Solutran SOLUTIONS Newsletter: Infancy to Adolescence -- A Check 21 Update

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Spring 2004

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Infancy to Adolescence − A Check 21 Update

It goes without saying that a tremendous amount has been written on Check 21 since President Bush signed the new legislation on October 28, 2003. What is it? What’s the status? Where are the opportunities? Where to from here? These are all questions we hear on a regular basis.

Check 21 allows for the creation of a new negotiable instrument called a substitute check (also referred to as an image replacement document, or IRD). A substitute check, as long as it meets the criteria spelled out in the rule amendments, will have the same legal equivalence as the original paper check and must be honored by the paying bank upon presentment. A common misperception is that Check 21 mandates the exchange of electronic images among banks – this is not true. While the legislation provides the legal framework for banks to enter into agreements to exchange images electronically, it is not required.

The Status

Check 21 is going down two developmental tracks and will become effective on October 28, 2004. One track involves the Federal Reserve writing the amendments to Regulation CC that will enact the legislation. In December of 2003, the Fed released for comment the proposed amendments and was seeking the industry’s feedback. The comment period ended on March 12, 2004 and the final amendment should come out by late summer.

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The second track involves the development of standards, by the Accredited Standards Committee (ASC), that will provide guidance for the users of Check 21. Solutran is a voting member of the ASC and is very involved with two particular standards:

X9.90 is focused on the image quality and characteristics of the substitute check. In order to capture the audit information that resides on the back of a check (store number, lane number, customer number, etc.), Solutran believes a grayscale image of the back of the substitute check will be crucial to the successful implementation of Check 21. We performed a data study (covered in this issue of the newsletter) that clearly shows a significant drop in the readability of the information on a black and white image when compared to a grayscale image. We have shared this study with the industry, you may have seen the recent coverage in the American Banker, and we believe significant traction is being achieved. That being said, this standard is still very much up in the air. We are continuing to voice our opinion to the retail and bank trade press as well as the relevant influencing parties.

X9.37 is the standard concentrating on the flow of the payments in an electronic format. The majority of large retailers and billers have adopted returns consolidation as a strategy to significantly enhance their check management strategies. What is critical under Check 21 is that this business practice be maintained. X9.37 allows for a routing number to be included in the electronic endorsement that will instruct the paying bank to direct the returned check to your consolidation bank. This capability has already been allowed for in the standard, we are simply making our clients aware of it and asking the ASC to preserve it in its current form. We will be providing a template letter this summer for communication to your banks asking them to include your return bank instructions in any image exchange the banks elect to do.

What are the Opportunities with Check 21?

Without a doubt, significant opportunities will come from the new legislation. That being said, time is required by the industry to build out the infrastructure needed to support a mature Check 21 world. It is one thing to capture an image of the check, and it is another thing for a bank to be ready and able to accept and settle the electronic image.

One of the first major opportunities will come with return-check processing. Companies employing returns consolidation recognize that the most significant benefit comes from receiving information faster so more informed risk management decisions can be made at the point-of-sale. Under Check 21, we are anticipating a one to three day improvement. Solutran is actively involved in several of the industry’s pilot programs to exchange images electronically; we are working toward an electronic image exchange pilot by the third quarter of this year.

Solutran is also working with an industry leader (to be announced within the next six to eight weeks) that will enable us to accept and clear Check 21 deposits. While this capability will not be applicable for all clients, some will see significant benefits.

Where to from here?

Solutran is very bullish on Check 21. We believe the immediate benefits will come from speeding up the flow of returns. We also feel strongly that a grayscale image of the back of the check is required for a successful Check 21 implementation. To that end, we encourage all of our clients to contact your relationship managers at your credit banks and let them know your concerns about the image quality and the flow of returns. For your convenience, we have put together a letter that you may use, in whole or in part, to help articulate your position. To request a copy of this letter, send an email to solutions@solutran.com. If you would like additional information, please do not hesitate to contact your Solutran representative at 888-SOLUTRAN.