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F ederal R es erve
L ocal Clearing Hous es
NCHA
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P S N/VIS A
ANS I
F ederal R es erve
L ocal Clearing Hous es
NYCH
PPS
P S N/VIS A
E lectronic Check Collection
E lectronic Notifications - R educed Write-offs
ANS I
F ederal R es erve
FSTC
L ocal Clearing Hous es
NYCH
P S N/VIS A
F ederal R es erve
NYCH
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P S N/VIS A
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Cas h Management R evenue
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Page 4
$300
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Page 6
ECCHO: BACKGROUND
ECCHO (Electronic Check Clearing House
Organization) is a non-profit, mutual
benefit, chartered national clearing house.
ECCHO was created in early 1990 by
major U.S. banks as a cooperative venture
to implement electronic check
presentment (ECP).
A primary goal was to address the
increased risk resulting from the
permanent availability schedule of
Regulation CC (Reg CC) which was
implemented on September 1, 1990.
Reg CC requires deposited funds be made
available to customers before the returned
checks can be received and processed,
thus creating a new risk. Through the use
of electronics, this risk is reduced by
expediting the forward presentment
process which compresses the overall
time required for presentment and return.
The risk can be further reduced by using
electronic notices of nonpayment. These
"RNOTEs" enable the depositary bank to
initiate protective actions one day after
deposit.
Electronic Check Presentment
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Membership Information -- Page 1
ECCHO: CLEARING HOUSE STATUS
MEMBERSHIP VALUE
Today ECCHO is the only clearing house
with a national membership designed to
facilitate the electronic presentment of
checks with paper checks to follow.
Current statutes and regulations do not
adequately address ECP with paper
checks to follow.
Both Reg CC and the revised Uniform
Commercial Code (UCC) Article 4 assume
paper checks are truncated. Additionally,
there have been no litigations to guide the
courts in resolving disputes. ECCHO
Operating Rules fill this legal void.
ECCHO Rules Provide
Legal Coverage
ECCHO
Rules
Electronic with
paper to follow
Modifies UCC
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Membership Information -- Page 2
ECCHO: CLEARING HOUSE STATUS
MEMBERSHIP VALUE
As a clearing house, ECCHO enjoys the
unique status afforded clearing houses
under the UCC which allows clearing
houses to modify certain aspects of the
law. Additionally, rules of clearing houses
are binding on all parties involved in
transactions processed under clearing
house rules even though they may not
have specifically agreed to be bound by
those rules.
These are unique legal characteristics of
clearing houses which create substantial
value for ECCHO's members.
Legal Environment
ECCHO
National Clearing House Rules
Customer
A
ECCHO
Bank A
ECCHO
Bank B
Customer
B
Bilateral Agreements
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Membership Information -- Page 3
ECCHO: INDUSTRY LEADER
STANDARDS
The most efficient collection system
requires a high level of consistency from
bank to bank, from clearinghouse to
clearinghouse, from state to state, from
dispute to dispute. ECCHO strives to
achieve consistency while managing
complexity and risk, and this effort
involves a number of legal and operational
issues. Even though ECP is a
comparatively youthful system, work on
the fundamental issues has been
completed.
wide variety of environments (systems,
competitive, operational) have reached an
agreement on many pivotal ECP rules.
Their own local paper clearinghouses and
many others around the country have
begun modifying their rules accordingly.
Some like Seattle's Northwest Clearing
House Association and the Puerto Rico
Clearing House Association have fully
incorporated ECCHO rules into their own
association rules. Others have adopted or
are considering adoption of ECCHOcompatible rules.
ECCHO member banks, representing a
Creating Industry S tandard
Northwest Clearing
HouseAssociation
Detroit
ClearingHouse
CaliforniaBankers
ClearingHouse
New York
ClearingHouse
Richmond
ClearingHouse
ClearingHouse
Association of theSouthwest
PuertoRico
ClearingHouse
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Membership Information -- Page 4
ECCHO: MEMBERSHIP
The ECCHO membership includes the
largest banks in the United States. The
total combined deposits of all ECCHO
member bank holding companies is
approximately $1.5 trillion (see ECCHO:
Current Members next page).
FOUR MEMBERSHIP TYPES
There are four membership types
available, Full Members, Affiliate
Members, Associate Members, and
Limited Members. Full Members have
paid a Full Membership fee and signed a
Full Membership Agreement.
Affiliate Members are affiliated (as defined
in the Bank Holding Company Act and
Federal Regulation Y) with a Full Member,
have paid an Affiliate Membership fee and
have signed an Affiliate Membership
Agreement.
Associate Members are banks that wish to
exchange ECP files with a very limited
number of banks and therefore pay
Associate Membership fees based upon
the number of send/receive points.
Associate Members have signed the
related Associate Membership Agreement.
ECCHO created a fourth membership
class and membership fee structure to
accommodate smaller banks ($500 million
plus) who, like the Associate Members,
wish to exchange ECP files with a very
limited number of banks. The membership
fee is calculated based on bank’s deposit
size and number of exchange partners.
Limited Members have signed the related
Limited Membership Agreement.
