By Betsy Didan, Document Processing Manager, COCC

The Check Clearing for the 21st Century Act, also known as Check 21, promises to influence the banking industry for years to come. By requiring all financial institutions to accept digital reproductions of the original check from an electronic transmission (substitute checks), Check 21 paves the way for eliminating much of the transportation and back office labor required for check processing today.

The Federal Reserve Board has now released its first draft of proposed Check 21 implementation regulations for comment. Vendors are still arranging their solutions for image exchange and electronic cash letters, making it difficult to develop definitive strategies for Check 21 implementation. However, given the intention of the act and the facts we know now, COCC has assembled a list of actions that your organization might well consider in preparation for Check 21. Here are COCC’s current suggestions for your institution’s preparations for Check 21:

UNDERSTAND THE REQUIREMENTS
Much of what has been written about Check 21 concerns opportunities rather than requirements. For the purpose of preparing for Check 21, it is important to understand the difference. COCC’s current understanding of the Check 21 Act brings us to the following three requirements for financial institutions:

• Receive and return substitute checks.
• Provide notification materials to their customers who receive original or substitute checks. This notification material must describe a substitute check and the consumer’s expedited re-credit rights. The notification must be delivered no later than the first regularly scheduled communications with the consumer after October 28, 2004 and also to any new accounts after October 28, 2004 and consumers who request copies of checks.
• Have procedures in place to support the expedited re-credit process. This process requires that your institution re-credit a customer if they experienced a loss due to a substitute check being charged incorrectly or they have a warrant claim with respect to the substitute check and a copy of the original check or a better copy is needed to determine the validity of the claim.

To meet these requirements, COCC recommends that financial institutions:

1. Gain a thorough understanding of your institution’s current check processing function, particularly the signature verification and fraud prevention areas. The use of substitute checks will trigger procedural changes in these areas.
2. Consider check imaging. Most institutions believe that check imaging is the same thing as image statements. It is not. Check imaging also involves image access and research – tools for customer support – in addition to image statements. Proper preparation for Check 21 should include utilization of check imaging.
3. Maintain a close relationship with your check processor. Check 21 will require your processor to change procedures, such as including substitute checks in your image research archive and rendering substitute checks in statements. Knowing your processor’s plans will be critical to your institution’s compliance with the published regulation. If you do currently process checks and statements in-house, get close to your hardware and software vendors for all the same reasons.
4. Begin to consider the customer impact of Check 21. When the regulations become effective on October 28, 2004, your customers may flood your institution with questions concerning substitute checks, dispute procedures, and re-crediting. Your call center and customer service representatives should be prepared to answer questions about these new concepts.
5. Train your employees in the Check 21 legislation and potential impact on customers.
6. Prepare a campaign to educate your customers on Check 21 and substitute checks.

• Lead your customers to image statements and other image-based services in order to limit the number of substitute checks that must be created and handled.
• Educate your business customers about substitute checks as proof of payment.

Your institution will probably not have to do the following:

• Author a consumer education piece. At this writing, the Federal Reserve Board plans to author by July 28, 2004 its own consumer education pieces for dissemination at your institution. There’s no need to re-invent the wheel! Use of the FRB language will provide a “safe harbor” and guarantee language compliance.
• Make arrangements with image exchanges. If you use a check processor, you may well get your best deal by letting your processor handle the details.

UNDERSTAND THE OPPORTUNITIES
Check 21 has been touted as the catalyst for major cost savings in your check operations area. This is really a function of electronic exchange, which moves images rather than physical items through many of the check payment processes, and has the potential to:

• Reduce handling costs because the physical item no longer needs to be returned to the paying bank.
• Improve availability because debit items are collected more rapidly.
• Increase overdraft privilege opportunities as your customer’s check move through the payment system faster.
• Reduce fraud exposure through quicker check clearing capabilities.

While individual institutions can negotiate with the electronic image exchanges, the largest institutions moving the greatest item volume will reap the greatest advantages. If your institution can be classified as “small” (under $3 billion in assets), a check processor will be your most cost-effective solution. Check processors can aggregate the items to gain volume discounts and pass the savings on to your institution. Also, the check processor will have worked out the technical hurdles involved in originating, archiving, receiving and returning images and substitute checks.

To gain the most benefit from Check 21, COCC recommends that financial institutions:

1. Participate in your processor’s Check 21 planning. Urge your processor to negotiate with the electronic exchanges and offer a choice of exchange service options. This is a great opportunity to help your processor work through issues by presenting the banker’s point of view, and to keep your institution informed of progress.
2. Build business analysis models for your major Check 21 initiatives. These include any electronic exchange agreements as well as the purchase of branch image capture equipment. These devices may require considerable volume to pay for themselves. In addition, your staff will need to develop new operational procedures and training to use the scanning devices effectively.
3. Increase the use of truncation wherever possible. Check 21 is all about check images. Truncation reduces your customers’ allegiance to checks and reduces your costs at the same time.

Your institution might consider the following steps to maximize the benefit of Check 21:

1. Prepare to truncate early and often, particularly at the teller window and at the ATM
2. Work with merchants to truncate at the point of sale
3. Deploy remote “Deposit” stations at large customers’ locations
4. Offer instant authorization and payment services wherever possible.

As the Check 21 regulations come into clearer focus, COCC will provide updates to your institution. We look forward to assisting you in deriving the greatest benefit from this new regulation.