Plan to attend the in-person Ops, R&A and Fraud meetings on September 6 & 7 in Rockwall, TX (suburb of Dallas)

Transcription

1 March 10, 2017 Dear ECCHO Operations Committee Member: Following are the meeting materials for the ECCHO Operations Committee and Roundtable on Thursday, March 23 from 8:00 a.m. to 5:00 p.m. at the Joule hotel. (Please note that internal links are quick but external links, like above, are slow due to size of document) Meeting Preparation: Please review the notes in advance and come prepared to make a decision on recommending Adjustments Matrix changes to the Board. Following is the Ops slide deck with appendices including: Agenda Returns & Adjustments Subcommittee update Small Business Survey for Digital Check presentation slides presented at the meeting Customer Experience with Electronic Check slides provided after March 20 th Check & ECI Trends ECI Subcommittee update Education & NCP update Legal Update Fraud Subcommittee update Industry Updates Issues Roundtable Topics Appendices: o A: Minutes from October 2016 Operations Committee Meeting o B: Adjustments Matrix o C: Draft of Sample Warranty Claim Letter I look forward to seeing you at the meeting! Sincerely, Jenny Plan to attend the in-person Ops, R&A and Fraud meetings on September 6 & 7 in Rockwall, TX (suburb of Dallas) E L E C T R O N I C C H E C K C L E A R I N G H O U S E O R G A N I Z A T I O N 3710 RAWLINS STREET SUITE 1075 DALLAS, TEXAS FAX

2 OPS Welcome to the ECCHO Ops Meeting March 23, 2017 Joule Hotel, Dallas

3 OPS Welcome & Introductions Jenny Johnson, ECCHO

4 Thanks to our Sponsors March 23,

5 Agenda 8.30 to 9.00 Full Breakfast & Networking 9.00 Welcome & Introductions 9.05 Opening Comments to Begin the Meeting 9.15 Returns & Adjustments Subcommittee 9.50 Small Business Survey for Digital Check Break Customer Experience with Electronic Check Preliminary ECI Count & Check Trends ECI Subcommittee Lunch 1.00 Education Highlights & NCP Game 1.20 Legal Update 1.40 Fraud Subcommittee 2.20 Break 2.30 Industry Updates 2.45 Other Business 3.00 Ops Committee Meeting Adjourns 3.30 to 5.00 Issues Roundtable March 23,

6 OPS Operations Committee Opening Comments Luke Huys, ECCHO Operations Committee Chair

7 Opening Comments & Meeting Business Opening Comments Introductions Minutes Minutes from October 4, 2016 ECCHO Operations Committee meeting are attached in Appendix A Need motion to approve minutes ECCHO contact lists are available upon request Please let staff know of any changes in contact info March 23,

8 OPS Returns & Adjustments Subcommittee Phyllis Meyerson, ECCHO

9 Returns & Adjustments: Agenda Board actions In-person meeting Adjustment Matrix Update Stale Dated Checks Void After.. Duplicate Suggestion Paper Minimum Adjustment Threshold Incorrect Return Reason Code Reject Claim if Customer account closed or lack of funds Duplicate Deposit Scenario Going Forward March 23,

10 Returns & Adjustments Subcommittee: Board Actions & In-person R&A Meeting Board Actions Approved matrix change for Mis-matched MICR timeframe from 180 days to 90 days, effective December 2016 In-person Returns & Adjustments Subcommittee Meeting ECCHO has conducted 4 in-person R&A meetings Well attended Receive good feedback Last one was September 2015 In-person R&A meeting scheduled for 2017 September 6 & 7 in Rockwall (suburb of Dallas) New Fraud Subcommittee will also meet in person Agenda to be determined March 23,

11 Returns & Adjustments Subcommittee: Adjustment Matrix Update Subcommittee discussed possible matrix update Following changes to matrix (see Appendix B) are being recommended Eliminated second Duplicate Adjustment Reason Was Same Bank / Different Bank now one code Included Without Entry for Late Return Claim and Late Return Disclaimer Eliminated Federal Reserve Minimum for Wrong Payee Credit and Return Adjustment Fed does not have those adjustment reasons Eliminated numbers for adjustment reasons Alphabetized Adjustment Reasons Subcommittee is recommending Operations Committee recommend these changes to the Board for its June meeting March 23,

12 Returns & Adjustments Subcommittee: Adjustment Matrix Update Subcommittee developed Explanation of Adjustment Reason which is on ECCHO website Is agreeable to including in matrix Will continue to be worked on March 23,

13 Returns & Adjustments Subcommittee: Stale Dated Checks Members questioned whether stale dated item can be adjusted as a non-negotiable item solely on the basis that it is a stale dated item Legal Subcommittee questioned the basis for this claim and requested further review of this issue Members are responsible for consulting with their legal counsel to evaluate potential warranty claims for checks and for developing policies and procedures for handling check claims Handling of claims may vary depending on underlying facts associated with the presented check ECCHO staff and legal counsel prepared a summary of additional legal research on stale dated checks. Summary is as follows: March 23,

14 Returns & Adjustments Subcommittee: Stale Dated Checks UCC Provision on Payment of Stale Dated Checks Stale dated check means a check presented more than six months after date on check UCC states: A bank is under no obligation to a customer having a checking account to pay a check, other than a certified check, which is presented more than six months after its date, but it may charge its customer s account for a payment made thereafter in good faith. Provision applies to Paying Bank only Applies to interbank collection of checks Provides Paying Bank option of whether or not to pay stale dated check Without potential liability to its customer for wrongful dishonor if returns stale dated check Paying Bank acts in good faith making decision March 23,