Four Membership Classes
1
3
Full
Member
$100,000
Associate
Member
$10,000
2
4
$1,000
$1,000
$1,000
Limited
Member
Variable
AffiliateMembers
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Membership Information -- Page 5
ECCHO: CURRENT MEMBERS
$CPEQ 5CPVCPFGT
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Membership Information -- Page 6
ECCHO: BOARD OF DIRECTORS
ECCHO OFFICERS:
ECCHO STAFF:
· Chairman of the Board
Mary Ellen Baker
Comerica
· Executive Director
Carreker-Antinori, Inc.
Dallas, Texas
Executive Director functions include:
- Administration
- Education
- Accounting
- Public relations
- Legal and regulatory
- Membership recruiting
- Industry relations
- Standards
· President
Mitchell Christensen
Wells Fargo & Company
· Secretary/Treasurer
Gerald McQuaid
Key Bank
CURRENT BANKS WITH ECCHO DIRECTORSHIPS ARE:
·
·
·
·
·
·
·
BankBoston
Bank of America
Bank One
Bankers Trust Company
Chase Manhattan Bank
Citibank, N.A.
Comerica
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·
·
·
·
·
·
·
Frost National Bank
Key Bank
Marine Midland Bank
Summit Bank
SunTrust Bank
Union Bank of California
Wells Fargo Bank
Membership Information -- Page 7
ECCHO: FULL / AFFILIATE MEMBERSHIP INFORMATION
FEES
The initial one-time membership fee for a
Full Membership is $100,000 and for an
Affiliate Membership is $1,000. After the
first year of membership, Full Members
also pay quarterly dues as determined by
the Board of Directors. For 1998 these
quarterly dues range from $4,300 $17,600. Affiliate members pay no annual
dues.
PRIVILEGES
Full Members have all rights and
privileges as provided for in the ECCHO
Operating Rules. Specifically, all Full
Members that are not Founding Members
are eligible for periodic two year rotating
directorships on the ECCHO Board of
Directors and are entitled to
representation on the ECCHO Operations
Committee. Full Members also are
eligible to exchange ECP files with any
Full or Affiliate ECCHO Member Bank.
Affiliate Members have all the same rights
and privileges as Full Members with the
exception that they are not eligible for a
two year rotating directorship on the Board
and are not entitled to representation on
the ECCHO Operations Committee. They
are eligible to exchange ECP files with any
Full or Affiliate ECCHO Member Bank.
Full/Affiliate Member Privileges
S end and Receive
Full/Affiliate Members may send to and
receive from an unlimited number of Full and
Affiliate members
ECCHO3
ECCHO1
Full/Affiliate
Members
ECCHO2
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ECCHO4
Membership Information -- Page 8
ECCHO: ASSOCIATE MEMBERSHIP INFORMATION
FEES
PRIVILEGES
The initial fee for an Associate
Membership is $10,000 per send and
$10,000 per receive partner. All Associate
Membership fees may be applied to the
initial Full Membership fee whenever the
Associate Member converts it’s Associate
Membership to a Full Membership.
Associate Members have all the same
rights and privileges as Affiliate Members
with the exception that they are restricted
to exchange ECP files with only the Full
and/or Affiliate ECCHO Member banks
specified in the Associate Membership
Agreement.
Associate Members will incur small annual
dues after the beginning of their second
year of membership ($7,500 in 1998).
Associate Member Privileges
and Fee S tructure
Example:
S END:
RECEIVE:
As s ociate Member will s end to two and will receive from
one ECCHO Full/Affiliate ECCHO members .
$10,000 X 2 $20,000 (one time fee)
$10,000 X 1 $10,000 (one time fee)
$30,000 One T ime Members hip Fee
$10,000
ECCHO 1
Associate
Member
$10,000
$10,000
ECCHO 2
$30,000
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Membership Information -- Page 9
ECCHO: LIMITED MEMBERSHIP INFORMATION
FEES
The Limited Membership fee is paid on an
annual basis and there are no annual
dues. The membership fee varies with the
size of the institution and with the number
of production exchange partners.
is $2.00 per month per $10MM of deposits
or a minimum of $200 per month. For a
Limited Member who has multiple send
and receive partners, the monthly fee is
calculated by the number of those
exchange partners.
PRIVILEGES
The monthly cost for one Limited Member
sending to one Full or Affiliate Member is
calculated at $1.50 per month per $10MM
of deposits, or a minimum of $100 per
month.
PLUS
The monthly cost for one Limited Member
receiving from one Full or Affiliate Member
Limited Members have all the same rights
and privileges as Affiliate Members with
the exception that they are restricted to
exchange ECP files with only the Full
and/or Affiliate ECCHO Member banks
specified in the Limited Membership
Agreement.
Limited Member Privileges
and Fee S tructure
Limited Member' s domestic depos it s ize is $750 million and will
s end to one ECCHO Member and will s end to and receive from a
s econd ECCHO member bank.
($1.50 X 12 mos X ($750 MM/10MM)) X 2 = $2,700 Annually
S END:
RECEIVE: ($2.00 X 12 mos X ($750 MM/10MM)) X 1 = $2,400 Annually
($200 monthly minimum)
$5,100 Annually
Example:
S ending ECP Files
$1,350 per year
Limited
Member
$750MM in
Domestic
Deposits
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Full/Affiliate
Member 1
S ending ECP Files
$1,350 per year
Receiving ECP Files
$2,400 per year
Full/Affiliate
Member 2
Membership Information -- Page 10
ECCHO: MEMBERSHIP FLEXIBILITY’S
Each ECCHO Member bank maintains its
flexibility by deciding :
· With which ECCHO members it will
exchange files
· Whether it will send
· Whether it will receive
· Which routing transit numbers it will
receive
· On its receipt deadlines for electronic
files
· On its receipt deadlines for paper cash
letters
· Which ECP items it will post
Further, each pair of exchanging ECCHO
Members agrees on benefit sharing rates,
methods, and settlement timing.
