NCP 2014 Exam ECCHO Training Series Session 8 March 25, 2014 2:00 pm ET (1:00 pm CT; 11:00 am PT) All sessions 90-min.

National Check Payments Certification

Standards and Formats Copyright© 2013 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 or in which they participate.

These program training materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO.

Copyright© 2013 by the Electronic Check Clearing House Organization

(Certain contributed content subject to third party copyrights)

National Check Payments Certification 2

Session Overview

• • • Three Key Standards – X9.100-140 – X9.100-160 – X9.100-187 Universal Companion Document (UCD) Technical Reports National Check Payments Certification 3

X9 Standards

Standards

• • • • Consists of Standards and Technical Reports (TR) Accredited standards body for Financial Services – Accredited Standards Committee (ASC) X9, Inc.

X9 creates American National Standards (ANS) – Standards accredited by American National Standards Institute (ANSI) Standards can be obtained from X9 or ANSI – www.X9.org

– www.ansi.org

National Check Payments Certification 5

Check Standards

• • • X9.100-140: “Specifications for an Image Replacement Document – IRD” X9.100-160: “Magnetic Ink Printing (MICR)” – Part 1: Placement and Location – Part 2: EPC Field Use X9.100-187: “Specifications for Electronic Exchange of Check and Image Data Domestic”; and – Universal Companion Document (UCD)  Not part of the standards National Check Payments Certification 6

X9.100-160 – Part 1 / Part 2

• • Part 1: Establishes placement and location for printing MICR ink on checks, drafts and other documents for automated processing – Example “other documents”: Internal forms such as batch tickets Part 2: EPC Field Use: Establishes assignment and management one digit optional field (EPC) code – Conveys special information for correct handling or routing of a check / check data to financial institutions or other processors – Primarily used for qualified returns or identification of substitute checks National Check Payments Certification 7

X9.100-160 – Part 1 / Part 2

• MICR – Used on documents to be read by magnetic ink character recognition – Band along bottom edge reserved for magnetic encoding – – Common fields divided into character spaces, organized into several areas or fields Fixed format for all users are:  Amount, Routing, and optional EPC fields

Drawer’s Signature

National Check Payments Certification 8

X9.100-160 – Part 1 / Part 2

• MICR – Used on documents to be read by magnetic ink character recognition – Variable fields:  On-Us: Format determined by needs of issuing financial institution  Auxiliary On-Us (Aux On-Us) May appear at extreme left side on business-size check

Drawer’s Signature

9 National Check Payments Certification

Image Exchange – X9.100-187

• • Cash letter structure – Supports the exchange of:  Posting data only  Posting data and check images  Posting data followed by an additional data and image file File is comprised entirely of variable length records to accommodate images National Check Payments Certification 10

Item/Bundle/Cash Letter/File

Example: Physical File Representation with Three Cash Letters FILE-1 FILE-1 - Cash Letter #1 - 3 Bundles - Forward Debit Item(s) - Cash Letter #2 - 1 Bundle - Forward Debit Item(s) - Cash Letter #3 - 2 Bundles - Forward Debit Item(s) CASH LETTER #3 WITH TOTAL Bundle 1 Bundle 2 Bundle 1 CASH LETTER #2 WITH TOTAL Bundle 3 Bundle 2 Bundle 1 CASH LETTER #1 WITH TOTAL National Check Payments Certification 11

X9.100-187

• • • Use Universal Companion Document (UCD) as guideline – Establish industry consistency in standard Hierarchy of File/Record Formats – Forward and Return Record Types – Cash Letter structure  Endorsement records o For BOFD o For Subsequent Collecting Bank(s) Following slides will illustrate commonly used record formats National Check Payments Certification 12

X9.100-187 – Selected Record Formats

X9.100-187

Selected Record Views

Cash Letter Hierarchy Diagram File Header (01) Cash Letter File Control (99) Cash Letter Header (10) Forward Presentment Bundle

LEGEND

M Mandatory Record Multiple Logical Entities Forward presentment bundles and/or return bundles National Check Payments Certification Return Bundle Cash Letter Control (90) 14

File Records

• • • File Header Record (Type 01) – First record of file containing:  Origin / Destination Routing Numbers and Names  Creation Date and Time File Control Record (Type 99) – Contains file control information:  Cash Letter count  Item count  Total amount File Header Record (Type 01) associated with File Control Record (Type 99) National Check Payments Certification 15

