank that is the drawee of a draft– See also “paying bank” definition in Reg CC

• Presenting Bank: Bank presenting an item except a payor bank


Acronyms & Terms• Reg CC or Regulation CC: Federal regulation that governs

availability of funds deposited in checking accounts and the collection and return of checks and substitute checks

• Reg J or Regulation J: Federal regulation that governs the collection of checks/other items by Federal Reserve Banks by establishing procedures, duties, and responsibilities among Federal Reserve Banks, senders and payors of checks and other items and senders and recipients of Fedwire funds transfers

• Remote Deposit Capture (RDC): Banking service which allows a user to scan checks and transmit the scanned images to a financial institution for posting and clearing– Images are generally created using a scanner or mobile device

• Uniform Commercial Code (UCC): Model state law as adopted in a state– Provides general business law of a state regulating sale of goods,

commercial paper (checks), bank collections and secured transactions in personal property


Defining General Check Processes• Cashing a check: Process by which check is negotiated by the

holder for cash• Depositing a check: Process by which check is negotiated by

the holder to the DFI for credit to the depositor’s account• Clearing a check: Process by which check moves through the

payments system from a DFI where it was deposited to payor/paying bank, (institution on which it was drawn)– Note: May involve one or more collecting banks in the process

• Collection of a check: Process by which a depositary or collecting bank transfers a check on a cash basis to another collecting bank or presents it to the paying bank for payment

• Presentment of a check: Delivery of a check to a paying bank to receive payment of the value (amount) of that check

• Adjustment for a check: Process by which a bank may adjust settlement for a paid check– Adjustments are by agreement– Must be for valid adjustment reason


Negotiable Instrument

Negotiable Instrument & Check• Two Concepts – Two Definitions

–Negotiable instrument and Check

• Negotiable Instrument defined in UCC–Unconditional promise or order to pay a fixed amount of money, with or without interest;Payable to bearer or to order;Payable on demand or at a definite time; andDoes not state any other undertaking or instruction by the person promising or ordering payment

• Check defined in UCC as a:–Draft payable on demand and drawn on a bank; or –Cashier’s check; or–Teller’s check


UCC 3: Negotiable InstrumentGraphic illustrates the definition of a negotiable instrument• How the definition relates to both

a draft and a check• UCC 3‐104 defines the check

within the definition of a negotiable instrument – Negotiable instrument is a draft

that is:Written instruction

o Must be a writing – a physical itemSigned by the drawer

o Person giving the instructionOrder to pay a fixed amount of money

o Value of the instrumentPayable on demand


Negotiable Instrument & Drafts

• UCC divides “instruments” into two general categories – drafts and notes–States that an instrument is a:Note if it is a promise to pay; and Draft if it is an order to pay

• Draft further defined in UCC 3‐104 as:–Written order signed by the drawer that is an unconditional order to pay

• Checks are drafts


Check and Demand Draft• Check definition in Reg CC covers several categories of

instruments including:– Negotiable demand draft drawn on:Or payable through or at, an office of a bank; Federal Reserve Bank or Federal Home Loan Bank;US Treasury;

– Demand draft drawn on:State or unit of general local government not payable through or at a bank;

– U.S. Postal Service money order; – Traveler's check; and – An original check and a substitute checkNote: Will discuss substitute checks later in this session

• Reg CC defined new terms (eff. Jul‐2018; see §229.2 (ggg))– Electronic check and electronic returned check:Electronic image of and electronic information derived from a paper check or paper returned check; that

o Is sent pursuant to an agreement between sender and receiving bank; ando Conforms with X9.100‐187 standard (unless Board determines another standard

applies)National Check Payments Certification 15

Parts of a Check

Blank Check Example

Basic Consumer CheckMICR Line


What is MICR?• Magnetic Ink Character Recognition (MICR)

– Common machine language for automated check handlingDescriptive information comprised of numbers and symbolsPrinted characters recognized at high speed by automated processing equipment; printed in magnetic ink according to standards

– E‐13B Font – Used in magnetic ink printing in USA, Canada and othersConsists of ten numeric characters and four symbols

– MICR line located at the bottom of physical check• Key Fields in MICR line

– Amount: 10 digit field– On‐Us – includes both: Drawer’s account number and check serial

number– Routing Number: ABA assigned identifier– EPC – External processing codeOptional, single‐digit field

• Note: Regulation CC (Jul‐2018) updates definition– References the MICR line data in an electronic record


Processed Check Example

Consumer Check


Processed Check – Back

Indorsers:Payee Indorsement and BOFD Indorsement


Drawer or Maker?• Usage of terms “Drawer” and “Maker” can be confusing when reviewing

UCC and Reg CC – please see the following definitions:• UCC Article 3 and 4 definitions:

– Drawer: Person who signs a draft and orders payment (person who signs the check)