HOW TO JOIN.
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Membership Information -- Page 11
Full Member Membership Letter
[DATE]
Electronic Check Clearing House Organization
14001 Dallas Parkway, Suite 1100
Dallas, TX 75240
ATTN: Mr. David Walker
We hereby agree to be a Full Member of the Electronic Check Clearing House
Organization ("ECCHO") and, as such a member, agree to the terms of the Bylaws of
the Electronic Check Clearing House Organization ("ECCHO Bylaws") and the
Operating Rules of the Electronic Check Clearing House Organization ("ECCHO
Operating Rules"), as the ECCHO Bylaws and ECCHO Operating Rules may be
amended from time to time.
___________________________
(Name of Depository Institution)
___________________________
By:
___________________________
(Authorized Signature)
___________________________
(Title)
cc: Julie Butler
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Membership Information -- Page 12
Affiliate Membership Letter
[DATE]
Electronic Check Clearing House Organization
14001 Dallas Parkway, Suite 1100
Dallas, TX 75240
ATTN: Mr. David Walker
We hereby agree to be an Affiliate Member of the Electronic Check Clearing
House Organization ("ECCHO") and, as such a member, agree to the terms of the
Bylaws of the Electronic Check Clearing House Organization ("ECCHO Bylaws") and
the Operating Rules of the Electronic Check Clearing House Organization ("ECCHO
Operating Rules"), as the ECCHO Bylaws and ECCHO Operating Rules may be
amended from time to time.
___________________________
(Name of Depository Institution)
___________________________
By:
___________________________
(Authorized Signature)
___________________________
(Title)
cc: Julie Butler
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Membership Information -- Page 13
Associate Membership Letter
[DATE]
Electronic Check Clearing House Organization
14001 Dallas Parkway, Suite 1100
Dallas, TX 75240
ATTN: Mr. David Walker
By signing below, [Name of Associate Member] as an Associate Member, agrees to
the terms of the Bylaws of the Electronic Check Clearing House Organization ("ECCHO
Bylaws") and Operating Rules of the Electronic Check Clearing House Organization
("ECCHO Operating Rules"), as the ECCHO Bylaws and ECCHO Operating Rules may
be amended from time to time.
[Name of Associate Member] further agrees to send items under the ECCHO
Operating Rules to:
[Name of Full or Affiliate ECCHO member].
[Name of Full or Affiliate ECCHO member].
[Name of Associate Member]
HWTVJGT CITGGU VQ TGEGKXG KVGOU WPFGT '%%*1
1RGTCVKPI 4WNGU HTQO
[Name of Full or Affiliate ECCHO member].
[Name of Full or Affiliate ECCHO member].
___________________________
(Name of Depository Institution)
___________________________
By:
___________________________
(Authorized Signature)
___________________________
(Title)
cc: Julie Butler
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Membership Information -- Page 14
Limited Membership Letter
[DATE]
Electronic Check Clearing House Organization
14001 Dallas Parkway, Suite 1100
Dallas, TX 75240
ATTN: Mr. David Walker
By signing below, [Name of Limited Member] as an Limited Member, agrees to the terms
of the Bylaws of the Electronic Check Clearing House Organization ("ECCHO Bylaws") and
Operating Rules of the Electronic Check Clearing House Organization ("ECCHO Operating
Rules"), as the ECCHO Bylaws and ECCHO Operating Rules may be amended from time
to time.
[Name of Limited Member] further agrees to send items under the ECCHO Operating
Rules to:
[Name of Full or Affiliate ECCHO member].
[Name of Full or Affiliate ECCHO member].
[Name of Limited Member] further agrees to receive items under ECCHO Operating
Rules from:
[Name of Full or Affiliate ECCHO member].
[Name of Full or Affiliate ECCHO member].
___________________________
(Name of Depository Institution)
___________________________
By:
___________________________
(Authorized Signature)
___________________________
(Title)
cc: Julie Butler
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Membership Information -- Page 15
ECCHO: SERVICE PARTNERS
NON-MEMBER PARTICIPANTS
Service Partnership is the only method by
which non-banks may participate in
ECCHO. Service Partners are nonmember participants in ECCHO because
ECCHO’s membership must be limited to
depositary financial institutions to maintain
its clearinghouse status. Although Service
Partners can not be members of ECCHO,
they can still be valuable participants in
the ECCHO process and organization.
This presents an opportunity for the
processors to sell additional services to
their bank clients and to “sponsor” those
clients’ memberships in ECCHO. The
banks can justify buying additional
services when they are receiving
additional value form the ECP exchanges.
The additional value to the banks is
discussed later in the “ECP Process and
Benefits” section.