15 Returns & Adjustments Subcommittee: Stale Dated Checks UCC Provision on Payment of Stale Dated Checks UCC Does not provide warranty from presenting bank to paying bank that check is not stale dated Does not give paying bank breach of warranty action if paying bank pays check and then determines check stale dated Does not relieve paying bank of obligations to drawer customer claims relating to missing endorsement or fraudulent signature, if banks pays stale dated check Does not alter time frames under UCC (or Reg CC) for paying bank to return checks, if it determines to return stale dated check Does not eliminate presenting bank warranties under UCC, Check 21 Act or Reg CC when presenting stale dated check Paying bank may have other claims under law No statute of limitations on enforceability of check by holder of check against drawer customer Court This UCC section has no effect on drawer s liability to payee March 23,

16 Returns & Adjustments Subcommittee: Stale Dated Checks Relationship of Stale Dated Checks to Article 4 Presentment/Transfer Warranties UCC transfer and presentment warranties do not provide warranty to paying bank that check is not stale dated Under transfer and presentment warranties, depositing customer and transferring and presenting banks warrant they are person entitled to enforce the instrument A collecting bank or depositing customer can be entitled to enforce, even if person only qualifies as holder and not holder in due course A holder is defined as person in possession of negotiable instrument that is payable to bearer or to identified person that has possession No concept of stale dated in definition of holder Can be holder and entitle to enforce stale dated check March 23,

17 Returns & Adjustments Subcommittee: Stale Dated Checks Relationship of Stale Dated Checks to Presentment/Transfer Warranties In contrast, holder in due course is a holder that took instrument (i) for value, (ii) in good faith, (iii) without notice that the instrument is overdue or has been dishonored Overdue check may cause holder to not meet definition of holder in due course UCC provides that check is overdue ninety (90) days after its date Fact that holder of overdue check is not holder in due course does not cause presenting bank to breach presentment warranties to paying bank The definitions of negotiable instrument and instrument under UCC do not exclude stale dated checks March 23,

18 Returns & Adjustments Subcommittee: Check with Void After In the discussion on Stale Dated Checks subcommittee also questioned Void after xx Days These are two separate issues Member shared article in which an Illinois court ruled this language not enforceable Acknowledges with electronic processing banks not expected to examine every check Customer should place stop pay on check Recognized UCC allows variation by agreement Customers should review bank statements timely and notify bank of errors March 23,

19 Returns & Adjustments Subcommittee: Duplicate Suggestion Paper Paper addresses possible adjustment actions for most common scenarios of when deposit made through RDC and then deposit of physical check Updated ECCHO Suggestion Paper Providing more explanation of suggestions, utilizing pictures Exceptions general rule is to go back to BOFD A Completed final review by Subcommittee, internal ECCHO staff and Legal Subcommittee Final paper redesigned for look, not substance Posted to ECCHO website here March 23,

20 Returns & Adjustments Subcommittee: Minimum Adjustment Threshold In August 2015 CFPB, OCC and FDIC took action against Citizens Bank for failing to credit customers full amounts of their deposited funds Stated that bank engaged in unfair and deceptive practice with respect to its handling of deposit slip discrepancies In light of these orders and requests from members, discussed possibility of reducing or eliminating dollar thresholds for adjustments Minimum adjustment thresholds typically $25.01 for some adjustment reasons and linked to Federal Reserve s minimum Fed is currently updating systems and won t have ability to make changes until around mid-2017 Likely they will make the changes then After further analysis determined only one significant adjustment reason is at $25.01 Encoding Error Subcommittee decided to wait for Fed to make changes March 23,

21 Returns & Adjustments Subcommittee: Incorrect Return Reason Code Reg CC and ECCHO Rules require: Identify as return Provide reason for return Members have questioned liability for item with wrong return reason code Came up originally in relation to Rule 9 Previously discussed and decided to develop FAQ No Rule or commentary change at that time FAQ developed Issue brought up again with some support for Commentary May be difficult due to numerous facts and circumstances Subcommittee did not support commentary March 23,

22 Returns & Adjustments Subcommittee: Reject Claim if Customer Account Closed or Lack of Funds Receiving some questions on this In most cases bank receiving claim cannot reject due to lack of funds or closed account Many adjustment claims are for breach of warranties and in those cases sending bank made warranty and can be responsible Unauthorized RCC for example There are exceptions: Rule 9 claims can be disclaimed if depositing customer account closed or no funds Paying bank can send Claim of Damages Due to Under-encoding for claim of under-encoding by BOFD, when no funds available BOFD warranted correct encoding Claim of Damages Due to Under-Encoding should not be used for encoding error or adjustment reversal ECCHO has form on website March 23,

23 Returns & Adjustments Subcommittee: Duplicate Deposit Scenario (diagram follows) Check is deposited at BOFD A and clears to Paying Bank Paying Bank returns to BOFD A as closed account Check is deposited at BOFD B on same day and clears to Paying Bank Paying Bank identifies as a duplicate (not closed account) adjusts and misses return window BOFD B says item is not duplicate because paying bank not being asked to pay item it already paid Paying Bank s return system should interface with duplicate system Is not re-presentment but similar Mostly technology issue with some software capable of interface Some banks utilizing manual processes to detect March 23,

24 Returns & Adjustments Subcommittee: Duplicate Deposit Scenario March 23,

25 Returns & Adjustments Subcommittee: Going Forward Recommendation to Board to approve Matrix changes Will continue to meet March 23,