– Maker: Person who signs or is identified in a note as a person undertaking to pay

• Other check terms:– Drawee: Person or bank ordered in a draft to make payment– Payor bank: Bank that is the drawee of a draft– Payee: Party receiving payment– Bearer: Check made payable to “CASH” (no specific Payee named), is a Bearer

Instrument• Note: Paying Bank is a Reg CC definition §229.2 (z)

– Bank to which the check is sent for payment or collection– May be designated as a “payable‐at” bank or “payable‐through” bank that is

responsible for the expedited return of checks and notice of nonpayment requirements (defined in Reg CC ‐ Subpart C)

– If a check is sent for forward collection based on the routing number, the bank associated with that routing number is a Paying Bank under the regulation.


Is this a Check?

What is a Check?

• Is this paper check a check?


Is This Large Check a Check?

• Hint: Assume this check has a MICR line


Is This A Check?

• If this is a check, what type of check is this?


Is This A Check?

• Hint: This “cloud” illustrates an image of a check. Is this a check?


Is This A Check?• This is a MICR line from a check?

• MICR line information alone is not a “check”– MICR line info + image (both derived from paper check)

= electronic check– See Reg CC 229.2 (ggg) for complete definition


Is This A Check?• Hint: May be created / transmitted from online accounting

software/system


Summary• UCC and Reg CC define checks, electronic checks, electronic

returned checks, noncash items and ECIs – Check: Defined as a negotiable demand draft Checks include an original paper check and a substitute check

– Electronic check and electronic returned check: Defined asElectronic image of, and electronic information derived from paper check or paper returned check; that is sent to a receiving bank by agreement; and that conforms to X9.100‐187 standard

– Noncash items: Would otherwise be checks except for attachments, special instructions, printed on more than a single thickness of paper, don’t qualify for handling by automated check processing equipment; not preprinted or post‐encoded in magnetic ink with routing number of paying bank

– Electronically Created Items (ECIs): Not derived from a paper checkCurrently not eligible for exchange under ECCHO Rules or Fed Operating Circular 3 (OC 3)


Check Processing Overview

Bank ABOFD

Bank BCorrespondent

or Federal Reserve

Bank C Paying Bank

Check Processing• Simple image exchange process (forward) with three banks

– Depositary Bank (BOFD – Bank A)– Intermediary (Correspondent or FRB – Bank B)– Paying Bank (Bank C)

Transmits (transfers) to Correspondent

(or Federal Reserve Bank)

Electronic Check

Electronic Check

Transmits (presents) to Paying Bank


Check Processing• Detailed example with Paper / Image Exchange

– Paper processes shown from individual/corporate payor → payee → depositary bank → through clearing network → Paying Bank

– Overlay with image process – only the medium changes (from paper check to electronic check); Process remains the same

Corporate Payor

Clearing Banks /Correspondent

Paying BankFederalReserve

Bank of First Deposit(BOFD)

On‐UsItems

IndividualPayee

Merchant/ or Corporate Payee

Individual Payoror

ElectronicCheck

Electronic Check

Electronic Check

Electronic Check

Electronic Check

Electronic Check

Electronic Check


Check Processing Overview• Daily cycle includes various steps; Processes depend on whether you are the depositary bank,

other collecting bank, or paying bank• High‐level outline follows; will discuss in more detail later in the training series

• Sources of work: Where are checks cashed, deposited, used for purchase or other payments?– ATM – Vault – Lockbox ‐‐ Bank branch – Merchants – etc.

• Image (or paper) capture of MICR line data– Virtual (electronic process) to capture the check information; – May also use some form of physical scanning of paper checks

• Reject/Repair & Re‐entry– Correction of errors – then re‐process corrected checks that rejected in the initial processing cycle

• Imaging of front and back of check– Required by standards to capture all information from both the front and back of the physical check

• Clearing process– Exchange of data – Process, prepare and release data files to move check data forward for collection

• Dispatch (transit cash letters)– Sending out checks drawn on other banks for collection and final settlement– Majority sent electronically (no paper transportation today)

• Settlement– Exchange of funds for the value of cash letters sent/received

• Exception handling – Returns and Adjustments– Based on timing, may return a check or send as an adjustment

• For more information, refer to the NCP P.R.E.P. Guide and other sessions in this training seriesNational Check Payments Certification 33

Exceptions & Check Fraud

Exceptions – Returns• Returns – Governed by statutory and regulatory requirements– UCC midnight deadline (UCC 4‐301)– Reg CC expeditious return requirement (§ 229.30)

• Any paper or electronic check that requires further investigation before final disposition can be determined

• Return of a check unpaid– Items that are being sent back by the Paying Bank –Must state it is a “return” and the reason for the return–Must meet timing requirements or may be considered a late return


Exceptions – Adjustments• Adjustments – Handled “by agreement” of the parties

– Fed OC 3 rules; Clearinghouse rules (ECCHO Rules), third‐party arrangements

• Errors may be caused during item processing– Generally require some research to resolve

• Depending on timing and type of adjustment, may adjust settlement for a paid check either:– With entry (with financial settlement)– Without entry (without immediate financial settlement)

• Must state specific adjustment type for each case• Adjustment types, timing and related requirements may differ

depending on adjustment provider and adjustment rules:– Federal Reserve, Viewpointe, The Clearing House/ECCHO Rules, etc.