Also, some organizations might wish to
influence the direction of ECCHO and
A Service Partner can be any organization ECP by participating as a Service partner
in ECCHO’s Operations Committee and
whose primary business is providing
services to depository financial institutions subcommittee meetings. The Operations
Committee and its subcommittees include
or whose members are primarily
depository financial institutions. Examples representatives from the most active ECP
banks in the U.S. and represent ECCHO’s
of Service Partners are third party
primary research and development efforts.
processors, bank clearinghouses,
These efforts, in part, determine ECCHO’s
organizations that operate banking
direction and frequently result in the
payment systems or banking networks or
development of ECP rules and formats.
switching facilities, etc. Examples of
organizations not eligible to become
Service Partners would be organizations
that primarily receive services from banks.
SERVICE PARTNER ELIGIBILITY
CHARACTERISTICS OF SERVICE
PARTNERS
One type of organization that might wish
to become a Service Partner is a company
that performs item processing functions for
one or more banks. For these banks to
become ECP capable, they will, in many
cases, rely on their processors to provide
ECP functionality.
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ECCHO Service Partners -- Page 1
ECCHO: SERVICE PARTNERS
THE FINANCIAL OPPORTUNITY FOR
SERVICE PARTNERS
Banks are interested in achieving
improved financial efficiencies and ECP
provides them with a new opportunity.
ECCHO membership provides a safe legal
environment under which to exchange
ECP files. ECCHO Service Partners can
assist their customers in achieving ECP
benefits at a reduced cost through
“sponsorship” of discounted ECCHO
membership fees. The reduce costs are
the result of volume discounts and the
elimination of charges for multiple
exchanges between sponsored members
and other ECCHO members. These
reductions provide a revenue opportunity
for Service Partners. Two scenarios
follow on the next page as examples of
these benefits.
While Service Partners can sponsor a
member of any of the four membership
classes the Limited Membership class
offers the best value for smaller banks.
Smaller banks, more frequently than larger
banks, are processed by other
organizations. Because of this, it is
necessary to understand Limited
Memberships and why ECCHO created
the Limited Membership class to
appreciate the financial potential of
Service Partnerships.
LIMITED MEMBERSHIP
these restrictions and reduce the cost of
membership for those banks by
sponsoring them as ECCHO members.
“Sponsored” banks must individually
become members of ECCHO to be
covered by the ECCHO rules.
ECCHO developed a membership class
designed for banks with deposits of
approximately $500 million and greater.
This class, Limited member, allows banks
to join ECCHO by paying a small monthly
fee (i.e., as low as $100 per month). The
amount of the fee varies with the size of
the institution and with the number of
production exchange partners .
Limited Members are restricted, under the
ECCHO Rules, to exchanges with only two
other classes of members; Full Members
and Affiliate Members. Banks can join
ECCHO as Limited Members without the
direct involvement of a Service Partner.
However, if a bank is sponsored by a
Service Partner, certain financial
opportunities are created.
For example, sponsored Limited member’s
production exchange restrictions are
modified to allow exchanges with other
sponsored members and with an unlimited
number of Full and Affiliate Members.
Additionally, significant membership fee
discounts are available when multiple
members are sponsored by a Service
Partner. Please see the following page for
a summary of these two benefits.
Limited Members experience several
restrictions that either limit their ECP
exchanges or increase the cost of those
exchanges. Service Partners can reduce
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ECCHO Service Partners -- Page 2
ECCHO: SERVICE PARTNERS
MEMBERSHIP COST SAVINGS WITH SERVICE PARTNER SPONSORSHIP
Comparing Scenarios 1 and 2 there is a
savings of $229,530 per year. Additionally
in Scenario 1, 51 banks could exchange
with only 3 Full Members and have
ECCHO Rules coverage. In Scenario 2,
51 banks could exchange with a) 51 other
banks (other banks sponsored by the
same Service Partner), b) an unlimited
number of Full and Affiliate Members, and
Monthly costs for:
1 Limited Member
sending to 1 Full or
Affiliate Member
1 Limited Member
receiving from 1 Full or
Affiliate Member
1 Limited Member
sending to and
receiving from 3 Full
Members
51 Limited Members
Sending to 3 Full or
Affiliate Members each
and receiving from 2
Full or Affiliate Members
each
Production Limitations
c) banks sponsored by other Service
Partners.
By Sponsoring ECCHO members, the
Service Partner could retain all or some
part of the savings to cover its ECCHO
Service Partner fees and it could produce
an attractive revenue stream for years to
come.
