National Check Payments Certification. Check Fundamentals and Check Processing. Copyright 2017 by the Electronic Check Clearing House Organization

Transcription

1 NCP 2018 Exam Cycle Core Training Series Session 1 Check Fundamentals and Check Processing Copyright 2017 by the Electronic Check Clearing House Organization NOTICES This 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 orinwhichthey participate. These materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO. Copyright 2017 by the Electronic Check Clearing House Organization (Certain contributed content subject to third party copyrights) 2 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 1

2 NCP Exam Registration Reminder Free ECCHO / NCP study aids upon registration! JumpStart Reading Program Links to all program resources NCP Roadmap Direction on establishing a personalized study plan P.R.E.P. Guide Training guide, glossary of terms, sample exam Question of the Day & Summary New daily question & detailed answer to prior day s question Exam Fees: $400 ECCHO member $500 non ECCHO member Not sure about membership? Check current status at: o Enter financial institution name in search box on left 3 NCP P.R.E.P. Guide Register for exam with ECCHO to access the current exam year s Guide Updated annually; 300+ pages of training and study materials which includes: Sample exam (multiple choice format similar to the exam) End of section study aids including: Suggestions for further study & Quiz questions (sample follows) Answer Key in Exhibits to Guide 4 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 2

3 Topics This Session Check Basics Need for Rules Check Payments System Overview Other Payment Systems Note: To prepare for the NCP Exam, it s recommended you review the entire training series which includes: 11 sessions plus at least 1 recommended review For complete listing of NCP Core Training program, visit ECCHO s website: 5 Check Basics Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 3

4 General Check Definitions Section will cover common definitions related to the check including: Amount Bank (general definition) Collecting Bank Depositary Bank Paying Bank Parts and Parties to the check including Drawer, Drawee and Payee MICR line and selected MICR line fields Other definitions discussed in subsequent sessions related to specific topics For additional definitions, see the current NCP P.R.E.P. Guide section titled Glossary of Terms and Common Acronyms Available upon registration to all NCP exam registrants 7 Blank Check Example Basic Consumer Check 8 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 4

5 Processed Check Example Consumer Check 9 Parts and Parties to the Check Regulation CC Definitions ( 229.2) Bank: Includes ALL depository institutions as defined by both: FDIA Federal Depositary Insurance Act FCUA Federal Credit Union Act Includes: o Insured commercial bank; o Insured credit union; o Mutual savings bank; o Savings and loan association; or o Agency or a branch of a foreign bank as defined in the International Banking Act Note: Expedited Funds Availability (EFA) Act uses the term depository institution Collecting Bank: Any bank handling a check for forward collection, except the Paying Bank Federal Reserve is collecting bank for items sent through the Fed o See Regulation J for more information 10 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 5

6 Parts and Parties to the Check Regulation CC Definitions ( 229.2) (continued) Depositary Bank: First bank to which check is transferred even though it may also be Paying Bank of payee (Reg CC definition) Depositary Bank or Bank of First Deposit (BOFD) and Paying Bank may be the same bank for on us items Paying Bank: Bank by which check is payable, to which it is sent for payment or collection Federal Reserve Bank (FRB) / Federal Home Loan Bank (FHLB) by which check is payable; or Bank through which a check is payable, if check is not payable by a bank; or State or unit of local government on which a check is drawn and to which it s sent for payment or collection 11 Parts and Parties to the Check UCC Definitions (Sections 3 103, 3 104, 4 104, 4 105) Amount: Part of definition of a negotiable instrument Negotiable Instrument: o Means an unconditional order to pay a fixed amount of money Should appear twice on the check: o Courtesy amount: Amount written in numbers» May also be referred to as convenience amount o Legal amount: Amount written in words Bank: Includes a savings bank, savings and loan association, credit union, or trust company Drawer: Person who signs, or is identified in a draft, as the person ordering payment Drawee: Bank or person ordered in a draft to make payment Item: An order to pay money that is handled by a bank for collection or payment Does not include a payment order governed by Article 4A (Wire Transfer) 12 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 6