26 OPS Small Business Survey for Digital Check Beverly Nichols, Fiserv (no copy to be provided)

27 OPS Customer Experience with Electronic Check Chris Clausen, Deluxe

28 Market Demand Overview - ECCHO 3/23/2017

29 A Brief Introduction Deluxe Enterprise Operations, LLC. Proprietary and Confidential. 2

30 Where does Deluxe market insight originate Deluxe has completed substantial in market primary customer research, and also has a product in market for business customers that allows the payor to experience a fully digital experience. Payees who experience a partial digital experience have demonstrated strong demand for a fully digital experience. Payor has fully digital experience issuing checks Payee has digital experience receiving a check but renders the item to paper before cashing or depositing Key: Deluxe s current product solution requires the check to be rendered to paper prior to presentment for negotiation and settlement Deluxe Enterprise Operations, LLC. Proprietary and Confidential. 3

31 Payor Insight What the check offers What businesses want In US $ Payor demand continues to grow with initial usage by pioneer type customers now influencing adoption by fast follower type customers Deluxe Enterprise Operations, LLC. Proprietary and Confidential. 4

32 Payee Insight #1 request from payees is for edeposit feature that allows for fully electronic experience Deluxe Enterprise Operations, LLC. Proprietary and Confidential. 5

33 A final piece of insight In 2017, a large company, that regularly makes a large number of disbursements to consumers, added the Deluxe echeck product to the list of payment disbursement options that it offers to its consumer customers. Previously there were 4 other payment options available leveraging other payment rails (as well as a paper check option). Within 4 weeks the Deluxe echeck was the #1 option selected by consumers for disbursement and the business has received a significant amount of positive feedback from its customers about the new payment option. Deluxe Enterprise Operations, LLC. Proprietary and Confidential. 6

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35 OPS Check and ECI Trends David Walker

36 Check & ECI Trends: Federal Reserve 2016 Triennial Payments Study Background Fed publishes, every three years, its report on payments volumes December 2016, Fed published its summary report for 2015 volumes Detailed report expected out within a few months Prior to 2013 Triennial Report No alternate volume source with which to compare In 2011 check image was fully implemented for forward collection Therefore, in 2012 transit check image volume was approximately equal to total transit check volume Since 2013 Triennial Early Look Report was available Compared transit volume against volumes reported by ECCHO/Fed March 23,

37 Check & ECI Trends: Federal Reserve 2016 Triennial Payments Study (continued) Background Immediately noticed significant difference in the volumes Given that ECCHO/Fed process does not collect 100% of transit volume, expectations would be that the triennial report should show slightly higher volumes that the ECCHO/Fed report Actual comparative volumes reported: Fed 2013 Triennial Study reported 12.9 billion transit checks in 2012 ECCHO/Fed collect process reported 16.0 billion transit images in billion differential = 24% difference (shortfall in triennial report) Actual monthly volumes reported versus triennially estimated volumes March 23,

38 Check & ECI Trends: Federal Reserve 2016 Triennial Payments Study (continued) ECCHO worked closely with the Fed since 2013 to understand and eliminate difference in future reports Results 2016 Triennial Report Comparison Fed triennial study reported 12.7 billion transit checks in 2015 ECCHO/Fed process reported billion transit images in billion difference = 1.2% deviation (significant improvement) March 23,

39 Check & ECI Trends: Federal Reserve 2016 Triennial Payments Study (continued) Transit Volume 2016 Triennial Report shows a decline of 1.4 billion checks? (12.9B 12.7B =.2B decline) Volumes in 2012 Triennial Report have apparently been revised upward from 12.9B to 14.1B (9.3% revision) 2016 Triennial Report shows an average decline in volumes of 3.4% (1.4B /14.1B / 3 years = ~3.4% average annual decline) But.2 billion / 12.9 billion / 3 years =.517% average annual decline 2013 Triennial Report shows an average decline in volumes between 2009 and 2012 of 10.4% Decisions about investments in check payments are likely very different for decline rates of.5% and 10%! March 23,

40 Check & ECI Trends: Federal Reserve 2016 Triennial Payments Study (continued) Total Check Paid (volume) 2015 Triennial Study reported (total checks paid): The number of check payments fell to 17.3 billion For an average annual decline rate of 4.4% But, 2013 Triennial Study reported: The estimated number of checks paid has declined to 18.3 Billion Resulting in decline rate of only 1.8% / yr. (18.3B B) / 18.3B / 3 years = 1.8% avg./yr.) Explanation Fed revised the 2012 volumes after its final detail report in July 2014 upward to 19.7B (volume upward adjustment of 1.4 billion or 7.5%) Thus overstating the decline from 2009 to 2012 In future Fed planning to conduct payment study annually March 23,

41 Volume in Millions Check & ECI Trends: Federal Reserve 2016 Triennial Payments Study (continued) By comparison Trends in ECCHO/Fed Transit Volumes 18, , B 14.69B 14, , B 12.85B 12.52B Change in Annual Transit Volume 10, , , to % 2013 to % 2014 to % 2015 to % 4, , March 23,

42 Check & ECI Trends: Federal Reserve 2016 Triennial Payments Study (continued) 30.0% 25.0% 20.0% 15.0% On-us Percentage of Total Check Volume* 20.0% 26.0% 29.0% 20.9% Fed reported growth in onus percentage reflected industry consolidation % drop in onus percentage 10.0% 5.0% 0.0% *Sources: The 2013 Federal Reserve Payments Study (Detailed Report and Updated Data Release July 2014) and Federal Reserve Payments Study 2016 ( early look at the use of core payment systems additional details to be released in 2017 ) March 23,

