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Introduction to check and Images

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					THE PAYMENTS INSTITUTE — July 10-13, 2011
Georgetown University Hotel & Conference Center, Washington D.C.




Introduction to Checks &
     Image Products

          Mary Gilmeister AAP
           President WACHA
         mgilmeister@wacha.org
 Introducing: The Check


 WILD WHEELS, INC.                                                          2048
100 Park Street                                       June 23, 2001
San Francisco, CA 94345
                                                                       11-99/1210

PAY TO THE ORDER OF   Susan Jones                            $   1,095.00
  One thousand and ninety five dollars and 00/100’s
                                                                            dollars


Last National Bank


 REF:      00987
/:072400998:          //:0544519999// 2048
         Parties to a Check
• Maker (aka, drawer): the party making payment;
  the writer of the check
• Payee: the party receiving payment
• Paying Bank (aka, drawee bank): the bank
  holding the maker’s checking account
• Depositary Bank (aka, the Bank of 1st Deposit or
  the Depository Bank): the bank where the check
  is deposited or cashed
• Indorser: a payee who has assigned the right to
  collect the amount to someone else


3
                   Check History
• 1956 MICR (Magnetic Ink Character Recognition) line
  was formed.
      • The MICR consist of the following:
          –   Field 1   The amount of the check
          –   Field 2   The number of the check
          –   Field 3   The account number on which the check is drawn
          –   Field 5   The ABA routing number
          –   Field 7   The auxiliary number appearing only on commercial
              checks




4
         The 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

5
            Routing Number:
              MICR Form
    • Called the ABA Routing Number
    • Has 3 components:
      – Federal Reserve Routing Symbol (4
        digits)
      – ABA Institution Identifier (4 digits)
      – Check digit (1 digit)



6
Federal Reserve Routing Symbol

    • 1st 2 digits represent Fed district
       01         Boston            07    Chicago
       02         New York          08    St Louis
       03         Philadelphia      09    Minneapolis
       04         Cleveland         10    Kansas City
       05         Richmond          11    Dallas
       06         Atlanta           12    San Francisco
    • 3rd digit represents branch office serving the bank
       12th District:
       1 San Francisco    2      Los Angeles
       3 Portland         4      Salt Lake City
       5 Seattle
    • 4th digit has different interpretations in different Fed
      districts
7
              Fractional Form
  91-03      Numerator includes a city (1-49) or
  1221       state (50-99) prefix followed by the
             ABA institution identifier
           » Denominator is the Federal Reserve routing
             number
           » ABA and FR routing numbers match
             corresponding numbers in MICR form
91-03/1221
             without leading zeros
           » Additional letters or numbers may be
             printed if paying bank wants
           » - May be printed in one of two forms

  8
           UCC Article 3:
        Negotiable Instruments
    • Covers
       – Definition and requirements of a negotiable instrument
       – Negotiation, transfer and endorsement of these
         instruments, and
       – Liability of the parties
    • Sample topics:
       – Standards of care required for processing checks
       – Establishing the identity of the payee
       – Negligence of maker in case of forgery or alteration
       – Forgery and fraud loss allocation
       – Employer’s responsibility for employee fraud



9
     A Negotiable Instrument Is:
 • A written order signed by the maker
 • An unconditional promise or order to pay a
   fixed sum of money
 • Payable on demand or at a definite time
 • Payable to order of a named payee or to
   bearer



10
     Definition and Requirements
 •   Unconditional promise to pay. 3-106
 •   Fixed amount of money. 3-104(a)
 •   Payable on demand or at a definite time. 3-108
 •   Date of instrument. 3-113
     – Check not dated it would be when it first comes into
       possession of the holder.
 • Payable to bearer or to order. 3-104, 3-109
     – Effect of endorsement 3/109c



     11
11
                                 Date
     • The day on or after which the transfer of the amount of the
       check may take place
     • Needed to satisfy the definition of negotiability
     • Post-dated checks:
        – A bank may charge a customer’s account even though
          payment is made before the date on the check unless
          the customer gives the bank notice of the postdating
          (UCC 4)
     • Stale-dated checks:
        – A bank may, but is not obligated to, pay a check
          presented more than six months after its date (UCC 4)




