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Master - RDC-MDC Rules & Training Ver14.1Q.1


Table of Contents COPYRIGHT

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LEGAL REFERENCE DISCLAIMER

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ACKNOWLEDGEMENTS

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MOBILE AND REMOTE DEPOSIT CAPTURE BASICS

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CHECK 21 FOUNDATION DESKTOP SYSTEMS PAVE THE WAY REMOTE DEPOSIT CAPTURE PRODUCT I MAGE EXCHANGE NETWORKS CHECK IMAGE POWERS CHECK 21 CHECK 21 ACCELERATES IMAGE USAGE REMITTANCE PROCESSING TIMELY PRODUCT FOR “SELF-SERVICE SOCIETY”

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WHAT’S IMPORTANT IN 2014?

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MOBILE DELIVERY CHANNELS INCREASED CELL PHONE VULNERABILITIES UNINTENDED I MPACT OF M OBILE BANKING BIOMETRICS

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BENEFITS OF REMOTE DEPOSIT CAPTURE

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I MPROVED AVAILABILITY OF FUNDS COST REDUCTION FOR M AKING DEPOSITS ELIMINATE HAZARD OF DRIVING IN BAD W EATHER CASH CONCENTRATION OF FUNDS FAST RESEARCH

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ELECTRONIC SECURITY

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AUTHENTICATION SINGLE FACTOR AUTHENTICATION M ULTI-FACTOR AUTHENTICATION HACKING AND ID THEFT ARE MAJOR ISSUES CONSUMER SENTINEL NETWORK FRAUDSTER PREFERENCES I MPROVING TRADITIONAL SECURITY SYSTEMS CHECK CAPTURE EQUIPMENT TRENDS PARADIGM SHIFT TO DECENTRALIZATION

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CHECK 21 ACT WARRANTIES AND INDEMNITIES

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W ARRANTIES I NDEMNITIES

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ABOUT CHECKS

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SUBSTITUTE CHECKS TYPES AND PURPOSES OF I MAGES CHECK ENDORSEMENTS M EMBERS CANNOT REQUIRE ORIGINAL PAPER CHECK CHECK CARRIERS I MAGE QUALITY ASSURANCE (IQA) COURTESY AMOUNT RECOGNITION (“CAR”) AND LEGAL AMOUNT RECOGNITION (“LAR”) CHECK IMAGE COMPRESSION

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AUTOMATED CLEARING HOUSE (ACH)

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ACH AND REMOTE DEPOSIT CAPTURE TECHNOLOGY COMPETE ACH AND CHECK 21 ACT TECHNOLOGY ANDLAWS/R ULES ARE DIFFERENT ACH TRANSACTIONS FOR REMOTE DEPOSIT CAPTURE RDC & ACH

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REMOTE AND MOBILE DEPOSIT CAPTURE PROCEDURES

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AN OVERVIEW REMOTE DEPOSIT CAPTURE DAILY PROCEDURES PLANNING THE DAY’S ACTIVITIES VERIFY PREVIOUS DAY’S DEPOSIT WITH ONLINE BANKING VERIFY PREVIOUS DAY’S DEPOSIT ACKNOWLEDGEMENT WAS FILED REVIEW SYSTEM AND SECURITY REPORTS PREPARING CHECKS FOR PROCESSING USE ENDORSEMENT PRINTER OR STAMP CREATE A CONTROL DOCUMENT CLEAN SCANNER DAILY JOG CHECKS CAPTURE CHECKS VERIFY IMAGE QUALITY UPDATE DAILY PROCESSING LOG STORE CHECKS IN LOCKED FILE CABINET DESTROYING CHECKS ENSURE DAILY BACKUPS ARE COMPLETED AND ROTATED. FREQUENTLY ASKED QUESTIONS ABOUT CHECK 21 (“FAQ”)

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COPYRIGHT “Remote Deposit Capture Rules & Training Guide 2014© ” is published and printed in the USA and marketed worldwide. Copyright © 2014 by T. Houston Technology Group. All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means electronic or mechanical, including photocopying, recording or by any informational storage or retrieval system without written permission from the publisher, except for brief quotations used in critical articles and reviews. For information contact: T. Houston Technology Group, P.O. Box 1727, Alvin, Texas 77512. Telephone (281) 756-0409 or eMail: thouston@thouston.com. For additional project team copies or corporate subscriptions, contact the above numbers, but do not make any additional copies of the book or pages.