43 Check & ECI Trends: ECI Volumes / Demand ECCHO is attempting to establish whether there is any demand for ECIs in the U.S. Approaching this from two directions One determine whether bank customers are currently transmitting electronic files of payments that originated as electronic records and that are cleared through the check system after being printed and imaged For example the Deluxe service Two determine if image files received by paying banks include payments that originated as digital records and that were not printed and imaged before entry into the payment system For example, detecting with software from All My Papers March 23,

44 Check & ECI Trends: ECI Count Project ECIs are currently going through the check payment system ECCHO was seeking ways to determine the volume/demand for ECIs All My Papers has software that detects and reports on ECIs The software detects perfect images as ECIs, since scanning causes imperfection (e.g., blurring, distortion, slanting) All My Papers graciously allowed a pilot group to download and run the software on a temporary basis Pilot group represents a large portion of check volumes Each participant carefully considered which files they would run in order to best represent their volumes while avoiding duplication with other participants March 23,

45 Check & ECI Trends: Comparative Dollar Growth Comparative Volumes In Millions / Year Electronically Initiated Image Returns Substitute Checks March 23,

46 Check & ECI Trends: Comparative Dollar Growth Fastest Payments Transition in History Occurred Only : After Federal Legislation and After Fed commitment to bridge paper to image and After significant, national promotion and Still took 12 months ECIs are without any of that support! March 23,

47 Check & ECI Trends: ECI Project Preliminary Results With only a few reports in from the ECI count effort, it appears that ECI volumes are around.4% More participants yet to report More to come as additional information is gathered March 23,

48 % of Total Payments Check & ECI Trends: Business Use of Checks Phoenix-Hecht 2013 through 2016 Middle Market Corps ($20 - $500 MM in Sales) 70.0% 60.0% 66.1% 65.5% Although there is a slight movement down in the use of check in the middle market, we would argue that it is no more than 1% per year 50.0% 40.0% 30.0% 19.0% 19.7% Note: In 2016, checks = 3.3 times the next largest payment type 20.0% 10.0% 8.0% 6.6% 6.7% 8.2% 0.0% Check ACH Wire Cards March 23, *Phoenix-Hecht 2016 Treasury Management Monitor

49 % of Total Payments Check & ECI Trends: Business Use of Checks Phoenix-Hecht 2013 through 2016 Large Corporate (>$500 MM in Sales) 50.0% 50.6% 48.7% The documented trend of little or no contraction in B2B check usage over the past three years may continue into the future. 40.0% 33.7% 35.3% 30.0% Note: In 2016, checks = 1.4 times the next largest payment type 20.0% 10.0% 9.5% 9.7% 5.8% 6.3% 0.0% Check ACH Wire Cards *Phoenix-Hecht 2016 Treasury Management Monitor March 23,

50 Check & ECI Trends: Business Use of Check (AFP) 90% 80% 70% Percentage of Organization s B2B Payments Made by Checks (Percentage of B2B Payments Made by Organizations) 81% 74% 67% What Has Happened? Declining Trend from 2004 is Broken! 60% 50% 40% 30% 20% 50% 51% Check Use is Not Declining Anymore! What is Behind the Continued Check Use? Barriers Cost of Change Familiarity with Checks 10% 0% Source: 2016 Electronic Payments, Association for FinancialProfessionals March 23,

51 Check & ECI Trends: Business Use of Check (AFP) Payment Initiation Methods For Major Suppliers % 60% 50% 40% 30% 20% 10% 0% Payment Method Used to Pay Major Suppliers Checks to Major Suppliers Continue to 65% Decrease 64% 12% 23% 1% 18% 11% 17% 49% 26% 4% 5% 5% 43% 31% 16% % 34% 13% 5% Checks ACH Credits Wire Transfers Purchasing Cards ACH Debits ACH Credits Are Gaining Popularity Wires Are Down Worry about Cost? Worry about BEC? Source: 2016 Electronic Payments, Association for FinancialProfessionals March 23,

52 Check & ECI Trends: Business Use of Check (AFP) 60% 50% 40% Likelihood of Converting Majority of B2B Payments to Major Suppliers From Checks to Electronic Payments in Three Years (Percentage Distribution) Likelihood of Converting: 50% 43% 41% 48% 48% 44% Very Likely Decreased! Very Likely Generally Positive Attitude Toward Switching from Checks To Electronic Payments Actual Switch Rate Fairly Low Still High Level of Check Use 30% 20% 28% 22% 31% 25% 19% 26% 21% Somewhat Likely Not at All Likely Majority Already Electronic To Switch from Checks to Electronic Payments May Be More Difficult Than First Anticipated. 10% 10% 6% 13% 8% 8% 8% 0% Already Electronic Increased! Source: 2016 Electronic Payments, Association for FinancialProfessionals March 23,

