National Check Payments Certification Image Exchange: Processes Copyright© 2014 by the Electronic Check Clearing House Organization NCP 2015 Exam Cycle

National Check Payments Certification

Image Exchange: Processes

Copyright© 2014 by the Electronic Check Clearing House Organization

NCP 2015 Exam CycleCore Training Series

Session 7

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)


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Session Overview

• Image Exchange Trends• Check Processing Definitions • Types of Image Exchange• Day 1 Processes• Day 2 Processes• Image Returns / Return Reasons


Image Exchange Trends• Check processing no longer the physical movement of

paper– Variety of electronic transmissions today

Image Cash Letters (ICLs) between banks for inclearing or transit cash letters

Internal image transmissions from front office to back officeFrom Image ATM, vault, lockbox, or Branch image capture

• Following industry volumes statistics provide overview for:– Average number of Images Received per Day–Number of RTs available to receive check images– Dollar value of check image transactions– Total of image-based transactions

Includes images and substitute checks derived from images

6

Avg # of Images Rec / Day#

Item

s in

Mill

ion

s

Source: Federal Reserve, Viewpointe, The Clearing House, selected ECCHO Full and Participating Members and other local / regional exchanges

56

.59

/ d

ay

Images O

nly

Dec-13

At year-end 2013:• 56.6 million Images/Day • Over 14 billion images

(annualized)

7

# of Receiving R/Ts#

of

Imag

e-A

vaila

ble

R/T

s

Image-A

vailable R

/Ts

24,774Image-Available

R/Ts


Dec-13

8

Transaction $ Amounts$

in B

illio

ns

21

da

ys

in

De

ce

mb

er

to

tali

ng

$1

,66

0

Dec-2013 Annualized= $19.9 trillion


Dec-13

9

# of Image Based Trans.#

Item

s in

Mill

ion

s

21

da

ys

in

De

ce

mb

er

tota

lin

g 1

,18

8

Substitute Checks

Images

Substitute Check volume has

decreased to volumes prior to

Jan-2005


Dec-13


Check Processing Definitions• Bundle– Subset of a cash letter usually containing about 200 – 400 checks

Dollar amount of bundle serves as a control totalListed on cash letter level control totals

• Capture: Process to read information from paper check– Virtual Capture: System “reads” (pulls information from) electronic

records

• Cash Letter– Group of checks sent by a bank or its agent(s) to another bank,

clearing house, or Federal Reserve office– Contains number of negotiable items

Accompanied by control information

• File– Collection of related data or program records

Stored on an input/output device or auxiliary storage medium


Check Processing Definitions• Inclearing Items – Received for payment– Generally inbound items from clearing house or Fed

• On-Us Items – Drawn against accounts at your financial institution– Deposited to same bank where they are drawn

• Reject Repair – Items rejected during capture–May be due to misread MICR information– Correction of MICR data to allow recapture / processing

• Transit Items – Drawn against accounts at other financial institutions– Separated from on-us checks during processing– Sent for collection to Paying Bank via direct presentment or

through the Fed


Check Processing Definitions

• Unit of Work – Individual or multiple transactions–Credits/debits to complete a balanced transaction–Based on specific bank products; could include:

Large corporate depositIndividual customer transaction from ATM or branchMultiple transactions from:

o Vault, lockbox or POD/branch work

–Cut-Off: Work may be cut off at:Volume limit (threshold); orTime of day schedule


Cash Letter

CASH LETTER (CL) WITH TOTAL

Bundle 1Tape of Detail w/ bundle total showing



Example: For a physical cash letter


Cash LetterExample: File with Three Cash Letters

FILE-1 - Cash Letter #1 - 3 Bundles - Forward Debit Item(s)- Cash Letter #2 - 1 Bundle - Forward Debit Item(s)- Cash Letter #3 - 2 Bundles - Forward Debit Item(s)

CASH LETTER #3 WITH TOTAL

Bundle 1

Bundle 2


Bundle 1


Bundle 1

Bundle 2

Bundle 3

FILE-1

Types of Image Exchange


Image Cash Letter (ICL)

• Image Cash Letter (ICL)–Digital images of paper cash letter– Includes both MICR data record and check images–Transmitted from sending bank to receiving bank–Can be created for presentment of all eligible items

Items eligible for image exchange can include anything defined as a check under Reg CC and an item under UCC

May differ based on channel used and applicable rules–Single or multiple presentment point options are available

depending upon clearing channelsCorrespondent BankClearing HouseDirect PresentmentFederal Reserve Bank