Cash Letter Records

• • • Cash Letter Header Record (Type 10) – First record of cash letter containing:  Destination and ECE Institution Routing Numbers –  Various dates and time Codes to indicate  Forward or return cash letter  Inclusion or to follow of image records  Type of returns Cash Letter Control Record (Type 90) – Provides control totals for cash letter  Bundle Count  Item Count  Total Amount Cash Letter Header Record (Type 10) associated with Cash Letter Control Record (Type 90) National Check Payments Certification 16

X9.100-187

Selected Record Views

Forward Presentment Bundle Diagram Forward Presentment Bundle Bundle Header (20) Item(s) Bundle Control (70)

LEGEND

M C Mandatory Record Conditional Record C Logical Entity Multiple Logical Entities Multiple Conditional Records Check Detail “25” Record Check Detail Add. A “26” Record Addenda Records Check Detail Add. C “28” Record Image View “25” record contains check MICR DATA One ”26” record to identify return location National Check Payments Certification One “28” record to identify each subsequent endorser Image View Detail (50) Image View Data (52) Record Types 50 and 52 occur together for each Image View Pair of 50/52 records for front view Pair of 50/52 records back view 17

Bundle Records

• • • Bundle Header Record (Type 20) – First record of bundle containing:  Destination and ECE Institution Routing Numbers  Various dates  Bundle ID  Bundle Sequence Number  Cycle Number Code to indicate forward or return bundle – Bundle Control Record (Type 70) – Provides control totals in bundle for:  Item count  Total amount  Images within Bundle count Bundle Header Record (Type 20) associated with Bundle Control Record (Type 70) National Check Payments Certification 18

Selected Cash Letter Records – Forward

• • Check Detail Record (Type 25) – – Check Detail Addendum A Record (Type 26) – Associated with previous Check Detail Record – – – – One record for each check containing:  Information from MICR line of check  ECE Institution Item Sequence Number Codes to indicate:  Type of Documentation associated with this check  Type of returns accepted  Archive available  Whether and how MICR line repaired May contain multiple records when check re-presented Identifies/provides info on return location for customer returns  Typically BOFD  Fields conform to Reg CC requirements Codes indicate institution that truncated original check  Not truncated IRD Codes indicated whether / how MICR line repaired National Check Payments Certification 19

Selected Cash Letter Records – Forward

• Check Detail Addendum C Record (Type 28) – Associated with previous Check Detail Record – May contain multiple records for subsequent endorsers – Identifies and provides information for each endorsing institution  Fields conform to Reg CC and other endorsement requirements – Codes to indicate  Institution truncated original check o Not truncated IRD  Whether and how MICR line repaired  Return Reason  Bank’s role in collection process National Check Payments Certification 20

X9.100-187

Selected Record Views

“31” and “33” records contain MICR data Bundle Header (20) Return Bundle Diagram Return Bundle Return Item(s) Bundle Control (70)

LEGEND

C M Mandatory Record Conditional Record C Logical Entity Multiple Logical Entities Multiple Conditional Records Return Detail “31” Record Return Detail Add. A “32” Record Return Detail Add. B “33” Record Return Detail Add. D “35” Record One ”32” record to identify return location National Check Payments Certification Image View One “35” record to identify each subsequent endorser Image View Detail (50) Image View Data (52) Record Types 50 and 52 occur together for each Image View Pair of 50/52 records for front view Pair of 50/52 records back view 21

Selected Cash Letter Records – Return

• • • • Return Record (Type 31) – – – Return Addendum B Record (Type 33) – Return Addendum A Record (Type 32) – – One record for each return Created by Paying Bank or returning institution containing:  Information from Check Detail Record or original check  Forward Bundle Date  ECE Institution Item Sequence Number Codes to indicate:  Return Reason  Archive available  Number of Times Returned Contains Aux-On-Us field for business-sized checks Record mirrors Check Detail Addendum A Record (Type 26) Return Addendum D Record (Type 35) Record mirrors Check Detail Addendum C Record (Type 28) National Check Payments Certification 22