7 Parts and Parties to the Check UCC Definitions (continued) Depositary bank: First bank to take an item even if it is also the payor bank Payor bank: Bank that is the drawee of a draft Bank ordered in a draft to make payment Intermediary bank: Bank to which item is transferred in course of collection Except the depositary or payor bank Collecting bank: Bank handling an item for collection, except the payor bank o Federal Reserve Banks are collecting banks Presenting bank: Bank presenting an item, except a payor bank. 13 Parts and Parties to the Check Correspondent Bank: Financial institution that provides services on behalf of another financial institution Can conduct business transactions, accept deposits and gather documents on behalf of other financial institutions they serve under the correspondent agreement (respondents) Example: Banker s bank (correspondent) and their members (respondents) 14 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 7

8 Processed Check Front 15 Processed Check Back Indorsers: Payee Indorsement and BOFD Indorsement 16 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 8

9 What is MICR? Magnetic Ink Character Recognition (MICR) 1956 Descriptive information comprised of numbers and symbols Magnetic ink printed characters that can be recognized at high speed by automated processing equipment E 13B Font Used in magnetic ink printing in USA, Canada and several other countries Consists of ten numeric characters and four symbols MICR line at the bottom of physical check 17 MICR Line of a Check Six inch check Generally used for consumer checking accounts DRAWER NAME STREET ADDRESS CITY, STATE Payee s Name One hundred twenty-three and 45/ Drawer s Signature External Processing Code Field Optional 1 digit ABA Routing Number 9 digits, no spaces bounded by transit symbols Account Number and Serial Number 10 DIGITS 18 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 9

10 MICR Line Key Fields Six inch check Amount: 10 digit field Maximum allowed amount? 99,999, On Us Drawer s account number Check serial number Routing Number ABA assigned routing number for Paying Bank EPC External processing code Optional, single digit field o Provides information for handling or routing of the check or check data to financial institutions and other processors 19 MICR Line of a Check Large check (longer than six inches) Generally used for business checking accounts Payee s Name One hundred twenty-three and 45/ Drawer s Signature Aux On Us Field: Can optionally include serial number or other transaction or product code 20 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 10

11 MICR Line Key Fields Business sized check Same fields as smaller six inch check Includes Aux On Us (optional field) To the left of the Routing Field on the MICR line Used for: Consecutive check serial numbers; or Account control information; or Product codes/information 21 Routing Number Used for all financial institutions in the U.S. Each FI has a unique number Some have more than one Two forms are currently used: MICR form Fractional form Both forms appear on most checks, although only MICR form is used in automated item processing 22 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 11

12 Routing Number MICR Form Called the ABA Routing Number May be referred to as routing number or: ABA Number Routing Transit (RT) Routing Transit Number (RTN) ABA Institution Identifier (4 digits) Check digit (1 digit) Federal Reserve Routing Symbol (4 digits) First two digits designate Fed District location of Paying Bank and Type of Institution 3rd and 4th digits represent specific Fed bank or branch serving paying institution 5th through 8th digits are ABA number for paying institution 9th digit is RT number validation (Check digit) 23 Routing Number Fractional Form May be printed in one of two forms as shown here: OR 91 03/1221 Numerator (91 03 in this example) Includes a city value (1 49) or a state value (50 99) as the prefix followed by a dash then the ABA institution identifier Denominator (1221 in this example) Federal Reserve Routing Symbol ABA and Federal Reserve numbers match corresponding numbers in MICR form without leading zeros Additional letters or numbers may be printed if paying bank chooses 24 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 12

13 Example: Fractional RT ABA routing number: /1221 In MICR form, shown on check s MICR line: 25 Example Fractional RT To convert to fractional form ABA routing number: Drop check digit last number in ABA routing number Pick up city or state prefix Assigned by ABA ABA institution identifier Drop leading zeroes Separate with dash Federal Reserve routing symbol Separate with slash / / / Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 13

14 Need For Rules Interbank Exchange of Checks Subject to state/federal law State Law: Uniform Commercial Code Model state law as adopted by each state Example: Provides transfer and presentment warranties Federal Regulations: Regulation CC Implements provisions of: o Expedited Funds Availability Act ( EFAA ) o Check Clearing for the 21st Century Act ( Check 21 Act ) Regulation J: Collection of Checks and Other Items by Federal Reserve Banks and Funds Transfers through Fedwire (referenced by Fed OC 3) National Check Payments Certification Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 14