Scenario 1
Limited w/o Service
Partner
$1.50/mo/$10MM of
deposits or a minimum of
$100 per month
$2.00/mo/$10MM of
deposits or a minimum of
$200 per month
($1.50/mo/$10MM of
deposits or a minimum of
$100 per month) X 3
plus
($2.00/mo/$10MM of
deposits or a minimum of
$200 per month) X 3
Sum (for 51 banks) of
$1.50/mo/$10MM of
deposits for each bank X
3 or a minimum of $100
per month for each bank
X3
plus
Sum (for 51 banks) of
$2.00/mo/$10MM of
deposits for each bank X
2 or a minimum of $200
per month for each bank
X2
Limited Members may
exchange only with Full or
Affiliate Members
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Scenario 2
Limited with Service Partner
Sponsorship
$1.50/mo/$10MM of deposits or
a minimum of $100 per month
less the discount*
$2.00/mo/$10MM of deposits or
a minimum of $200 per month
less the discount*
$1.50/mo/$10MM of deposits or
a minimum of $100 per month
less the discount*
plus
$2.00/mo/$10MM of deposits or
a minimum of $200 per month
less the discount*
Sum (for 51 banks) of
$1.50/mo/$10MM
of deposits for each bank or a
minimum of $100 per month for
each bank less the discount*
plus
Sum (for 51 banks) of
$2.00/mo/$10MM of deposits for
each bank or a minimum of
$200 per month for each bank
less the discount*
Limited Members may exchange with
an unlimited number of Full or
Affiliate Members and with other
Limited Members sponsored by the
same Service Partner and with other
Limited Members sponsored by other
Service Partners
ECCHO Service Partners -- Page 3
Discount
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ECCHO Service Partners -- Page 4
ECCHO: SERVICE PARTNERS
SERVICE PARTNERSHIP COSTS
HOW TO BECOME A SERVICE PARTNER
Organizations have two levels of Service
Partnerships available for selection.
Becoming an ECCHO Service Partner for
qualifying organizations involves only
three steps: 1) request an invoice for the
appropriate Service Partnership initiation
fee, 2) pay the invoice, and 3) sign the
Service Partnership Agreement.
$25,000: Initial fee for Service Partner
sponsoring less than 51 ECCHO
members. This level also includes an
annual dues of $15,000 beginning the
second year.
$100,000: Initial fee for Service Partners
sponsoring more than 50 ECCHO
members. This level also includes annual
dues of $40,000 beginning the second
year and direct participation in the
ECCHO Operations Committee. Service
Partners wishing to participate in the
Operations Committee but sponsoring
fewer than 51 members may also select
this level.
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Once the payment and signed agreement
are received, ECCHO’s Executive
Director’s staff will then notify you of your
new status and assist you with the
membership information that your
customers will need to join ECCHO. The
ECCHO staff can be reached by calling
(972) 458-1981 and asking for Sissy
Toney, Phyllis Meyerson or David Walker.
ECCHO Service Partners -- Page 5
ECP: PROCESS OVERVIEW
ECCHO uses electronics to move check
information more efficiently between
depositing and paying banks. Depositing
banks begin the funds collection process
by transmitting MICR line information
while continuing the presentment of the
physical checks via ground and air
transportation. Checks deposited on a
Monday can be presented electronically to
the paying bank anywhere in the country
for posting that same evening.
The paper checks will usually arrive the
next day (Tuesday) for inclusion in the
return processes. Because ECP can be
completed faster than physical check
presentment, the check clearing process
can be accelerated by at least one day
and the return process can be initiated on
Tuesday rather than on Wednesday.
Late Evening Exchange
ECP Forward
DAY 1
Presenting
Bank
DAY 2
ECP S ENDING BANK
Paying
Bank
ECP RECEIVING BANK
ECP Return
DAY 2
Presenting
Bank
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DAY 3
Paying
Bank
RNOTEs -- Page 1
ECP: PROCESS OVERVIEW (CONT.)
MINIMAL OPERATIONAL IMPACT
ECCHO assumes that paper checks
continue to flow from originator to
depositary bank to paying bank just as
they do today. While truncation and
safekeeping of checks is desirable and
possible under ECCHO, the volume of
truncated checks is expected to remain
relatively small for many years.
The processing steps for ECP remain
paper based from start to finish with a
small, but very important, electronic step
in the middle.
ECCHO's approach, therefore, is to
minimize changes to the existing paper
check process. When the presenting
bank produces a paper cash letter, it also
creates an electronic cash letter from its
existing check capture files. Both the
paper and electronic cash letters are sent
to the paying bank. Because electronic
transmissions are faster than ground or air
transportation, the ECP files would
typically arrive before the initiation of the
posting cycle and the paper cash letter
would arrive the next day in time for the
exception pull process.
After the paying bank receives and
captures the paper checks, it then
reconciles the paper checks with the
electronic items to determine missing or
free items. The items to be returned are
then pulled and the return process
initiated.
ECP Mirrors Checks
Paper Check
Flow Flow
Deposit into Bank
Paying Bank
%CUJ
.GVVGT
Check
DR
Customer
S tatements
Returns
ECP Flow
ECP Flow
Deposit into Bank
Check
Paying Bank
(receiving)
%CUJ
.GVVGT
DR
Customer
S tatements
Returns
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RNOTEs -- Page 2
ECP: PROCESS OVERVIEW (CONT.)
TRADITIONAL CORRESPONDENT RELATIONSHIPS
ECCHO members exchange ECP files
under the overall umbrella of the ECCHO
Operating Rules. These rules are
designed to supplement, but not replace,
traditional exchange arrangements
between exchanging partners. ECCHO
Rules and Bylaws preserve these
traditional arrangements.
Under ECCHO Rules and Bylaws each
member:
· Decides whether it will send or receive
ECP files
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· Determines the routing transit numbers
for which it will receive ECP files
· Selects members with which it will
exchange ECP files
· Determines which items it will post or not
post from ECP files
· Assigns its own deadlines for the receipt
of both electronic and paper cash letters
· Negotiates the pricing and settlement
arrangements with each exchange
partner
RNOTEs -- Page 3
ECP: PAPER CHECK RISKS
REGULATION CC RISK REDUCTION
Reg CC has reduced the allowed hold
period for check deposits (e.g., for local
items from three to two days after the date
of deposit). ECP reduces the forward
presentment time, thus reducing the check
fraud effects of Reg CC.