Selected Cash Letter Records – Image

• • • Image View Detail (Type 50) / Image View Data (Type 52) Records – – Convey image data and image on forward collection for Check Detail Record (Type 25) or Return Record (Type 31) on return side Records occur together – Must have:  Pair of 50/52 records for front view and  Pair of 50/52 records back view of each check Type 50 record contains codes about Image view including: – Format – – – – Type 52 record contains: – Image Data – – – – Compression View side (front or rear) View descriptor (full or partial view) Digital signature and security information, if included Reference Key information Security information Clipping information Digital signature, if included National Check Payments Certification 23

25

26 *

Bank of First Deposit (BOFD) • • •

Legend:

BOFD – Lt. Green * Intermediary – Blue Paying Bank – Red ** National Check Payments Certification

X9.100-187 Flows

Forward Presentment

25

26 * 28 **

Intermediary Paying Bank 24

X9.100-187 Flows

Return Record/ Return Addendum B

Return

31/33

26 * 28 ** 35

Bank of First Deposit (BOFD) • • •

Legend:

BOFD – Lt. Green * Intermediary – Blue ** Paying Bank/Returning Bank – Red National Check Payments Certification Paying Bank/ Returning Bank “26” becomes “32” record “28” becomes “35” record 25

X9.100-187 Flows

Return Record/ Return Addendum B

Return

31/33

26 * 28 **

Bank of First Deposit (BOFD) • • •

Legend:

BOFD – Lt. Green * Intermediary - Blue ** Paying Bank/Returning Bank - Red National Check Payments Certification Paying Bank/ Returning Bank New “35” record added Note: Return Reason is in 31 & 35 records 26

X9.100-187 Flows

Representment

Check Detail Record 25

32 26 *

Bank of First Deposit (BOFD) / Representing Bank

35 ** 28 35 *** 28

• • • •

Legend:

BOFD – Lt. Green * BOFD / Representing Bank – Dark Green *** Intermediary - Blue ** Paying Bank/Returning Bank - Red Paying Bank “32” becomes “26” record “35” becomes “28” records 27

X9.100-187 Flows

Representment

Check Detail Record 25

26 *** 26 * 32

Bank of First Deposit (BOFD) / Representing Bank

28 ** 35 28 *** 35

• • • •

Legend:

BOFD – Lt. Green * BOFD / Representing Bank – Dark Green *** Intermediary - Blue ** Paying Bank/Returning Bank - Red Paying Bank “26” record added for Representing Bank 28

Reasons for Returns

• Customer and Administrative Returns – Customer Returns  Dishonored item under check law  Usually attempted to be charged to customer account – Administrative Return/Administrative reason  Return for reason other than dishonored item  Usually handled internally rather than charged to customer  May be handled through adjustment process  If handled as return, must meet return timing National Check Payments Certification 29

Reasons for Return

• Common Return Reason Codes – Customer Return Reasons  NSF – Not Sufficient Funds  Stop Payment  Closed Account  Warranty Breach – Administrative Reasons  Image Missing  Ineligible  Unusable Image  Duplicate Presentment National Check Payments Certification 30

Return Reason Codes

• • • Standard recognizes return reason codes may be used for two purposes Return Code Examples include: – “I” for Customer return = Indorsement missing – – – – “I” for Administrative return = Image missing “Q” for Customer return = Unauthorized “Q” for Administrative return = Ineligible “3” for both but has same meaning = Warranty Breach (includes Rule 8 & 9 claims) Unauthorized Remotely Created Identification of type of return – Returns Indicator field determines type of return:  Customer or  Administrative reason National Check Payments Certification 31

Electronic Records

• • Return Reason – Type 35 Record – Paying Bank adds return reason to its Type 35 Record  Match Return Reason in Type 31 Record Other Institutions in return collection chain – When adding a Type 35 record, match return reason from:  Last Type 31 Record, or  Last Type 35 record received  Should be the same National Check Payments Certification 32

Electronic Records

• • Representment – Type 28 Record – Should only have return reason, if created (flipped) from Type 35 Record that had return reason

Why is this critical to the collection process?