What is Fraud?• Fraud exists in all payments systems• Occurs when following elements exist:

– Intentional untrue representation about an item, fact or event

– Untrue representation is believed by the victim– Victim relies upon and acts upon the untrue representation

– Victim suffers a loss of money and/or property as a result of reliance on untrue representation

• Check Fraud: – Refers to a category of criminal acts that involve making the unlawful use of checks in order to illegally acquire funds that do not exist within the account balance or account holder's legal ownership [Source: www.uslegal.com]


Where Can Fraud Occur?

Source: 2013 Federal Reserve Payments Study

• All Payments Systems! Studies show distribution of fraud based on payment type (see graphic below)

• Check payments showed:– Lowest volume (3% of total reported); and smallest related $ amounts (16% of total reported) in prior study


Other Payment Systems

Multiple Channels / Options

• Checks can be cleared via multiple channels–As a physical check –As an electronic check–As a substitute check (IRD)– As an ACH debit (if check is eligible for conversion) using appropriate SEC code:ARC – Accounts Receivable entry, orPOP – Point of Purchase entry, orBOC – Back Office Conversion entry


Automated Clearing House (ACH)• Funds transfer system governed by NACHA Rules

– Provides for interbank clearing of electronic entries for participating financial institutions

– ACH generally considered “batch and forward” payment system

• General terms to consider:– ACH transactions: Debits or creditsExamples include:

o Direct Deposit of payroll, government and Social Security benefits; oro Mortgage, insurance or other bill payments

– ACH Operators: Two central clearing facilities:Federal Reserve and The Clearing House (EPN)

– Originator: Individual, corporation or another entityInitiate either a deposit or payment transaction

– ODFI: Originating Depository Financial Institution– RDFI: Receiving Depository Financial Institution


Simple ACH Process Example

ORIGINATOR


Other Payment Systems• Debit Card – May use term “bank card” or “check card”

– Generally uses shared ATM networks that offer payment services associated with a financial institution’s DDA system

– Similar to a credit card, but unlike a credit card, the money comes directly from the user's DDA account

• Credit Card –Issued by company to allow user to purchase goods/services from merchants who accept the card– Major networks include: American Express, Discover, MasterCard, and Visa

– Merchants generally pay fees to accept credit cardsCard‐issuing banks receive part of the fees as revenue

– Card Processing: When the card is used, card‐holder is technically using the bank’s money instead of their own to pay for a product or serviceOver time must repay with interest


Other Payment Systems• Wire – Electronic payment service for transfer of funds

– Characteristics of large dollar transactions, immediate availability, and irrevocable payments

– To “wire funds” is to make a funds transfer from one bank to another with almost immediate availabilityCredit transfer (crediting funds)Contrast to checks which are debits

• Funds transfer defined in UCC 4A‐104 as:– Series of transactions, beginning with originator's payment order, for

purpose of making payment to beneficiary of the order– Term includes payment order issued by originator's bank, or an

intermediary bank, intended to carry out originator's payment order– Completed by acceptance of payment order by the beneficiary's bank

for the benefit of the beneficiary• Wires governed by provisions in UCC 4A and:

– Regulation J for Fedwire– CHIPS Rules & Procedures for Clearing House Interbank Payments

System (CHIPS)


Additional Information• Uniform Commercial Code (UCC): www.law.cornell.edu/ucc

Article 3 – Negotiable InstrumentsArticle 4 – Bank Deposits and Collections

• Regulation CC – Availability of Funds and Collection of Checks (12 CFR – Part 229)– See Electronic Code of Federal Regulations (e‐cfr) website to access Title 12 Banks and Banking (Chapter II) regulations: http://www.ecfr.gov/cgi‐bin/text‐idx?SID=942b94b5cd556e12a997d012c0dba6d2&node=pt12.3.229&rgn=div5

• X9 Standards: www.x9.org or http://webstore.ansi.org/


Thank You!ECCHO|The Clearing House

3710 Rawlins Street; Suite 1075Dallas, Texas 75219www.eccho.org

NOTICEThis NCPC Program document contains copyrighted materials of its publisher.

These materials may not be reproduced or published, in whole or in part, without the express permission of The Clearing House Payments Company L.L.C.


Check Payments – The Basics

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