15 Clearing Paper Checks UCC & Reg CC Provisions [Statutory and Regulatory] UCC, Reg CC & Payee s Deposit Agreement UCC & Reg CC & Correspondent Agreement UCC, Reg CC & Check Writing Agreement Payee (Merchant) Paper Check BOFD Paper Check Paying Bank Paper Check Drawer 29 Paper Check Law Applicable Laws and Regulations Impose warranties on financial institutions when transferring and presenting checks Together with case law form boundaries for most aspects of check processing Complemented by large body of court interpretations Provide guidance and understanding in check payment disputes 30 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 15

16 Recognized Role of Rules UCC [4 103(b)] Recognizes role of check clearinghouse rules and Federal Reserve Operating Circulars May set forth additional provisions for paper check collection by financial institutions Reg CC [229.37] Recognizes role of check clearinghouse rules and Federal Reserve Operating Circulars May vary some provisions of laws and regulations o However may not fail to act in good faith or exercise ordinary care 31 Not Covered Under UCC or Reg CC What Rules or Agreements Apply? Clearing Images What Rules or Agreements Apply? What Rules or Agreements Apply? Remote Deposit Payee (Merchant) IMAGE IMAGE BOFD Key Considerations: Are the images authorized payments? When does legal presentment occur? Can the images be dishonored? Who is responsible for duplicates? Who is responsible for data security? What are the rights of the payee and drawer? Paying Bank IMAGE Drawer 32 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 16

17 UCC Updates UCC anticipated electronic check truncation/ image exchange 1990 revision ( 4 110) permits electronic presentment of items pursuant to an agreement for electronic presentment Agreement may be in the form of: Check clearing house rules and/or Federal Reserve regulation or Operating Circular 33 What Did Check 21 Do? Successfully encouraged and continues to support check truncation by removing key barrier to truncation No longer required to obtain agreements from all parties to the transaction Provides for replacement of paper check with substitute paper check Allows unilateral decisions to truncate checks Does not mandate the receipt of electronic (image) transactions Only applies to the substitute check Encourages image exchange Use image technology to create substitute check 34 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 17

18 Paper Check vs. Images Regulations vs. Rules UCC and Reg CC provide statutory and regulatory definitions for a paper check, but... No default definition of image in current check law Where is the image of a check currently defined? 35 Need for Rules Currently, No Laws Cover the Exchange of Check Images Exchanging images in the absence of agreements exposes financial institution to an indeterminately large amount of risk Potential for consequential damages Check Image Exchange Need agreements for exchanges through: Federal Reserve or Private sector 36 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 18

19 Check Rules, Regulations and Agreements State Law Uniform Commercial Code (UCC) Developed with efforts towards uniform laws for sales and other commercial transactions in all 50 states Detailed Code Addressing Most Aspects of Commercial Law Set of standardized state laws that govern financial contracts Establishes general duty standards for parties to act in Good Faith and exercise Ordinary Care Organized as Articles Each deals with a different subject area o Article 3 covers negotiable instruments o Article 4 cover bank deposits and funds transfers 37 Check Rules, Regulations and Agreements Federal Laws Code of Federal Regulations Codification of general and permanent rules published by executive departments and agencies of Federal Government Title 12 Banks and Banking Part 229 Availability of Funds and Collection of Checks (Regulation CC) Reg CC implements legislation relative to: Funds availability (EFAA); and Substitute checks (Check 21 Act) Important Note: Updates to Regulation CC released May 2017; eff. July 1, 2018 New regulatory provisions not in effect for 2018 exam window Reg CC updates not addressed in 2018 training or 2018 NCP Exam See NCP P.R.E.P. Guide for additional details 38 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 19