53 Check & ECI Trends: Business Use of Check (AFP) Top Barriers of Transitioning to Electronic Payments (Percent of Organizations) Shortage of IT Resources Lack of Integration between electronic payment and accounting systems No Standard Format for Remittance Information Difficult to Convince Customers to pay Electronically Collecting and Storing Bank Account Information Difficult to Convince Suppliers to Accept Electronic Payments Privacy/Security of Bank Account Information 19% 19% 22% 20% 28% 38% 39% 32% 37% 38% 43% 42% 56% 57% In Addition: Barriers Cited By 2/3 of Respondents: 1. Difficulty Convincing Customers to Pay (78%) 2. Shortage of IT Resources (77%) My Trading Partners cannot send or receive automated remittance information with Check Systems work well 14% 12% 37% 44% 3. Difficulty Convincing Suppliers to Accept(76%) My Organization cannot send or receive automated remittance information with Loss of Check Float My Organization needs to open/hold a current account to make or receive payments in 5% 9% 12% 16% 27% 28% 0% 10% 20% 30% 40% 50% 60% 4. Absence of Standard Formats for Remittance (71%) 5. Lack of Integration payment and accounting systems (69%) Major Barrier Minor Barrier Source: 2016 Electronic Payments, Association for FinancialProfessionals March 23,

54 OPS ECI Subcommittee Jenny Johnson, ECCHO

55 ECI Subcommittee: Formation Several Members approached ECCHO in 2016 expressing support for potentially developing rules for ECIs Operations Committee discussed topic at the October 2016 meeting Members agreed to move forward with the ECI Subcommittee to consider possible approach to rules to support interbank exchange of ECIs There is no commitment from Operations Committee or ECCHO at this time as to whether or not ECCHO would ultimately adopt rules supporting ECIs in any form March 23,

56 ECI Subcommittee: Purpose & Background To promote the understanding of ECIs, including operational and legal issues, and to potentially develop ECCHO Rules for ECIs First ECI Subcommittee was held on Nov 8, 2016 There have been four ECI Subcommittee meetings: November, December, January and February There are 66 people on the ECI Subcommittee participation list Please let me know if you wish to add someone to the ECI Subcommittee participants list March 23,

57 ECI Subcommittee: Background Subcommittee agreed to change the name from EPO Subcommittee to ECI Subcommittee in order to adopt the Fed term (ECI Electronically Created Item; EPO Electronic Payment Order) There is no legal definition yet for ECIs. An ECI is generally described as an electronically created check that never exists in paper, that has certain characteristics of checks and uses the check payment rails ECIs are not eligible for exchange under ECCHO Rules or Fed OC3 ECI Subcommittee began with an overview of ECIs including descriptions and diagrams First subcommittee meeting provided an overview of the types of ECIs: payor initiated and payee initiated March 23,

58 ECI Subcommittee: Examples of Possible ECIs Use Cases March 23,

59 ECI Subcommittee: Examples of Possible ECI Use cases March 23,

60 ECI Subcommittee: Initial Discussions Agreed: Any rules approach to ECIs would require ECIs to use X format Agreed: ECCHO will consult X9 Standards group as necessary The subcommittee discussed potential Reg E requirements for consumer ECIs Subcommittee agreed some of the requirements could be onerous The subcommittee was not ready to decide the following ECI related issues: Legal framework Whether potential ECCHO Rules would apply to B2B ECIs only Subcommittee sought to understand how consumer ECIs could be separated/rejected allowing processing for only business ECIs The subcommittee agreed that it would be more effective to first discuss the operational issues with ECIs March 23,

61 ECI Subcommittee: List of Operational Issues for Discussion Identification of ECIs Indorsements Electronic signatures Forward exchange of ECIs: process, holds for reviewing ECIs, applying/passing/not applying ECI indicator, etc. Checklist of image processes that may not be applicable to ECIs Returns process issues: replacement document, flow/fed, representment issues, late return if hold ECIs, etc. Statement rendering issues: imaging implications, return items/replacement documents, mixing checks with ECIs Identification of business only ECIs, rejecting consumer ECIs March 23,

62 ECI Subcommittee: Identification of ECIs Potential categories of identification: automated identification for system recognition and manual/visual identification of item Subcommittee agreed that both categories of identification would be necessary to support ECIs Potential levels of identification: cash letter level and/or item level Subcommittee agreed that ECIs should be identifiable at the item level and not at the cash letter level March 23,

63 ECI Subcommittee: Visual Identifier Subcommittee unanimously agreed that a visual identifier, indicating an item as an ECI, is necessary A simple, yet unique identifier is preferred Suggestion of putting ECI on item where check design is currently blank Stay away from watermarks A searchable identifier would be beneficial More work to be done on this topic in future March 23,

64 ECI Subcommittee: Automated Identifier The subcommittee examined three potential fields (highlighted) within the check detail record (Type 25) for use as an ECI identifier FIELD FIELD NAME USAGE POSITION SIZE TYPE 1 Record Type M N 2 Auxiliary On-Us C NBSM 3 External Processing Code C NS 4 Payor Bank Routing Number M N 5 Payor Bank Routing Number Check Digit M N 6 On-Us C NBSMOS 7 Item Amount M N 8 ECE Institution Item Sequence Number M NB 9 Documentation Type Indicator C AN 10 Return Acceptance Indicator C AN 11 MICR Valid Indicator C N 12 BOFD Indicator M A 13 Check Detail Record Addendum Count M N 14 Correction Indicator C N 15 Archive Type Indicator C AN March 23,

65 ECI Subcommittee: EPC Code The subcommittee agreed that the EPC code appeared to be the best option but more research is needed Being able to define two new values for use in the EPC code would be most effective in order to separately identify: 1) payor initiated ECIs and 2) payee initiated ECIs Discussed the possibility of using EPC code as identifier at the recent X9B meeting Discussed possibility of securing two EPC code values Discussed potential for writing standard for ECI More detailed discussions planned for June X9 meeting More analysis/discussions planned for future March 23,