Typically, checks deposited on a Monday
can be transmitted to the paying bank late
in the evening for posting on Monday.
Through the posting process, return
candidates can be identified early
Tuesday a.m. even as the paper checks
are arriving. The return process can then
be initiated on Tuesday rather than on
Wednesday.
With RNOTEs (electronic notices of
nonpayment), it is possible to directly
improve the return process and further
reduce the elapsed time by one or two
additional days. RNOTEs can be
transmitted to the depositary bank on
Tuesday where the hold can be extended
under Reg CC to prevent the funds from
leaving the bank.
An ABA study shows check fraud losses
increasing at 19% per year. Studies by
ECCHO members show check fraud
losses can be reduced by more than 95%
through the use of ECP and RNOTEs.
Paper Payment Risk
Local Exchanges
MON
T UES
Deposit
RegCC
Deposit
Fed/
Clearing
House
ECP/
Same
Day
Debiting
Deposit
Presentment
to PayingBank
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Presentment
to payingbank
Return
Initiated
WED
T HUR
FRI
Funds
available
RegCCNotice
Return
Initiated
Return
Received
Returns reflected
in customer’s
balance
RegCCNotice
Bank initiates
customer notice
Return
Received
Returns reflected
in customer’s
balance
Bank initiates
customer notice
RNOTEs -- Page 4
RNOTES - RISK REDUCTION PROJECT
BACKGROUND
The passage of the Expedited Funds Availability Act and the implementation of the
Federal Reserve's Regulation CC, focused banks' attention on the risk in the paper
check payment system. Specifically, banks have become increasingly concerned about
the elapsed time difference between 1) the number of days between the date of deposit
and the date the returned check (or notice of return) is received, and 2) the number of
days between the date of deposit and the date the customer can withdraw the
deposited funds.
The implementation of Reg CC eliminated the banks’ ability to control the amount of
risk it is willing to accept by establishing the maximum number of days funds availability
can be withheld from customers. Additionally, Reg CC educated the public about the
existence of a time gap between the required funds availability and date of return
receipt thus creating an environment conducive to fraud.
The Electronic Check Clearing House Organization (ECCHO) was formed, in part, to
address this time gap risk through the use of electronics. Specifically, ECCHO created
electronic check presentment (ECP) to accelerate the forward collection process and
electronic notices of non-payment (RNOTEs) to accelerate the return notification
process. The combination of ECP and RNOTEs can eliminate at least two days of risk
and frequently three to five days for local exchanges.
Two ECCHO members independently performed projects to estimate the return losses
which might be avoided through the use of ECP and RNOTEs. Their studies indicated
that a large percentage of these write-offs could have been avoided. Thus ECCHO's
Board of Directors approved a project (RNOTEs – Risk Reduction Project) to determine
the impact of ECP and RNOTEs on the level of write-offs from returned deposited
items.
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RNOTEs -- Page 5
RNOTES - RISK REDUCTION PROJECT
OBJECTIVES
PARTICIPANTS
Specific objectives of the RNOTEs - Risk
Reduction Project included: 1) the
quantification of the potential reduction in
write-offs through the use of ECP and
RNOTEs; and 2) the development of a
survey questionnaire which could be used
in the initial project phase and in later
phases.
Seven banks participated in the survey:
·
·
·
·
·
·
·
BankBoston
Bank of California
Bank One, Texas
Chase Manhattan Bank
Chemical Bank
First Interstate Bank, Texas
Wells Fargo Bank
RNOT Es Project Particpants
Bank of Boston
Chase Manhattan Bank
Chemical Bank
W ells Fargo
Bank of California
First Interstate of T exas
Bank One, T exas
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RNOTEs -- Page 6
RNOTES - RISK REDUCTION PROJECT
APPROACH
Two different approaches were used to
determine the amount of the potential
savings from avoided write-offs. The first
compared three amounts and the least of
the three became the estimated savings
amount. The three amounts included the
check amount, the write-off amount, and
the balance in the account as of the endof-day on the day of deposit.
The second approach compared two of
the components, the check amount to the
amount of the write-off. All of the
participating banks agreed the former was
too conservative and the latter was more
representative.
The first approach was the subject of
lengthy discussion. At the start of the
project, it was felt the primary comparison
would include a determination as to
whether sufficient balances would have
been present if the RNOTE had been
received early the morning after the day of
deposit. The inclusion of the balance in
the comparison makes the assumption the
loss could not have been avoided if
sufficient funds were not in the account at
the time. The participating banks felt this
assumption was erroneous. This project
assumes that RNOTEs are available early
in the morning before the pay/no pay
decisions have been made. With the
additional RNOTE information included,
the depositing bank may have made
different decisions than it did without the
RNOTE.
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For instance, if the balance was $0 after
the posting cycle, there would have been
no funds available to reduce the loss of
return. The balance at that time assumed
the checks processed through DDA the
evening before were paid. If the bank had
had reason to believe the funds might not
be good (based on the receipt of an
RNOTE), it might have decided to extend
the hold on the item(s) and therefore the
funds would not have been available to
pay all the checks and one or more might
have been returned.