20 Check Rules, Regulations and Agreements Federal Reserve Regulations Regulation J Subpart A: Collection of Checks and Other Items by Federal Reserve Banks Purpose is to provide rules for collecting and returning items and settling balances via the Federal Reserve Banks Referenced by Fed OC3 Industry Image Rules FRB Operating Circulars OC 3: Collection of Cash Items and Returned Checks OC 5: Electronic Access ECCHO Rules: Private sector clearing house rules Note: Rules and regulations will be discussed in more detail in other sessions 39 Image Exchange Rules Establish legal rights and obligations of financial institutions in exchanging check images Address operational and technical requirements and reduce risk to exchange participants May be in the form of: Fed Operating Circular 3 (OC 3) Private sector rules (ECCHO Rules) Eligible item: Check under Reg CC; Item under UCC US savings bonds now transmitted via image exchange Noncash items not eligible for exchange ECCHO Rules permit imperfect image to be exchanged Foreign items currently not eligible Canadian items may be exchanged by agreement o ECCHO Rules updated 2015 to facilitate image exchange of Canadian items within U.S. prior to delivery to Canadian financial institution 40 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 20

21 Summary Warranties/Indemnities Come From Different Sources Federal regulations State Laws Rules and agreements To determine what rules apply, is the item: Original physical check, substitute Check (IRD), or image? For images, determine presentment/clearing channel: Through the Fed Reg J and OC3 apply Through a clearinghouse clearinghouse rules (i.e. ECCHO) Direct bank to bank (Clearinghouse rules and/or agreements) Generally, warranties start at first bank that deals with substitute check or image 41 Check Payments System Overview Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 21

22 Check Collection 101 Check Payments System Well established with rules and responsibilities clearly defined for each participant Daily process that occurs across thousands of deposit institutions including: Commercial banks Credit unions Saving institutions 2015: Nearly 18 Billion checks processed! Most as images Most cleared within 1 day 43 Check Collection 101 Check Payments System Paper processes shown from individual/corporate payor payee Paying Bank Overlay with image processes only the medium changed From paper to fully electronic On Us Items Image Image Individual Payor or Individual Payee Image Clearing Banks /Correspondent Image Corporate Payor Merchant/ or Corporate Payee Image Bank of First Deposit (BOFD) Image Federal Reserve Image Paying Bank 44 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 22

23 Check Collection 101 Check Payments system strongly influenced by various legislation Uniform Commercial Code Documents legal boundaries for most aspects of check processing Regulation CC Reflects the availability schedules found in EFAA Includes provisions for check and return item processing timeframes and standards Same Day Settlement Reg CC Update Requires paying bank to settle for checks presented to it prior to 8:00 a.m. by a private sector collecting bank Check 21 Legislation Facilitates check truncation by authorizing substitute checks; Subpart D added to Reg CC for Check 21 provisions 45 Check Collection 101 Objective: To clear checks using highest quality and most costeffective means Check processing for all sources of work completed timely each day Source of Work areas can include: Branches Mail Deposits Cash letters pre encoded including Lockbox Loan Departments (including Credit Card) Accounts Receivable Trust Department ATMs Vaults Check processing efficiency directly impacts: Collection speed and related Float (both bank and customer float) Clearing expenses and product revenue and the bank s balance sheet Clearing paper checks included specialized equipment plus transportation and support staff Examples on next slide show that specialized equipment used for paper check clearing 46 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 23

24 Check Collection 101 #1 Incoming Paper Cash Letters (paper checks to be captured/sorted) #2 Trays of Captured On us Items (waiting to be exception sorted) #3 IBM 3890 XP Reader/Sorter Views show a system with Microfilm & Image Camera (left) and multiple sort pockets (right) Software (sort patterns) directed the reader/sorter equipment to: Sort the paper checks Route to correct pocket after capture of MICR line information Source: JPMorgan Chase 47 Check Collection 101 Reader/Sorter Functions: Read the MICR data line Capture Data for application processing DDA General ledger Cash letter generation Endorse each item Sprayed endorsements on back of paper checks Sort by destination Tied to routing number listed in MICR line data Dispatch outgoing transit cash letters for clearing 48 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 24

25 Clearing Checks Check Processing Locations At one time there were 45 locations across 12 Federal Reserve districts With advent of image exchange, reduced to a single check processing location at FRB Atlanta 49 Clearing Checks Various channels to move payments through system to final collection May use clearing bank, correspondent relationship, or Federal Reserve Bank to present items to Paying Bank Depositary Bank wants to collect funds quickly and at reasonable cost Depositary Bank collects funds it has provisionally credited to its depositor s account 50 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 25