66 ECI Subcommittee: Bank Indorsements Subcommittee discussed bank indorsements No changes anticipated from the current process for indorsements once ECIs enter the banking system Using X standard Record type 26 for BOFD indorsements Record type 28 for Intermediary indorsements There would not be physical indorsements on the ECI because the ECI never exists in paper March 23,

67 ECI Subcommittee: Payee Indorsements Subcommittee discussed payee indorsements for deposited ECIs There are various choices for how to accomplish an electronic indorsement (i.e., insert code, electronically indorse, etc.) The choice of how is a product decision for each FI/provider Customer agreement would be affected Paying bank could return ECI for lack of payee indorsement Committee discussed whether rules could require payee indorsement, and could permit use of electronic payee indorsement More discussions necessary March 23,

68 ECI Subcommittee: Electronic Signatures Subcommittee discussed drawer signatures There are various choices for how to accomplish a drawer signature (i.e., insert code, electronically sign, electronic business stamp signature, etc.) The choice of how is a product decision for each FI/provider Customer agreement would be affected Potentially different issues for payor initiated vs. payee initiated ECIs Payee-initiated ECIs may not contain signature of account holding customer; but would carry some evidence of customer authorization More discussions necessary March 23,

69 ECI Subcommittee: Issues to Examine According to X9 standards, Field Truncator Indicator (Type 26) must be Y or N Indicates whether or not to create a substitute check from an image If ECI, creating a substitute check would not be an option since only an image of an original paper check can be printed as a substitute check according to Reg CC ECI is not created from a paper check so cannot create a substitute check Must have Y or N in field so won t cause major system issues Need to examine all fields in Type 26 and Type 28 records Need to look at/potentially reference virtual as defined in X Investigate PCI reflectants March 23,

70 ECI Subcommittee: Next Subcommittee Calls April 6, 11am ET May 8, 3pm ET June 13, 2pm ET July 19, 3pm ET March 23,

71 OPS Education Highlights Ellen Heffner, ECCHO

72 Education Highlights: NCP Program Nearly 1,500 registrants (all years) 624 NCPs to date An average of 115 new NCPs are added each year 240 currently registered for 2017 exam! 12 NCP Educational Partner organizations offering exam prep training 2017 Test window: April 15 May 6, exam dates: April 21 May 12, 2018 March 23,

73 Education Highlights: NCP Program Editorial Board Added 1 new member this year - Marcy Cauthon, EPCOR 2017 exam development is complete NCP 2018 exam development underway Evaluation of Pilot Items (EPI) Project Working with HumRRO and our program training partners to evaluate a backlog of test questions that are approved for testing but have never been piloted Evaluation process will be completed by NCP participants between May and October this year March 23,

74 Education Highlights: NCP Program Continuing Education (CE) program All NCPs required to complete 50 CE credits & 3 workshops in each 5-year renewal cycle Workshop recordings available on-demand (both current & prior years) 2017 Workshop dates & topics: May 16: Learning to Navigate the FFIEC Guidance Aug 23: What Should I Do When? Common Operational Scenarios Nov 16: Industry Update (TBD) 5 th Annual NCP Day celebration August 7, 2017 Recognition of NCPs & educational session eligible for CE credits March 23,

75 Education Highlights: ECCHO Rules Training and Other Education ECCHOEd: At-Your-Desk training library Recordings publicly available for fee Broad range of topics in initial recordings Now marketing sessions through several ECCHO education partners Provides new avenues for check payments education ECCHOInsights: Complimentary webinars covering current hot topics Anticipate 1 to 2 sessions in 2017 All are recorded and available on ECCHO website All are eligible for NCP CE credits March 23,

76 Education Highlights: ECCHO Rules Training & Other Education ECCHO Rules training: two member training sessions scheduled for 2017 (to date) Customized for fee training available upon request Webinar or in-person sessions ECCHO Snippets: New education product coming in 2017 Designed to be short (15 min.) recorded sessions Initial speakers (Phyllis & Ellen) will cover questions on a variety of topics (adjustments, Rule 9, cashier s checks, etc.) Have a Snippet topic you d like to see covered? Contact Ellen Heffner March 23,

77 NOW FOR SOME FUN! OPS Let s Play: FACT OR FICTION? Drawing for two free NCP Workshops!

78 GAME TIME!

79

80 FACT OR FICTION How to Play: Room will be divided into two sides Each side gets to have one person guess for their side for each of the four topics Each statement is read as it s displayed on screen Players then guess which 2 of 4 statements (by number) are FICTION for the given topic Players with the most correct guesses win a prize! March 23,

81 READY...SET...GO!

82 Substitute Check 1. A substitute check can be created by a depositary bank to provide to their customer for a return item. 2. A substitute check is identified by a value of 6 in the EPC digit in the MICR line. 3. A substitute check can be created by a customer to deposit at their bank. 4. Every substitute check is required to have magnetic ink in the MICR line. Which two statements are FICTION? March 23,

83 Stale Dated Check 1. A stale dated check is considered an item under UCC and a check under Reg CC. 2. A paying bank can adjust a stale dated check as a non-negotiable item. 3. A paying bank cannot return a stale dated check. 4. A stale dated check is a check that is presented more than 6 months after its date. Which two statements are FICTION? March 23,

84 Remotely Created Check 1. The definition of a remotely-created business check can be found in the Uniform Commercial Code. 2. RCCs can be identified by the placement of a specific EPC value in the MICR line. 3. The definition of a remotely-created check can be found in the ECCHO Rules. 4. Banks may create and exchange RCCs through the Federal Reserve Bank. Which two statements are FICTION? March 23,