12
                        Amount
     • The value which will pass from the account of the
       maker to the account of the payee
     • Required for negotiability
     • To inhibit unauthorized alteration, it should appear
       twice on the check
         – Amount in numbers is called the “convenience
           amount”
         – Amount in words is the “legal amount”
     • Although automated scanning equipment may read
       the convenience amount, if there is a discrepancy in
       the amount, the legal amount takes precedence
       (UCC3)

13
                  CAR/LAR
 • Courtesy Amount Recognition & Legal
   Amount Recognition
     – The ability to locate, analyze and recognize
       handwritten or machine-printed courtesy and
       legal amounts on documents




14
          When a Bank May Charge a
             Customers Account
 • Overdrafts, 4-401a
     – May create overdraft
 • Postdated checks, 4-401c
     – Customer must give notice
 • Stale dated items, 4-404
     – No obligation to pay
 • Altered and incomplete checks, 4-401d
     – Good faith


15   15
                           Payee
     • The name of the person or organization that is to
       receive the amount of the check
     • Usually preceded by the words: “Pay to the
       order of...” or “Pay to...” or “Pay...”
     • Required for negotiability
     • Identity of the payee is determined by the intent
       of the maker
     • Joint payees:
        – If check is payable to A or B, then either may
           endorse and negotiate
        – If payable to A and B, then both must
           endorse and negotiate


16
                Signature
 • Authorizes the paying bank to disburse
   funds
 • Required for negotiability
 • Must coincide with the conditions of
   payment on the signature card
 • May contain restrictive notations for which
   bank may require an indemnity


17
      Unauthorized UCC 3-402
     • A person is not liable on an instrument unless he or
       she signs it. If a person’s name is signed without
       authority, the signature is unauthorized.
     • Ratification
        – A son borrowed a check from his Mother’s
          account and forged her signature. The Mother
          allowed it as it was her son. The signature was
          ratified and once this is done it cannot be
          reversed.




18
       Employer’s Responsibility


     • An employee of the company and it
       also includes an independent contractor
       and employee of an independent
       contractor retained by the employer.
       – Checks written, stamped or deposited
         fraudulently using the companies account.
         • The employer is liable and not the Paying Bank



19
             Unauthorized
             UCC 4-406(f)
 • Provides that without regard to the care or
   lack of care of the customer or the bank,
   the customer has to within one year from
   the date that the statement was made
   available to the customer to report an
   unauthorized signature to the bank.




20
          The Indorsement
 • Transfers ownership to another party
 • Payee must endorse check to deposit,
   cash or transfer ownership of the
   instrument (although bank need not
   require endorsement to deposit to payee’s
   own account)
 • Also called Endorsement


21
           Indorsements UCC 3-4
     • Referred to throughout
        – definition, 3-204
     • Types, 3-205 and 206
        – special, 3-205a
        – blank, 3-205b
        – anomalous, 3-205d
        – restrictive, 3-206
     • Unauthorized, 3-403
        – employer’s responsibility, 3-405
     • Depository bank becomes holder, 4-205




22   22
          Payee Indorsements

     • Required to negotiate check, unless
       depositing to own account
     • Must include authorized signature or
       stamp
     • Payee endorsement need not be in the
       exact name of the named payee. The
       endorsement need be only made in a
       name “substantially similar” to that of the
       payee

23
     Types of Payee Indorsements
     • Blank
       – Payee simply signs his/her name
       – The check becomes a bearer instrument and
         can be transferred to anyone simply by giving
         the check to another party
     • Special
       – Transfers the check to a specified payee
       – Negotiation then requires that person’s
         subsequent endorsement
     • Restrictive
       – Imposes limitations on transferring the check
24
        Types of Indorsements
 • Anomalous
     – An endorsement made by a person who is not
       the holder of the instrument.
       • A check is made payable to Joe Cool and Joe
         does not have a banking account in the city to
         which he is located but his friend Happy Mary
         does. Mary and Joe go to the bank together. Joe
         endorses the check and so does Mary.




25
   Depository Bank as Holder in Due
                delivers an item to a depositary 302
 • If a customerCourse UCC 3 - bank for collection
 • (1) the depositary bank becomes a holder of the item at the time it
   receives the item for collection if the customer at the time of delivery
   was the holder of the item whether it is endorsed or not.
 • (2) the depositary bank warrants to collecting banks, the payor bank
   or other payor, and the drawer that the amount of the item was paid
   to the customer or deposited to the customer’s account.