26 Clearing Checks Clearing Term used to generally define the process where payment instruction data is exchanged between financial institutions Moves checks from banks where they are deposited to banks where they are drawn Clearing process: Includes data collected from multiple transactions that is sent to an FI s core processing system Results in updates to accounts of the FI s customers 51 What is Settlement? Settlement Exchange of value between financial institutions for payments As shown in previous example: Clearing involved exchange of payment instructions (data) between two financial institutions Settlement: Exchange of funds Separate event based upon agreement between the two exchanging parties Settlement process varies for each clearing alternative Clearing House Correspondent clearing bank Federal Reserve 52 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 26

27 Settlement Federal Reserve Settlement at the Federal Reserve Bank All banks designate accounts for settlement at the Federal Reserve Bank May have own Fed account May use that of a correspondent o Some banks utilize both and designate which types of settlement occurs at each account 53 FRB National Settlement Service Owned and operated by Federal Reserve Banks Service is offered to depository institutions that: Settle for participants in clearing houses Financial exchanges Other clearing and settlement groups Settlement agents electronically submit settlement files to Federal Reserve Banks Files are processed on receipt Settlement occurs when FRB actually credits the reserve account of the depositor bank 54 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 27

28 Designated Settlement Accounts Checks, Credit Cards, ACH Wires, TT&L, Treasuries +/ $ +/ $ Federal Reserve Bank A s Fed Account Bank Bs Correspondent Account at Bank A 55 Settlement Clearing House Data Data Data Data Clearing House Each member financial institution presents payment instructions to clearing house Clearing house facilitates presentment to each paying bank for clearing Settlement occurs as a separate event 56 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 28

29 Gross vs. Net Settlement Gross Settlement Exchange of value for a single payment Net Settlement Exchange of value for multiple payments Net effect of all payments is settled to each financial institution 57 Gross Settlement For the value of a single payment; one financial institution receives credit and other receives debit DFI sending wire receives a debit on FRB books; DFI receiving the wire receives the credit Debit Bank A s Account on Books of the Federal Credit Bank B s Account on Books of the Federal Reserve $ +$ Reserve Federal Reserve Bank A s Fed Account Bank B s Fed Account 58 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 29

30 Net Settlement Multiple payments are grouped together Net effect settled to the designated account on books at Federal Reserve All debits / credits are combined for single bank; Net effect reflected on designated settlement account at the Fed +/ $ Federal Reserve +/ $ +/ $ +/ $ Net settlement: Settle between participating banks in a clearing network Bank A s Account Bank B s Account Bank C s Account Bank D s Account 59 Float Definition Float: Calendar days elapsing between the deposit/posting of a check and final collection with funds made available to the customer Dollar value of cash balances created by the time lag in processing unpaid checks Checks outstanding in the process of collection Conditional credit (ledger credit) in a depositor's checking account Until the checks are collected/paid and funds made available to customer 60 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 30

31 Float Overview Banks receive checks for deposit and can provisionally credit funds to account of the check depositor Timing to clear the check: Time it takes to collect and settle funds from drawee (bank upon which check is drawn) Check clearing results in checks in process of collection (CIPC) appearing briefly in accounts of both Depositary Bank and Paying Bank (drawee) 61 Float Overview Float tied to the timing to move, clear, and settle for checks in process of collection Types of Float may include: Bank float Customer float Positive and negative float Mail float Processing float Deposit float Ledger float 62 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 31

32 Bank Float and Customer Float Bank Float May be referred to as incurred float Non earning asset created through delay in collection of deposited funds Correlates to calendar days elapsing between: Posting of customer ledger credit; and Bank s receipt of usable funds Customer Float May be referred to as allocated float Sum of dollars credited to a demand deposit account but not available for immediate withdrawal/earnings credit Correlates to calendar days elapsing between: Posting of customer ledger credit; and Funds made available to customer 63 Positive and Negative Float Negative float occurs when: Customer Float greater than Bank Float Negative position from customer s point of view o Positive for the bank as the bank has use of funds prior to providing availability to the customer Positive float occurs when Bank Float greater than Customer Float Positive position from customer s point of view o Negative for the bank as now the Customer has funds available for use prior to the bank s collection and final settlement 64 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 32