85 Overdue Check 1. An overdue check would not be eligible for a holder in due course claim. 2. A check becomes overdue 90 days after the date of the check. 3. If a check is overdue, it is not properly payable. 4. An overdue check would not be eligible for a claim by a holder of the check. Which two statements are FICTION? March 23,

86 Lost or Stolen Cashier s Check Claims 1. The payee of a lost or stolen cashier's check claim must make this type of claim. 2. This type of claim must be accompanied by a Declaration of Loss statement. 3. If an enforceable claim is received before the cashier s check is presented, the issuer is not obliged to pay the cashier s check when presented. 4. If the claim is filed within 60 days of the date of the cashier s check and is accompanied by a Declaration of Loss statement, the obligated bank must pay the claim. Which two statements are FICTION? March 23,

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89 OPS Legal Update Tom Fox, Schwartz & Ballen

90 Legal Update: Court Case Regarding Check Image Warranties Federal Appeals Court for the 7 th Circuit issued decision involving check image warranties and related claims The case: First American Bank (Plaintiff-Appellant) versus Federal Reserve Bank of Atlanta, Citizens Bank, N.A., and David M. Goodson (3 Defendants-Appellees) March 23,

91 Legal Update: Court Case Regarding Check Image Warranties Facts of the Case: In 2013, Fumiko Anderson (fraudster) hired David Goodson (attorney) to assist in recovering money from divorce proceedings Attorney received check in mail for settlement & fees which he needed to pass along to client Check was counterfeit in the amount of $486, Check was payable to Law Office of David M. Goodson Check was drawn on account of First Aid Corp at First American First American paid the check and debited the drawer s account Mr. Goodson wired proceeds to Japanese entity (fraudster) Fraud was discovered by First Aid Corp First American reimbursed First Aid Corp (its drawer customer) March 23,

92 Legal Update: Court Case Regarding Check Image Warranties (Facts of the Case, continued from previous slide) First American brought suit in federal district court against Citizens (BOFD), Goodson (payee depositor), and Federal Reserve (collecting bank) District Court rejected First American s claims and held for all defendants First American appealed to 7 th Circuit Court of Appeals Appeals Court issued decision on November 22, 2016 Diagram follows March 23,

93 Legal Update: Court Case Regarding Check Image Warranties March 23,

94 Legal Update: Court Case Regarding Check Image Warranties Summary of Ruling: Appeals Court ruled against First American Bank on all claims First American Bank will incur loss associated with the payment of the counterfeit check Key Points of Appeals Court s Decision: No breach of Reg J warranty against BOFD Citizens handled check as image and it passed electronically through FRB Reg J states item must accurately represent the item Some security features were not image survivable but court ruled absence of security features no actionable basis for warranty claim under Reg J First American alleged that one security feature a warning box was designed to survive imaging, but was not on the image presented Court stated that First American failed to show that if the box was on the image it would have been suspicious and returned the check Court stated that First American could have protected itself by demanding a substitute check then it would have received Reg CC substitute check warranties March 23,

95 Legal Update: Court Case Regarding Check Image Warranties Key Points of Appeals Court s Decision: (continued) No basis for restitution recovery for mistake First American claimed it was victim of mistake and entitled to recovery under UCC (Payment or Acceptance by Mistake) UCC 3-418(a) provides that, if a drawee bank that acts on the mistaken belief that the signature of the drawer was authorized, the drawee bank may recover the amount of draft from the person to whom payment was made UCC 3-418(c) states that this remedy for mistake may not be asserted against a person who took the instrument in good faith and for value Court held that First American could not recover under this claim The lawyer payee and two banks acted in good faith March 23,

96 Legal Update: Court Case Regarding Check Image Warranties Key Points of Appeals Court s Decision: (continued) No negligent destruction of evidence First American alleged that Citizens destruction of the paper check breached common law duty not to destroy evidence (under IL common law) Court held there is no duty on BOFD to retain original paper check after electronic substitute has been created provided there is a record of the contents of the paper check No professional negligence (against Attorney Goodson) Goodson believed check was money he was asked to recover Court traditional rule is that attorney is only liable to his client March 23,

97 Legal Update: Court Case Regarding Check Image Warranties Takeaways & Additional Comments: By ruling in favor of defendants, particularly bank defendants, Court affirmed common practice of collecting electronic items through electronic cash letters, a practice incorporated into Reg J with its sensible loss allocation structure Paying bank faces significant hurdle if paying bank elects to press claim against account holder of depositary bank, depositary bank and Federal Reserve as a result of loss suffered from fraudulent check converted to electronic item. The solution of demanding a substitute check, recommended by the court, may not be practical because 1) window to decline electronic item is brief, and 2) substitute check would have similarly not included the security features. March 23,

98

99 OPS Fraud Subcommittee Jenny Johnson, ECCHO

100 Fraud Subcommittee: Formation The Fraud Subcommittee was created as a result of discussions during the October Operations Committee: ECCHO brought the idea for creating a sample warranty claim letter for altered items and indorsement warranty claims ECCHO gets many calls about problems involving indorsement issues and altered items FI staff often do not know how to process a warranty claim and are looking for sample letters to use Ops Committee participants agreed that creating a sample letter was a good idea A member suggested that ECCHO facilitate creation and maintain a contact list for vetting funds at the paying bank Ops Committee participants agreed to look into the idea further The Fraud Subcommittee was formed to address these issues and other member issues March 23,