Image Cash Letter

SENDING BANK(BOFD)

RECEIVING BANK /PRESENTING BANK

CUSTOMER

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

ICL


Shared Archive

IMAGE

MICR Data RecordARCHIVE

IMAGEAccess

CUSTOMER SENDING BANK(BOFD)

PAYING BANK

Electronic Record: Governed by check law and created from entire MICR line on a check, suitable for posting to a customer’s account

Image exchange requires MICR data record to be sent along with (or preceding/following) the image of the physical item. BOFD may send directly to Paying Bank or to ARCHIVE provider which then sends to Paying Bank

Image Archive: Facility of the sending bank and/or the receiving bank, or of a third-party agent that stores images for and makes them available to the receiving bank and/or the sending bank

Remote Deposit: Capture of the paper items at a location other than the DFI’s check processing operations center including customer and/or branch locations

ScanOriginal Check

IMAGE

19

Federal Reserve

Private Sector RulesCover TheseExchanges

IMAG

E

Exchange co

vered

by

Reg J and OC 3

Settlement Bank

Other Banks Other Exchanges(i.e., Viewpointe,

Endpoint Exchange, SVPCO)IMAG

E

IMAGE

Exchange Network Member Banks

Local/Regional Exchange

Day 1 Processes


Typical Item Processing Functions• Day 1– Receipt – File or Paper– Work Set-up / Proof & Encoding– Image Quality Analysis (IQA) and Code Line Match– Electronic (Virtual) Capture / Capture– Image Reject Repair– Duplicate Item Detection– Image Balancing– File Transmission / Dispatch– Image Archive / Bulk File– DDA Posting– Settlement and Reconciliation

• Day 2– Image Exceptions– Outgoing Returns– Incoming Returns– Research and Adjustments


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


Receipt• Image Files Created/Transmitted to Centralized Back Office

Operation– Image ATM, Vault or Lockbox– Front counter/Branch image capture

Teller receives, scans, transmits customer deposits to centralized location– Back counter/Branch image capture

Teller receives customer deposit and sends to another station within branch to be scanned

– Image Deposit productsICL, RDC – Options to manage electronic file receipt and confirmation

process prior to “virtual capture” – Incoming transit cash letters (ICLs)

• Any physical/paper inclearing or transit cash letters– Handed off to Proof & Encoding or – Prepared directly for capture


Work Setup / Proof & Encoding• Regional Image Capture– Replaces Proof and Encoding function

Ensure items are in proper order, right side up, etc.Encode amount and missing MICR informationMake corrections to transactions as needed to balance

– Remote Image Keying functionKey missing MICR information into electronic work flowDirect keying using image instead of physical item

• Proof & Encoding for remaining paper items– Prepare unencoded paper deposits received from:

Branches or internal bank departments for image capture process– Encode amount and missing MICR fields– Correct customer errors, as needed– Balance transactions

• Prepare for capture/sort process


Image Quality Analysis (IQA)

• Image Quality Analysis (IQA)– Image processing function to interrogate electronic

items prior to virtual or electronic capture–Ensure all items adhere to the accepted quality

standards–Most systems utilize combination of systematic IQA

and manual staff reviewSystematic first level rejection of any itemsManual second level review of any itemsBased upon business rules parameters which are

configurable by each bank– Items that fail IQA

May be rejected, returned or adjusted


IQA / Code Line Match

• Ensure item’s electronic data record (MICR information) matches visual representation of original check’s MICR line–As shown on image

• Business Rules Parameters– Image quality requirements

Too light, too darkSize of item, etc.

–Needed MICR information for itemsFull-field versus partial MICRSome image exchange rules allow partial MICR “by

agreement”


Electronic / Virtual Capture• File Control – Verify X9 format, control totals, check for duplicate

file• Image Capture Functionality – Can set business rules for:– Special processing requirements – Assign virtual sort patterns (time of day, type of work, etc.)– Assign internal control documents– Full-field encoding requirements– Image quality parameters– Adjustment method– Indorsement to be applied (BOFD/Subsequent)– Automatic system alerts (i.e.: file does not fit profile)

• Paper Items: Capture/Sort– Read / capture MICR line data and sort items based on routing criteria

May indorse item backs with BOFD / subsequent indorsement– Microfilm or image capture fronts and backs of item


Electronic / Virtual Capture

• System “Reads” Electronic Data Record–Capture of front and back of image–Appends data record with:

Processing sequence numberIndorsement (BOFD/Subsequent)