– Without return reason, item may be flagged as duplicate – Especially true for represented items and when Intermediary Bank may be part of collection process and checking for duplicates – No knowledge item was previously presented and returned National Check Payments Certification 33

Duplicates and Representment

• • Some intermediary banks do duplicate checking – May cause issues on represented items Previous examples illustrated “flipping” electronic indorsement records – Presentment then return then representment with:  BOFD and Paying Bank only  No Intermediary Collecting Bank – Following slides will illustrate “flipping” of electronic indorsement records with Intermediary Collecting Bank for both:  Return Processing; and  Represented items National Check Payments Certification 34

Intermediary Duplicate Checking

Return Processing

31/33 31/33

26

26

28

28 35 35

Bank of First Deposit (BOFD)

35

Return Reason in 31 & 35 records National Check Payments Certification Intermediary New “35” record Added by Intermediary

35

Paying Bank/ Returning Bank Return Reason in 31 & 35 records “26” becomes “32” record “28” becomes “35” record New “35” record Added by Paying Bank 35

Intermediary Duplicate Checking

Representment Processing

25 26 32 26 35 28 35 28

Bank of First Deposit (BOFD) / Representing Bank “26” record added as Representing Bank Return Reason “35” Record 35

28

Return Reason “35” Record National Check Payments Certification Intermediary “32” becomes “26” record “35” becomes “28” records 36

Intermediary Duplicate Checking

• If Intermediary Banks does duplicate checking: – Proper use of return reason code in electronic records may help prevent “false positives” on represented items National Check Payments Certification 37

Build the Electronic Records

• • BOFD A may represent item automatically – What indorsement records would be required on the representment?

BOFD A may provide substitute check to their customer and customer re-deposits sub check via different bank - BOFD B – What indorsement records would be required on the representment?

• X9 records: – (1) Initial forward presentment: – – – (2) Return: (3) Representment (4) Return 38

Universal Companion Document

UCD – Background and Purpose

• • • Improve image exchange interoperability – Minimize and document differences in files between major image exchanges  Endpoint Exchange  Federal Reserve  SVPCO  Viewpointe Develop uniform industry approach for creating and validating check image files Bank-driven approach to use of X9.100-187 standard – Focused on business needs not technological capabilities National Check Payments Certification 40

UCD – Background and Purpose

• • • Create a vehicle for common edit practices – Uniform format for the exchange of images Flexible approach to identify data elements critical to payment processing – Establish business practices for image exchange – Establish file and item rejection criteria Three components to UCD adoption: – More detailed documentation – Validation – New Return Reason Codes/New Fields National Check Payments Certification 41

UCD Document Structure

• • Two additional pieces of data to standard includes: – Validation criteria  Required, Required, if present, and None – Comments  Information augmenting or clarifying the standard to facilitate exchange Records – Mandatory: Must always appear within the file – Conditionally Required: Will appear when the condition is fulfilled National Check Payments Certification 42

Image Replacement Document – IRD (X9.100-140)

IRD Standard – X9.100-140

• • • “Specifications for an Image Replacement Document – IRD” – ANSI X9.100-140-2008 Provides the financial industry with a specification for Image Replacement Document (IRD) – Standard for machine readable substitute document created from an image made from the front and back of the original check What’s the difference between an IRD and a Substitute Check? Nothing!

– Substitute Check: Legal definition in Reg CC – Image Replacement Document: Defined in technical standard X9.100-140 National Check Payments Certification 44

Substitute Check

• Check 21 and Reg CC definition – Designed to be processed exactly as if it were the original paper check – Legal equivalent of original check for all purposes – Contains image of front and back of check – Conforms to industry standards – Suitable for automated processing – Must accurately represent all information on original check – Bears legal legend – Includes all indorsements – Includes identification of party creating it National Check Payments Certification 45

Substitute Check

• • According to X9.100-140 an IRD: – Supports legal framework for Check 21 Magnetic ink required or not?

– Not required if IRD is created for paid item returned to issuing institution’s customer as a properly paid item  MICR characters (E-13B font) may then be printed in non-magnetic ink – IRD used for this purpose must still conform to all other requirements of standard National Check Payments Certification 46

Substitute Check

Forward Substitute Check - Front

Creating Institution Routing Number, Creation Date & Sequence Number Legal Legend Original Truncating Institution Routing Number, Date & Sequence Original Scanned Front Image Clipped Area Optional Area No branding or marketing Substitute Check Identifier MICR Line from Original Check Notes: Creating, truncating and BOFD Institution is not necessarily the same.

Truncating Institution is not necessarily the BOFD or Return Location. Look at Endorsement on back for Return Location.

Date & Sequence numbers may not be available for Truncating Institution.

47

Substitute Check

48

Return Substitute Check

Return Substitute Check - Front

Return Reason Overlay Return Reason Printed on Return Substitute Check National Check Payments Certification Return Substitute Check Identifier ‘5’ can only appear on qualified return strip.