26
             Negotiation

 Occurs as the result of a transfer of
 possession of an instrument by a
 holder to another person (e.g., a
 bank) who becomes a holder as a
 result of the transfer
                                             Depositary
                     $                       Bank




The payee is the holder of the check. She exchanges it for
money at her bank. Now the bank is the holder of the check.
        Indorsements by Depositary
         Bank and Any Subsequent
           Processing Institutions
     Provide a warranty to the Paying Bank that:
     • Prior Endorsements are genuine and
       authorized
     • No alterations have been made to the
       check
     • Warrantor has no knowledge that maker’s
       signature is unauthorized
     • Its customer has been paid (either in cash
       or deposited into the account of payee)
28
            Paid vs. Cashed
     • When a check is exchanged for cash,
       it is said to be “cashed.”
     • When a check is debited from a
       checking account, thereby reducing
       the balance, and cancelled, it is said to
       be “paid.”
     • Only the paying bank can “pay” a
       check, but anyone who rightfully holds
       it can “cash” it.
29
                   A Check:

     • Is a draft which is payable on demand
       and drawn on a bank
     • Its purpose is to transfer a specific
       amount of money on or after a specific
       date to a specific person or to bearer
     • The transfer is authorized by the genuine
       signature of the maker of the check
     • The data on the front and the back of the
       check are necessary for the proper
       processing of the check through the
       payment system
30
              Types of Checks

     • Other Types of Checks
       –   Cashier checks
       –   Certified Checks
       –   Money orders
       –   Government checks
       –   Traveler’s checks
       –   Warrants
       –   Payable-Through drafts
       –   RCC Remotely Created Checks
       –   Substitute Checks


31
                Cashier’s Checks
     • Are checks that a bank draws on itself
     • Include
       –   Cashier’s checks
       –   Treasurer’s checks
       –   Official checks
     • They are a direct obligation of the bank
     • Can be used
       –   To pay its own bills
       –   As a service offered to its customers/members
     • Are often regarded as an equivalent of cash

32
                 Money Orders
• A form of draft that a person may purchase from
  a financial institution, post office or sales agent
  for the purpose of paying a debt or transferring
  funds
• Typically used by persons without checking
  accounts
• Typically issued with the amount printed on its
  face by the issuer
• Drawn on issuing agent
• Status under UCC depends on form (bank
  money order, personal money order, etc.)
33
           Government Checks

     • Instruments payable on demand
       and drawn by the U.S. government
       on the government itself are
       generally regarded as checks,
       even though they are not drawn
       on any bank.
     • Such instruments are demand
       drafts under the UCC
     • They are treated as checks and generally
       referred to as “government checks”

34
                Warrants
 • Issued by state or local government
   agencies
 • Are generally treated as checks if they are
   payable on demand
 • Many, however, are actually payable
   through drafts




35
             I.O.U. Warrant




     Not a Check
36
     What is a Remotely Created
               Check?
 • The holder of a checking account authorizes a
   payee to draw a check on the account but does
   not actually sign the check
   A.K.A. telecheck, preauthorized drafts and paper
   drafts:
       • Example: I was late in paying my electric bill so I called the
         WE Energies and they created a draft
       • Example: An insurance payment




37
        Remotely Created Check

     • Legal Definition according to the Regulation:
       – Means a check that is not created by the paying
         bank and that does not bear a signature applied,
         or purported to be applied, by the person on
         whose account the check is drawn.
       – Includes a remotely created check that has been
         reconverted to a substitute check.
       – Includes an account held by a consumer,
         corporation, unincorporated company,
         partnership, government unit, or trust


38
     Remotely Created Checks




39
                Signature
 • Instead of the account holder’s signature it
   usually bears a statement that the
   customer authorized the check or bears
   the customer’s printed or typed name.




40
        What is included in the
              Definition
 • Checks created by the payee
     – Telemarketer
 • Checks created by the consumer’s agent
     – Paypal, Yahoo
 • What is not included
     – Not included consumer’s bank internet
       banking services




41
               Collections
               Traditional Paper
               Collection



Check           Check                        Check
                          Intermediary
        BOFD
                                                      Paying Bank


               Substitute Check Collection




Check                      Intermediary      Sub Ck
                  Image
        BOFD                                          Paying Bank
                                                            42
                     What Is a
                 “Substitute Check”?