The best example of banks using this
same decision process today is for
accounts which were processed as "pay
all". DDA systems make the assumption
that items presented for payment will be
paid regardless of the balance amount.
An officer will review the DDA system's
default decision to pay when the account
becomes overdrawn and may decided to
return one or more of the checks which
contributed to the overdraft.
Because the participating banks felt the
inclusion of the balance comparison
inappropriately understated the value of
the RNOTEs, the agreement was reached
to base the value of RNOTEs on the
comparison of the check amount and the
write-off amount. The lesser of the two
amounts therefore became the potential
saving amount.
RNOTEs -- Page 7
RNOTES - RISK REDUCTION PROJECT
PAPER CHECK RETURN PROCESS
Using the traditional processes, the
depositing bank receives a Reg CC
notification on Thursday afternoon for
items deposited on Monday.
in account balances, it will be Friday a.m.,
four days after deposit. For non-local
exchanges, the differences in the elapsed
time will be at least four days and will
frequently be five to six days.
If the item to be returned is less than
$2,500, the earliest the depositing bank
will know the check has been returned is
upon receipt and process of the return
items. By the time the returned items are
processed and the changes reflected
Under Reg CC, the depositing bank
makes the funds available for the Monday
deposits of local items on Wednesday,
before the bank knows whether the items
are good or will be returned.
Return Item Risk
Local Paper Exchange
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RNOTEs -- Page 8
RNOTES - RISK REDUCTION PROJECT
ECP RNOTES RETURN PROCESS
Using ECP and RNOTEs, the following
scenario occurs for local or non-local
transactions, while the paper check
continues its traditional flow.
presenting bank receives the preliminary
RNOTEs early in the morning and extends
the holds on the deposited items on
Tuesday. The paying bank initiates final
RNOTEs early evening on Tuesday. The
Monday:
Checks are deposited on a
presenting bank receives the final
Monday which include items drawn on
another ECCHO Member. The MICR lines RNOTEs and places extended Reg CC
holds on the items.
from these items are transmitted via ECP
to the paying bank that same day. The
Through ECP and RNOTEs, the
paying bank attempts to post the items on
depositing bank will determine on Tuesday
Monday.
checks deposited on Monday may be
Tuesday:
Return candidates are
returned. This is effectively more than two
identified from the ECP file in the early
days earlier than through the traditional
morning. The paying bank initiates
paper check forward collection and return
preliminary RNOTEs to the presenting
processes.
bank early Tuesday morning. The
Risk Reduction
ECP with RNOT Es
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RNOTEs -- Page 9
RNOTES - RISK REDUCTION PROJECT
PROJECT DATA
The project was approved to determine
the value of ECP and RNOTEs in reducing
the risk of return write-offs. To accomplish
this, participating banks were asked to
provide two levels of information about
their return losses. The first level was
summary information reporting the total
write-offs from deposited returns over a
period of time.
The second level was detailed information
about each check included in the survey.
By collecting information at the check
level, evaluations could be made by check
as to whether a particular write-off could
have been avoided.
After the survey form was drafted and
modified, each participant was asked to
complete the form. The survey
questionnaire focused on the collection of
information about deposited checks which
were returned and subsequently writtenoff. This focus excluded other types of
returns such as on-us items and write-offs
for less cash amounts and fees. While the
survey was limited to returned deposited
checks, all return reasons for those
checks which were written-off were
included.
The participants were asked to include in
their sample the details for at least 250
checks.
Project Data
Detail reported on each return item:
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Date of
deposit
Date
received
Amount
of check
Amount
of loss
No. of
days held
Account
ledger
balance
Reason
for return
Would
take action?
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RNOTEs -- Page 10
RNOTES - RISK REDUCTION PROJECT
IMPROVED REG CC REPORTING
Many of the items written-off were greater
than $2,500. The banks emphasized that
generally they do receive timely Reg CC
notices and that they act on the notices
even though the sample data suggested
some weakness in this process. However,
they further stated that many of the Reg
CC notices of non-payment which they
receive do not contain meaningful data
upon which to act. Either the data is
incomplete or not accurate, thus defeating
the regulatory safety provision. The
automation of this process through the use
of RNOTEs would provide an improvement
over the current manual process.
of the information. This manual process
is conducive to misreads of the
information and erroneous data reporting
to the depositing bank. Moreover, Reg
CC requires the paying bank to report but
does not provide the incentive for high
quality information.
Using ECP and RNOTEs, the MICR line,
as read by the depositing (presenting)
bank, is transmitted to the paying bank.
The paying bank attempts to post, using
this automated information. When items
are identified as return candidates,
information is extracted from the paying
bank's applications to automatically create
RNOTEs for transmission bank to the
The current process requires the paying
presenting bank. ECCHO defined
bank to read and interpret information on
RNOTEs include only information which
the physical check (i.e. the endorsement)
and report this and other information to the can be pulled from automated systems
depositing bank. While there are a variety and therefore avoid the inherent problems
associated with manually reading and
of reporting methods available to the
transposing data from endorsement
banks, virtually all depend on the manual
stamps, DDA systems and Return Item
interpretation and manipulation
systems.
l %QR[TKIJV D[ %CTTGMGT#PVKPQTK +PE
RNOTEs -- Page 11
RNOTES - RISK REDUCTION PROJECT
FINDINGS
The seven banks reported details on
2,579 checks totaling $3.564 million. The
span of time covered by the survey
information varied by bank. When
annualized, the amount of the checks
returned and written off totaled $22.5
million. Of the $22.5 million, $20.5 million
were for checks which did not require
physical inspection (i.e. signature or
endorsement problems).