• Electronic Items “Virtually Sorted” by Destination–On-us items uploaded to bank’s posting

application and image archive (if appropriate)–Transit items included in outgoing Image Cash

Letter (ICL) based upon routing criteria


Image Reject Repair

• Items missing required MICR information–Rejected from the virtual capture process–Queued for key entry process using image

Key entry missing or incorrect electronic data record (MICR) information

–Merge “repaired” data records back into electronic work flow–Segment items requiring additional investigation–Send to Exceptions & Returns

Usually researched and processed next day


Duplicate Item Detection

• Follows data imaging and repair–Suspect duplicates presented on image review

screen–Operator reviews for decision–True duplicates result in exception item

May be returned or adjusted Depends on timing and other factors


Image Balancing• Branch Capture Workflow– Balance individual transactions– Create correction entries as needed

• Image Deposit / Inclearing ICL workflow– Verify incoming customer-created X9 file

Check for duplicates and verify required information– Systems may electronically insert credit (“deposit ticket”)– Systems may automatically create adjustments directly back

to the customer for:Ineligible items enclosedPoor quality imageMissing image

– System can reject file prior to processing if:Incoming work out-of-balance at a file level


File Transmission / Dispatch• Create outgoing ICL in standard format (X9.100-187)• Transmit outgoing image cash letters by endpoint– Image exchange system queries captured item information

Attach associated images and addenda recordsManage file transmission schedule by endpoint

• Software generally manages:– Image file creation– Valid X9 file format– Duplicate item / file detection and prevention– Verification control totals prior to transmission– ICL transmission and tracking– Dispatch according to schedules

Determined by agreement / Float Management scheduling• Transit Dispatch (Paper)– Ensure correct routing by captured MICR information


Image Archive / Bulk File• Completion of Virtual Capture Process– Balancing, and posting processes– On-us items segmented by statement requirements by account

• No image process to replace bulk file– For statement rendering

On statement date, file becomes “pick list” into image archive• Bulk File – Paper– Filing and temporary retention system

Process occurs at end of day after capture, balancing and posting– May still be required for customers with special statement

requirementsIRD may need to be created for customer / statement type that requires

return of physical checks – Process: All captured on-us items resorted into appropriate cycles

associated with statement cutoff dates


DDA Posting

• Posting to customer accounts–Part of end of day processing functions for

check processing area–Send all information about items processed

that day to DDA system to attempt posting to customer accountsDeposited creditsOn-us checks


Settlement and Reconciliation

• Settlement – Facilitates the exchange of funds between banks for the value of cash letters sent and received– All credits must equal debits before processing can be

determined to be complete• Reconciliation – Focuses on control totals after posting– Primarily for internal accounts– Compares internal control totals for items captured to

credit and debit entries reflected in GL accounts• Float Management Reporting– Analyze trend data based on specific product requirement


General Ledger Reconciling

• Reconciling cash letters in an electronic environment can be more complicated and critical than with paper– It is impossible to send two of the same paper cash

letters; not so with ICL–Multiple presentments and added clearing channels

make reconciling more complicated, as there could be:• More general ledgers to reconcile (added clearing channels)• More items to reconcile (multiple presentments)

Day 2 Processes


Typical Item Processing Functions• Day 1– Receipt – File or Paper– Work Set-up / Proof & Encoding– Image Quality Analysis (IQA) and Code Line Match– Electronic (Virtual) Capture / Capture– Image Reject Repair– Duplicate Item Detection– Image Balancing– File Transmission / Dispatch– Image Archive / Bulk File– DDA Posting– Settlement and Reconciliation

• Day 2– Image Exceptions– Outgoing Returns– Incoming Returns– Research and Adjustments


Check Collection Process

Returning Bank /Correspondent

Paying Bank

FederalReserve

Bank of First Deposit(BOFD) /

Reconverting Bank

On-Us Items

Individual Payee

Merchantor

Corporate Payee

“Day in the Life of a Check” Returns

ICLR

ICLR

ICLR

ICLR

ICLR

ICLRor

ICLRor


Image Exceptions• Exceptions – Review and Resolution – Can systematically download items– Review on-us items rejected from previous day’s posting for:

Stop payments or non-sufficient fundsFraud review, selected signature verificationOther conditionsRepair missing or incorrect information

– Items to be paidAdd to workflow to be processed on today’s business

– Items to be returned: Return items to BOFD Add to a Return Image Cash Letter (ICLR) or create an IRDFor image records, add return reason code in X9 fileReturn records “Type 31” and “Type 35”