     •   Contains image of front and back of check
     •   Conforms to industry standards
          – MICR
          – Physical characteristics of check
     •   Suitable for automated processing
     •   Must accurately represent all information on original check
     •   The substitute check MUST contain a legend that reads…
          – “This is a legal copy of your check. You can use it the
             same way you would use the original check”
     •   Includes all indorsements




43
Substitute Check




                   44
Substitute Check




                   45
                   Parties to a
                 Substitute Check
 • Truncating Bank
    – The Financial Institution that truncates the original check
     – If a person other than a Financial Institution truncates the original
       check, the first Financial Institution that transfers, presents, or
       returns, in lieu of such original check, a substitute check or, by
       agreement with the recipient, information relating to the original
       check(including data taken from the MICR line of the original
       check or an electronic image of the original check), whether with
       or without the subsequent delivery of the original check.




46
      Parties to a Substitute Check
            Substitute Check
     • Reconverting Bank
       –The Financial Institution/correspondent
        bank that creates a substitute check
       –If a third party processor creates a
        substitute check (Metavante, FISERV) the
        bank of First Deposit is the Reconverting
        Bank



47
     Reconverting Bank Examples
 • ABC Bank sends substitute check
   information to a Correspondent Bank who
   prints the substitute check on ABC Bank’s
   behalf. The Correspondent Bank is the
   Reconverting Bank.




48
      Parties to a Substitute Check
 • Claimant Bank(Paying Bank)
     – Means a Financial Institution that submits a
       claim for a recredit for a substitute check to an
       indemnifying Financial Institution.




49
              Eligible Checks?
     • ALL CHECKS are eligible for replacement
       with substitute checks, for example:
        –   Retail checks
        –   Non retail checks
        –   Government warrants
        –   Treasury checks
        –   Money orders
        –   Controlled disbursement
        –   Payable through drafts
        –   Etc.


50
     On-us and Transit Items
• In check processing, there are two basic kinds of
  checks: on-us and transit
• On-us checks are drawn against accounts at
  your own financial institution (i.e., the Depositary
  Bank and the Paying Bank are one and the
  same)
• Transit checks (aka, off-us or on-other) are
  drawn against accounts at other financial
  institutions
                  Check Collection System
               “Day in the Life of a Check Image”
                                                    On-Us
                                                                Image              Image
                                                    Items


     Individual         Individual    Image
                                                                  Clearing Banks
     Payor               Payee
                                                                  /Correspondent
          or                                                                        Image
                     Remote Deposit
                     Capture




     Corporate
                                       Image   Bank of First    Image              Image
     Payor                                     Deposit
                                                                        Federal
                                               (BOFD)
                  Merchant                                              Reserve
                                                                                            Paying Bank
                  or
                  Corporate Payee



               Typically Day 1                                 Typically Day 2
                                                               Settlement Occurs
52
Types of Image Exchange
                                     Image Cash Letter: Digital images of paper
 IMAGE CASH LETTER                   cash letter; includes both the MICR data record
                                     and the transmitted check images
  (ICL)


                                                                       IMAGE
                                                                       CASH LETTER
                                          IMAGE                        or
             DEPOSIT                      CASH LETTER
             CHECK




                           SENDING BANK
 CUSTOMER                     (BOFD)
                                                RECEIVING BANK
                                                RECONVERTING BANK                PAYING BANK

                                                              Substitute Check: A paper
                                    Reconverting Bank:        reproduction from an electronic record
           STORE CHECKS             First FI to create or     of (or image of) an original paper
                                    transfer the substitute   check that was previously truncated.
                                    check                     Must meet the definition of a substitute
Truncation: Stop processing of
                                                              check from Reg CC Subpart D and
physical paper item(s) and
                                                              applicable standards (X9.100-140)
forward electronic image(s)
   53
and MICR data
Types of Image Exchange
LOCAL/REGIONAL
EXCHANGE


                              Other Exchanges
             Other Banks                                         Federal
                              (i.e., Viewpointe,
                              Endpoint Exchange, SVPCO)          Reserve




                           Exchange Network
                           Member Banks




                                                          Private Sector
Settlement                                                Rules (ECCHO)
Bank
54
                                                          Cover Exchanges
55

				
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