101 Fraud Subcommittee: Purpose To discuss fraud/risk issues that Members bring ECCHO Members often bring ECCHO questions about how to resolve fraud scenarios Members bring ECCHO ideas to decrease risk around fraud To create an industry working group to discuss check fraud and risk topics To create a network for fraud/risk colleagues across the industry to get to know each other better and have forum for discussing issues To create potential resolution for certain check fraud/risk issues March 23,

102 Fraud Subcommittee: Facts First Fraud Subcommittee was held on Nov 18, 2016 There have been three Fraud Subcommittee meetings: November, January and March There are 105 people on the Fraud Subcommittee participation list Please let me know if you wish to add someone to the Fraud Subcommittee participants list March 23,

103 Fraud Subcommittee: Work Items Since its inception, Members have suggested many topics for the subcommittee to address including: Sample warranty claim letter Funds verification contact list Check fraud alerts Check fraud department name contact list Timings for processing warranty claims Scenarios for fraud claims with intermediary banks Automated warranty claim system Discuss status of each work item next March 23,

104 Fraud Subcommittee: Industry Fraud Alert s Status: Discussed/Not Moving Forward ECCHO receives information on fraud schemes from time to time Member initially agreed to discuss the idea of fraud alerts via (e.g., fraud with cashier s checks) Upon further discussion, Members decided not to move forward for various reasons including: Sharing customer account information violates privacy Fraud schemes are often regional so nation-wide sharing not helpful Would be difficult to share with staff that really need the info like tellers, fraud department, security department, adjustments, etc. March 23,

105 Fraud Subcommittee: Funds Verification List Member suggested developing funds verification list Status: Agreed to move forward No detailed discussion yet preliminary ideas about the list: Optional participation but must participate to get access to list Low tech solution for verifying funds/account open Not a guarantee/just information Call on certain suspicious/high risk items Highly confidential list, not to be shared, only people on the list can use, initially only for direct participants Potential for being like the super secret list for R&A ECCHO would maintain the list with updates twice a year like super secret Details to be discussed at upcoming subcommittee meeting: security, what info provided, response, right people for list, etc. March 23,

106 Fraud Subcommittee: Check Fraud Department Name List Status: Agreed to Move Forward / Details Not yet Discussed Idea came about during discussion of sample letter Challenge with who to send the fraud warranty claim to since banks have different names for area that processes fraud warranty claims ECCHO agreed to facilitate creation and maintenance of a Fraud Department contact list How to move forward will be discussed in an upcoming Fraud Subcommittee meeting March 23,

107 Fraud Subcommittee: Timings for Processing Warranty Claims Status: Agree to Move Forward / No Discussion Yet Topic came up in sample letter discussion Members believe it takes too long for some banks to process warranty claims There are no official deadlines for processing warranty claims Banks left to their own discretion on response timeline Plan to discuss timings at a future Fraud Subcommittee call March 23,

108 Fraud Subcommittee: Scenarios Involving Intermediary Bank Status: Agreed to Move Forward / No Discussion Yet Several members have brought fraud scenarios involving intermediary banks to ECCHO the issue can be complicated Member suggested that subcommittee review/discuss various scenarios and see if any suggestions emerge Topic will be discussed in a future subcommittee meeting March 23,

109 Fraud Subcommittee: Automated Warranty Claim System Status: Agreed to Move Forward / No Discussion Yet Sponsoring Organization suggested the creation of an automated warranty claim system for ECCHO members only Sponsoring Organization offered to develop the system for ECCHO Members Initial discussion planned for Roundtable Detailed discussion planned for future Fraud Subcommittee meeting if viable March 23,

110 Fraud Subcommittee: Sample Warranty Claim Letter The Fraud Subcommittee began with a detailed discussion of the sample warranty letter Status: In progress nearing final review Discussed within the Fraud Subcommittee, achieving several versions of edits Sent draft to Legal Subcommittee for review Legal Subcommittee is still in process of review/edits expect they will conclude during next call Sample letter will go back to Fraud Subcommittee for one final review Sample letter will be published on our web site Members may use as they see fit including making their own edits; suggestion consult your legal counsel prior to use See current draft of sample letter in Appendix C March 23,

111 Fraud Subcommittee: Sample Letter Brief review of draft sample letter First section provides instructions for using sample letter: This letter only for use with UCC warranty claims for altered items and items with certain indorsement issues For items not indorsed as drawn, unless known facts indicate that signature is fraudulent, check missing indorsement box and use the Description section to describe why the check is not indorsed as drawn This letter not for use for counterfeit/forged items Seek advice of your legal counsel prior to using letter Use of this letter is voluntary, it may be edited as seen fit by your legal counsel Complete all sections and described fields on the sample letter March 23,

112 Fraud Subcommittee: Sample Letter Type of Warranty Claim A. TYPE OF WARRANTY CLAIM: (Check one box below) Altered Item Indorsement is Unauthorized/Fraudulent Indorsement is Missing March 23,

113 Fraud Subcommittee: Sample Letter Opening of letter Ability to file claim on more than one item Date: Attention: [INSERT APPROPRIATE RECIPIENT/DEPARTMENT] Re: Breach of Warranty Claim Transfer or Presentment Warranty Our Reference Number: This letter constitutes our claim to your institution arising from your institution s alleged breach of warranty under Uniform Commercial Code (UCC) presentment warranties (UCC 4-208) or transfer warranties (UCC 4-207) with respect to the following items. Drawer Payee Name on Item Dollar Amount We reserve any rights that may be available to us with respect to the item(s) under applicable law, regulation or clearing house rule. March 23,