– All outgoing returns timing must follow UCC and Reg CC return deadlines• Physical Paper Exception Items– Sorted out from all other on-us items– Delivered to Exceptions area for manual review and resolution


Outgoing Returns• Completes process started in Exceptions area for items decisioned

to “Return”– Reg CC requires Paying Bank to:

Identify return and Reason for return

• Route return file (ICLR or paper) to BOFD – Based on indorsement from forward item received; follow Return

Routing Hierarchy for images received– Look in X9 electronic records Type “26” or back of the item, or Type

“28” record(s)• Exceptions $2,500 or greater segregated for special handling– Based on Reg CC Notice of Nonpayment requirement

• Reg CC requires returns must get back to BOFD by 4:00 pm local time (of BOFD) 2nd business day after presentment– Same timing for Notice of Nonpayment

Return can serve as notice


Incoming Returns

• Items matched to bank’s All Items File–Charged back to depositing customer or

represented Images of items to be charged back provided to

customerPrinted notice sent or IRD created

–Items to be represented are segregated and uploaded to today’s workflowCan eliminate need to re-process through Proof

and Encoding


Statement Processing• General description of paper statement rendering process

– Physical checks identified, pulled, inserted in printed customer statement– Not as common in image world with:

Image statementsOnline statements and account management

• Process: Same as we described before. . . Items pulled from Bulk File– Sent to statement area for statement rendering– Statements made available / sent to customers

No image process to replace bulk fileFor statement rendering: Statement file becomes “pick list” into image archive

• Statement Types– Safe-keeping statement

Check number and dollar amount– Enclosure statements

Physical paper and other enclosures– Online statements– Image statement

Image of paid items


Research and Adjustments

• Many adjustments reduced with image exchange– Information may be downloaded from Fed or other

exchange partners–Manually entered into system–System assigns cases and queues for operator

System obtains images, all items file information, addenda data, etc.

Presents to operator for reviewSystem generates letters to other institutions if neededSystem generates settlement entries

–Once research completedSystem generates cases to be uploaded to the Fed and

exchange partners


Research and Adjustments

• Research request submitted and downloaded–Put in a processing queue for operator retrieval

• Photo copy requests: System automatically does image retrieval from image archive–Can submit direct to requestor if email address

providedExample: Request to determine how error occurred

and provide entry to reverse if issue is foundSystem emails or delivers information direct to

requestor


Adjustments

• Additional information covered in other sessions in this series:–Common adjustment types–Fed OC 3 and Reg J provisions–ECCHO Rules provisions and Matrix

Image Returns / Return Reasons


Outgoing Returns• Previously mentioned Reg CC Requirements– Timely delivery of all items decisioned to “Return”

• Reg CC also requires Paying Bank to:– Identify return; and – Reason for return

• Route Returns to BOFD – Based on indorsement from forward item received

Follow Return Routing Hierarchy for image returnso See ECCHO Rules

• Following examples – X9.100-187 standard records– Type 26 or Type 28 record(s) that are “flipped” for return

routingSee session on Standards and Formats to review various record types


Reasons for Returns• Customer and Administrative Returns– Customer Returns

Dishonored item under check lawo Usually attempted charge to customer account

– Administrative Return/Administrative reasonReturn for reason other than dishonored item

o May be handled internally rather than charge to customero May be handled through adjustment process

If handled as return – must meet return timing

• How to tell which is which?– Identification of return type – Returns Indicator field

Carried in Cash Letter Header Record (Type 10)o If Returns Indicator equal to ‘R’ = Customer returno If Returns Indicator equal to ‘E’ = Administrative reason


Return Reason Codes• Standard recognizes return reason codes may be used for both

Customer and Admin returns– Same code – Different purposes:

‘I’ return code for:o Customer return = Indorsement missingo Administrative return = Image missing

‘Q’ return code for:o Customer return = Not Authorized o Administrative return = Ineligible

– Same code – Same purpose:‘3’ for both

o Warranty Breach (includes Rule 8 & 9 claims) Unauthorized Remotely Created

• How to tell which is which?– Identification of return type - Returns Indicator field– Carried in Cash Letter Header Record (Type 10)

If Returns Indicator equal to ‘R’ = Customer returnIf Returns Indicator equal to ‘E’ = Administrative reason


Reasons for Return

• Common Return Reason Codes–Customer Return Reasons

NSF – Not Sufficient Funds = ‘A’Stop Payment = ‘C’Closed Account = ‘D’Endorsement Missing = ‘I’Not Authorized = ‘Q’Warranty Breach = ‘3’