The annualized net write-off for the
sample data was $10.5 million. This net
amount recognizes that part of the check
amount is collected and therefore the
difference between the check amount and
the collected amount is the write-off
amount.
RNOT Es Risk Reduction Project
Findings
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$20.4 million
Annual
amount
that
ECP/
RNOT Es
can
reduce
l %QR[TKIJV D[ %CTTGMGT#PVKPQTK +PE
$10.5
million
49 percent
of returns are
eventually
collected
Annual
amount
written
off (lost)
RNOTEs -- Page 12
RNOTES - RISK REDUCTION PROJECT
FINDINGS
Using the analysis process described
under Assumptions and Issues, the
average potential saving per bank was
$1.6 million per year. Because the
number of banks used in the sample was
small (7), a second average was
developed.
By excluding the largest and smallest
saving amounts, the average potential
saving per bank for the remaining 5 banks
was $840,000 per year.
RNOT Es Risk Reduction Project
Findings
Adjus ted for data variances , the s avings per bank
remain s ignificant
$1.6 million
$840,000
Seven
Bank’s
Data
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Bank’s
Data
RNOTEs -- Page 13
RNOTES - RISK REDUCTION PROJECT
FINDINGS (CONTINUED)
When the 2,579 checks were organized by
dollar amount, 67% of the total $3.564
million were for checks greater than
$2,500. Checks ranging from $1,000 to
$2,499 comprised 15% of the total.
Checks ranging from $300 to $999 were
15% of the total and checks less than
$300 equaled 3% of the total. When
organized by write-off amounts, the
percentages were respectively, 44%, 15%,
29% and 13%.
RNOT Es Risk Reduction Project
Findings
Returned checks
Checks > $2,500 accounted for two-thirds
of the amount of reported returned checks
Write-offs
67%
44%
29%
13%
15%
15% 15%
3%
<$300
l %QR[TKIJV D[ %CTTGMGT#PVKPQTK +PE
$300-999
$1,000-2,499
$2,500+
RNOTEs -- Page 14
RNOTES - RISK REDUCTION PROJECT
FINDINGS (CONTINUED)
When the checks were organized by item
counts, 14% of the total 2,579 checks
were greater than $2,500. Checks
ranging from $1,000 to $2,499 comprised
13% of the total. Checks ranging from
$300 to $999 were 36% of the total and
checks less than $300 equaled 37% of the
total.
It should be noted that the dollar
distribution of the items does not include
all of the items less than $1,000. Four of
the banks did not provide detailed
information for checks below certain dollar
thresholds.
RNOT Es Risk Reduction Project
Findings
Item Counts
37%
36%
13%
< $300
l %QR[TKIJV D[ %CTTGMGT#PVKPQTK +PE
$300-999
$1,000-2,499
14%
$2,500+
RNOTEs -- Page 15
RNOTES - RISK REDUCTION PROJECT
FINDINGS (CONTINUED)
When the checks were organized by
elapsed number of days between the date
of deposit and the date of return receipt,
12% were received in two days or less.
23% were received in three or four days.
31% were received in five to seven days,
and 33% were received in more than
seven days. The number of elapsed days
is expressed in calendar days.
RNOT Es Risk Reduction Project
Findings
Elaps ed number of days between the date
of depos it and the date of return receipt
31%
26%of Dollars
Written off
33%
23%
12%
1 - 2 days
l %QR[TKIJV D[ %CTTGMGT#PVKPQTK +PE
3 - 4 days
5 - 7 days
> 7 days
RNOTEs -- Page 16
RNOTES - RISK REDUCTION PROJECT
FINDINGS (CONTINUED)
When the checks were organized by
return reasons by dollar amounts, 9%
required physical inspection of the item by
the paying bank or its customer. Another
9% was for "refer to maker" and 5%
included no reason. 31% were for "NSF"
and 4% were for "uncollected funds". 41%
were for "closed account", "unable to
locate account" and "stop payment". The
checks included in the 41% also
comprised 44% of the dollars written off.
When the checks were organized by
return reasons by item counts, 4% of the
total 2,579 sample checks required the
physical inspection of the item by the
paying bank or its customer. Another 7%
were for "refer to maker" and 1% included
no reason. 45% were for "NSF" and 2%
were for "uncollected funds". 39% were
for "closed account", "unable to locate
account" and "stop payment".
RNOT Es Risk Reduction Project
Findings
Dollar Amounts
Return Reas ons
ItemCounts
45%
41%
39%
31%
9%
9%
4%
7%
5%
4%
1%
Physical
Inspection
"Refer
toMaker”
NoReason
2%
NSF
Uncollected
Funds
Other*
*(Other = " Closed Account" , " Unable to Locate Account" and " Stop Payment" )
l %QR[TKIJV D[ %CTTGMGT#PVKPQTK +PE
RNOTEs -- Page 17
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RNOTEs -- Page 18