Return Qualification Strip with BOFD Routing Number and Dollar Amount Optional – All returns do not have strip. Strip can be applied after Substitute Check is created.

49

Quiz Questions

• • • • Available online with session handout Review each question carefully Answer based on what’s been presented – Use additional recommended resources if needed:  Question of the Day  P.R.E.P. Guide  Other resources Answer Key included National Check Payments Certification 50

Additional Standards

Standards & Technical Reports

• Additional Standards and Technical Reports – – Available from X9 organization www.x9.org

Standards  X9.100-110: Document Imaging Compatibility  X9.100-181: TIFF Image Format for Image Exchange  X9.100-183: Electronic Check Adjustments – Paper Standards/Technical Reports  X9/TR-2: Understanding, Designing and Producing Checks  X9/TR-8: Check Security  X9/TR-33: Check Image Quality Assurance and Processes National Check Payments Certification 52

X9 Standards

• X9.100-110: Document Imaging Compatibility (2011) [New name] – Scope: Standard specifies the location and background design of essential check data fields. It is intended for all business size and personal size checks  Formerly part of X9.7

National Check Payments Certification 53

X9 Standards

• X9.100-181 – TIFF Image Format for Image Exchange (2010) – Scope: Defines specific fields and parameters for check image exchange and the allowable values for those parameters.  Identifies the fields that should be read and required or allowable values for those fields to accomplish interoperability  Goal – Interoperability for check image exchange – Consider TIFF as “envelope” around the image  TIFF “tags” describe the image National Check Payments Certification 54

X9 Standards

• X9.100-183 – Electronic Check Adjustments (2010) – Scope: Establishes the file sequences, record types, and field formats to be used for the electronic exchange of check adjustment messages.  Standard format supports: o Check related adjustment notices o Requests for individual checks o Bundles of checks o Check cash letters o Attachment of images National Check Payments Certification 55

X9 Paper Standards/Technical Reports

• X9/TR 2: Understanding, Designing and Producing Checks (2005) – Purpose: To promote uniformity in design and production of checks  Improve processing and handling throughout check payments system – Note: This technical report used as reference for the “life cycle of a check” National Check Payments Certification 56

X9 Technical Reports

• X9/TR 8 – Check Security Guidelines – Scope: Provides information about industry practices and processes that identify and deter fraudulent use of paper checks, check images, and electronically transmitted check data  Report also discusses tools that detect and prevent fraud, covering topics from high-tech software to low-tech physical control of the source documents National Check Payments Certification 57

X9 Technical Reports

• X9/TR 33 – Check Image Quality Assurance — Standards and Processes – Scope: Provide a framework for assuring and assessing image quality to support the exchange of check images between financial institutions. – Provides detail about the problems and limitations associated with automated methods and systems that might be used to detect check quality problems (i.e., image defects and usability issues) National Check Payments Certification 58

Questions

National Check Payments Certification 59

Quiz Questions

• • • Available online with session handouts Review each question carefully – Answer based on what’s been presented – Use additional recommended resources as needed  P.R.E.P. Guide  Question of the Day  Other online exam resources – Answer Key included – Will review at start of next session Save weekly Quiz Handouts – Review Questions and answers – Will reference in Series Review sessions National Check Payments Certification 60

Recommended Resources

• • • Standards available at: www.X9.org

Universal Companion Document (UCD) – Published /freely available at Checkimage Collaborative website: http://www.checkimagecentral.org

CheckImage Central website: “Endorsements: Information and Usage” www.checkimagecentral.org/PDF/UCD_Endorse ments_Reformatted_2011_Mar_09.pdf

National Check Payments Certification 61

Next Session

• Session #9: March 27 – 2:00 pm ET (1:00 pm CT / 11:00 am PT) – All sessions – 90-minutes • Topic: “Check Products” – Will cover:  Types of checks and purpose and benefits  Remote Deposit Capture National Check Payments Certification 62

Ellen Heffner, NCP Director and Education Manager [email protected]

214-273-3211 Phyllis Meyerson, AAP, CCM Executive Vice President pmeyerson@ eccho.org

214-273-3202 Standards and Formats

Thank You!

Electronic Check Clearing House Organization 3710 Rawlins Street; Suite 1075 Dallas, Texas 75219 NOTICE This NCPC Program document contains copyrighted materials of its publisher.

These program training materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO.