ACCELERATE THE PROCESS

CHECK TRUNCATION
June 2007

Jerry Brown

Agenda

Worldwide Market Forces National Truncation Examples

France United States of America

Brazil Recommendations

Market Forces Truncation Drivers

Countries with highest operating costs are early technology adopters Labor, facilities, transportation costs etc. Nations achieved a positive ROI at different times Scandinavia has one of the highest labor and social costs
yC log no ch Te t os

Cost

Cost tions a r e p O

Time

Other Drivers Transportation Crisis 9/11, strikes etc. Every national truncation system has required new legislation

Market Forces Truncation Drivers

1980s Brazil

Hyperinflation drove country wide ECP clearing Escalating operational costs drove full truncation Inter Bank Data Exchange (IBDE) mandated [ECP] 2007 rapidly declining paper volumes reduced truncation ROI Operational costs drove full truncation completed July 2002 Truncation via ARC for remittance consumer payments Transportation crisis of 9/11 drove Check 21 legislation in 2004 Driven by operational savings & US alignment completes 2010

1990s Norway and Sweden

1997 U.K.

2001 France

2002 USA

2008 Canada

Market Forces Truncation Inhibitors

Legal obstacles slow to change

Microfilm or paper required by courts

Smaller banks inability to compete

Insufficient image outsource capabilities

Banks have competing investments

Alternative use of capital with higher return

Network Traffic Bandwidth

Telecommunications infrastructure requirement to support image exchange.

Market Forces Impact of Declining Volume

Electronic payment adoption has been high

Direct debit, web payment, wires etc. Exceptions India, China and a few emerging markets Consolidations whole bank or operations centers Trend to outsource or offer an outsource service Ultimately market consolidates to just a few processors

Paper payment in decline worldwide

Operations challenged to maintain unit transaction costs

Sweden Netherlands U.K. Canada

Privatgirot and Nordea Postbank, Interpay IPSL, EDS, BancTec Symcor, Intria

National Truncation Examples

National Truncation Examples France

Continuous ECP exchange until 6 p.m. - settlement shortly after 6 p.m. Items over Euro 5,000 and suspect items are sent to paying banks
d sen t c e dir nd ge ema a d m I on

Bank of first deposit -Branch -ATM -Vault -etc. Item processing & image quality verification
- Archive includes all request history

ta da P EC

SIT EIC

Paying Bank

s urn Ret est equ R ge Ima

Paris Clearing Chamber

2% of checks volumes

National Truncation Examples France At the Branch

DAY 1

Primary branch focus is to sell new products and services During off peak time teller loads deposits into scanner MICR data and Image snippets (code line & amount) are transmitted to regional center Local archive of images maintained for 30 days or more End of day courier takes checks to regional center

DAY 2

Local image archive updated from center with balanced data Supports local customer queries

National Truncation Examples France At the Regional Center

DAY 1

Processing for many branches (typically 100 to 200) Uses ICR to read check snippet image data Processes, corrects and balances the transactions Balanced data stream sent to ECP exchange throughout the day Items matched to electronic data and out-sorted as required Images from the sorters are archived with authentication Branch images not used for archive Truncated documents secured for subsequent destruction High value items dispatched for physical exchange ECP exceptions / requests for images actioned

DAY 1 - 2 OVERNIGHT

DAY 2

National Truncation Examples France Advantages

Teller focus on customer relationship, not operational process Reduces peaks by operating the process throughout the day Minimizes branch capture infrastructure required Minimizes telecommunication infrastructure requirement Reduces courier runs to one per day Fewer, more skilled staff at regional centers ECP exchange removes the physical exchange peak sorter demand Minimizes equipment at the center all night to process Document storage, security and destruction is removed from the branch Improved operational process control and quality in specialized centers Software allows functions to be performed at branch, region or center

National Truncation Examples USA

Check Truncation

1990s Electronic Check Presentment (ECP) introduced

Voluntary between banks with limited adoption Check truncation of any scale was never achieved.

2002 As a result of 9/11, Check 21 legislation expedited.

Law makes a substitute check (Image Replacement Document) a legal replacement for the original

2004 28th October Check 21 Act effective. 2005 Banks and consortia piloting image exchanges 2007 Largest banks image exchanging up to 40% of volume

National Truncation Examples USA Image Replacement Document

From ANS X9.100-140-2004, Specifications for an Image Replacement Document (IRD) used with permission of the copyright owner Accredited Standards Committee X9, Inc. Financial Industry Standards.

National Truncation Examples USA Image Replacement Document

From ANS X9.100-140-2004, Specifications for an Image Replacement Document (IRD) used with permission of the copyright owner Accredited Standards Committee X9, Inc. Financial Industry Standards

Brazil Recommendations

Brazil Recommendations

There are essentially two ways to approach national truncation, both require changes in legislation

1. Legislate the whole process (French example) Mandate all processors have image and archive capability Agree image interchange / archive / security rules Mandate timeframes ( France completed in under 2 years) 2. Legislate for an enabling document (IRD) (U.S. example) Adoption based on market forces and economics Early adoption by largest banks Local or national image archives

In both cases smaller banks may face competitive disadvantage and are likely to outsource.

Brazil Recommendations

FEBRABAN works with banks to determine truncation direction

Full legislation of complete process or Enabling legislation relying on market forces

In either case the legal issue of images and / or substitute image documents must be resolved. Potential Subsequent Steps

Work with banks to establish ROI for truncation Facilitate image interchange between banks Establish image formats, quality metrics, security Establish archive / retention guidelines Announce reasonable time frames for implementation Sponsor Pilot tests Communicate progress

ACCELERATE THE PROCESS

Thank You
Jerry Brown jerry.brown@banctec.com