33 Negative Float Example Days (timing) from Deposit to Funds Availability Customer Deposit Transaction (at BOFD A) Customer Credit Posted (at BOFD A) (Availability Deferred) Day 1 10:00 PM Day 1 10:00 AM Cash Letter Dispatched to Paying Bank for Clearing Day 1 11:00 PM Paying Bank Receives & Processes Cash Letter Day 2 10:00 AM BOFD A Obtains Usable Funds from Paying Bank Day 2 11:00 PM Day 3 8:00 AM Funds made available to Customer Number of Days until usuable funds are collected Bank (incurred) Float CIPC Checks in process of collection = cost on balance sheet Number of Days until funds available to the customer Customer (allocated) Float Negative Float (Float margin for bank) 65 Positive Float Example Days (timing) from Deposit to Funds Availability Customer Deposit Transaction (at BOFD A) Customer Credit Posted (at BOFD A) (Availability Deferred) Day 1 10:00 PM Day 1 10:00 AM Cash Letter Dispatched to Paying Bank for Clearing Day 1 11:00 PM Paying Bank Receives & Processes Cash Letter Day 2 10:00 AM Funds made available to Customer Day 2 10:00 AM Day 3 8:00 AM BOFD A Obtains Usable Funds from Paying Bank Allocated Float to Customer (Number of Days until funds available to the customer) Incurred Bank Float (Number of Days until usable funds collected) CIPC Checks in process of collection = Cost on balance sheet Positive Float (Float cost for bank) 66 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 33

34 Other Payment Systems Multiple Channels / Options Check Can Be Cleared via Multiple Channels As a physical check As an image Convert image to substitute check (IRD) As an ACH debit (if check is eligible for conversion) ARC Accounts Receivable entry POP Point of Purchase entry BOC Back Office Conversion entry 68 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 34

35 Automated Clearing House (ACH) Funds transfer system governed by NACHA Rules Provides for inter financial institution clearing of electronic entries for participating financial institutions ACH generally considered batch and forward payment system where: Day 1: Files are originated Day 2 or beyond: Files are settled General terms: ACH transactions: Debits or credits; Examples include: Direct Deposit of payroll, government and Social Security benefits; or Mortgage, insurance or other bill payments ACH Operators: Two central clearing facilities: Federal Reserve and The Clearing House (EPN) Originator: Individual, corporation or another entity that initiates either a deposit or payment transaction ODFI: Originating Depository Financial Institution RDFI: Receiving Depository Financial Institution 69 Ineligible Items ACH Following Do Not Qualify for Conversion to ACH Transactions Checks containing Aux on us field Greater than $25,000 Third Party checks/share drafts/money orders Demand drafts/3rd party drafts with no signature HELOC checks Money Market Checks FI Obligations Traveler s checks, official checks, cashier s checks State/local Gov t checks Checks/money orders in a foreign currency 70 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 35

36 Simple ACH Process Example ORIGINATOR ODFI Originating Depository Financial Institution RDFI Receiving Depository Financial Institution ACH OPERATOR Federal Reserve or The Clearing House RECEIVER 71 Other Payment Systems Debit Card May also be called 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 a company to allow the 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 cards Card 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 service; over time, they repay the bank with interest 72 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 36

37 Other Payment Systems Wire Electronic payment service for transfer of funds Characteristics include: Large dollar transactions, immediate availability, and irrevocable payments 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 To wire funds is to make a funds transfer from one bank to another with almost immediate availability Credit transfer (crediting funds); Contrast to checks which are debits Wires governed by provisions in UCC 4A Funds Transfer and: Regulation J for Fedwire CHIPS Rules & Procedures: Clearing House Interbank Payments System (CHIPS) 73 Questions 74 Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 37

38 Recommended Resources CheckImage Central Website: White paper on Need for rules : ECCHO website: Federal Reserve website: Uniform Commercial Code (UCC) Article 3 Negotiable Instruments Article 4 Bank Deposits and Collections X9 Standards: or go to: 75 Check Fundamentals and Check Processing Thank You! WesPay Education Team info@wespay.org NOTICE This 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 ECCHO Copyright 2017 by the Electronic Check Clearing House Organization Copyright 2017 by ECCHO (Certain contributed content subject to third party copyrights) 38