–Administrative ReasonsImage Missing = ‘I’Ineligible = ‘Q’Unusable Image = ‘U’Duplicate Presentment = ‘Y’


Intermediary

25

26*

25

26 *

2828 **

Paying Bank

Bank of First Deposit

(BOFD)

Forward Presentment

Legend:• BOFD – Lt. Green*• Intermediary – Blue**• Paying Bank – Red

X9.100-187 Flows


Paying Bank/ Returning Bank


(BOFD)

31/33

26 * 32

28** 35

X9.100-187 FlowsReturn

“26” becomes “32” record“28” becomes “35” recordLegend:

• BOFD – Lt. Green*• Intermediary – Blue**• Paying Bank/Returning Bank – Red

ReturnRecord/Return

Addendum B




(BOFD)

31/33

26 *32

28**

35

35

Legend:• BOFD – Lt. Green*• Intermediary - Blue**• Paying Bank/Returning Bank - Red

X9.100-187 Flows

New “35” record added

Note: Return Reason is in 31 & 35 records

ReturnRecord/Return

Addendum B

Return


25

Representment

Paying Bank


(BOFD) / Representing Bank

26*32

28**

35

28***

35

Legend:• BOFD – Lt. Green*• BOFD / Representing Bank – Dark Green***• Intermediary - Blue**• Paying Bank/Returning Bank - Red

X9.100-187 Flows

“32” becomes “26” record“35” becomes “28” records

Check Detail Record


25

26***

Paying Bank



26* 32

28** 35

28*** 35

X9.100-187 Flows

Legend:• BOFD – Lt. Green*• BOFD / Representing Bank – Dark Green***• Intermediary - Blue**• Paying Bank/Returning Bank - Red

“26” record added for Representing Bank

Check Detail Record

Representment


Electronic Records

• Return Reason – Type 35 Record–Paying Bank adds return reason to its Type 35

RecordMatch Return Reason in Type 31 Record

• Other Institutions in return collection chain–When adding a Type 35 record, match return

reason from:Last Type 31 Record, orLast Type 35 record received

o Should be the same reason code


Electronic Records

• Representment – Type 28 Record–Should only have return reason, if created (flipped)

from Type 35 Record that had return reason• Why is this critical to the collection process?–Without return reason, item may be flagged as

duplicate–Especially true for represented items and when

Intermediary Bank may be part of collection process and checking for duplicates–No knowledge item was previously presented and

returned


Duplicates and Representment• Some intermediary banks do duplicate checking–May cause issues on represented items

• Previous examples illustrated “flipping” electronic indorsement records– Item presented;– Item returned;– Item represented with:

BOFD and Paying Bank only in those exampleso No Intermediary Collecting Bank

– Following slides will illustrate “flipping” of electronic indorsement records with Intermediary Collecting Bank for both:Return Processing; andRepresented items


Intermediary Duplicate Checking Return Processing



(BOFD)

31/33

Intermediary

31/33

2632

2835

35

35

Return Reason in 31 & 35 records

26 3228 35

“26” becomes “32” record“28” becomes “35” record

35

Return Reason in 31 & 35 records

New “35” record

Added by Paying Bank

New “35” record

Added by Intermediary


Intermediary Duplicate Checking Representment Processing

25



28 35

Intermediary

Return Reason “35” Record

Return Reason “35” Record

26

“26” record added as Representing Bank

“32” becomes “26” record“35” becomes “28” records

26322835

2835


Intermediary Duplicate Checking

• If Intermediary Banks does duplicate checking:–Proper use of return reason code in electronic

records may help prevent “false positives” on represented items


Questions

??? ?? ?


Recommended Resources

• 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

• Regulation J:(12 CFR – Part 210): http://www.ecfr.gov/cgi-bin/text-idx?SID=0ed75d38896a339d9b5189ceb4ebe8b9&node=12:2.0.1.1.11&rgn=div5

• Federal Reserve website: http://www.frbservices.org/regulations/operating_circulars.html

• ECCHO website: www.eccho.org/rules

• NCP P.R.E.P. Guide–Available to all exam candidates upon registration

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






http://www.frbservices.org/regulations/operating_circulars.html

http://www.eccho.org/rules

Thank You!

Image Exchange: Processes

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 of Education

[email protected]

Documents

National Check Payments Certification Image Exchange: Processes Copyright© 2014 by the Electronic Check Clearing House Organization NCP 2015 Exam Cycle