LEGAL REFERENCE DISCLAIMER This “2014 Remote Deposit Capture Rules & Training Toolkit ©” (Training Manual) was developed to provide assistance to Credit Unions and their Members that use Remote Deposit Capture and Mobile Deposit Capture. The Training Manual was developed based on research from individuals, companies and state and federal agencies. Every effort was made to identify all materials quoted with appropriate footnotes that identify the original authors, agencies and companies that originally published the material. The sale and provision of this Training Manual by any company representative or person does not constitute endorsement of, or by, T. Houston Technology Group, a Georgia Corporation, and no part of the Training Manual is meant to be construed as legal advice or any other form of business recommendation to any person, financial institution or user of the Training Manual concerning the products and services described herein. As with all legal matters and documents, a reader or user should consult with a qualified attorney on all matters discussed in this Training Manual before taking any related action, using any form or document discussed, referenced or published.

ACKNOWLEDGEMENTS Most people work under the most difficult of circumstances: stress, fear, joy, deadlines and unreasonable Member demands. We struggle to find balance in our lives. In the Old Testament, a simple shepherd named David had the same problems on his way to becoming the "greatest king of Israel." During his turbulent life, he paused occasionally to write advice about how to handle day-to-day problems. Although these Psalms are thousands of years old, they still bring peace and hope to all that read and believe them. 23 Psalms (King James Translation): The LORD is my shepherd; I shall not want. He maketh me to lie down in green pastures: he leadeth me beside the still waters. He restoreth my soul: he leadeth me in the paths of righteousness for his name's sake. Yea, though I walk through the valley of the shadow of death, I will fear no evil: for thou art with me; thy rod and thy staff they comfort me. Thou preparest a table before me in the presence of mine enemies: thou anointest my head with oil; my cup runneth over. Surely goodness and mercy shall follow me all the days of my life: and I will dwell in the house of the LORD forever.


With the help of many people, we have completed a large part of your homework. The research for this Toolkit required hundreds of hours and we are especially grateful to more people than we can name - but we do want to spotlight a few: Carter Houston Claire Esguerra Carolyn Sorrell

Editor-in-Chief Graphics Designer Sorrell Writing Services


MOBILE AND REMOTE DEPOSIT CAPTURE BASICS Check 21 Foundation After 9/11, congress instructed several agencies to create a system using advanced technology and avoid having our payment system grind to a halt due to fears of terrorists. Immediately after the attacks in New York, all airlines were grounded for several days and the impact on business was devastating. For years, airlines had couriered checks across the U.S. in an efficient and timely manner, but the attacks froze payments and payroll, which significantly exacerbated a horrible situation. Financial Institutions had for years transmitted check images, but they had no legal standing and could only be used for research. The Check Clearing for the 21st Century Act1, or Check 21, was signed into law on October 28, 2003. Provisions of the law took effect on October 28, 2004. The Check 21 law gave capture and transmissions a solid legal foundation. Immediately after the law passed, software vendors began re-tooling their imaging system and the result is a seamless exchange of check images. The processes for handling checks decreased from days to minutes and the end is still not in sight. Desktop Systems Pave the Way Starting more than eight years ago, Remote Deposit Capture adoption exploded in financial institutions; and now after three attempts, Mobile Deposit Capture is building momentum targeted at consumers and small businesses. For almost a decade, business Members have enjoyed the convenience of making deposits without driving to a branch, plus they receive better availability of funds. The process could not be easier And now the ubiquitous Smart Phone has added check capture; it is like having a miniature version of your Credit Union in a holster. Remote Deposit Capture Product Remote Deposit Capture Products (“ RDCP”) are typically small, powerful desktop systems that include a workstation, desktop scanner, laser printer and software to capture checks and transform them into an electronic deposit that can be transmitted to any participating Credit Union.2 The scanners range in speeds from 2 documents per minute (“DPM”) to more than 180 DPM. As the checks move through the scanner, an internal digital camera takes high-resolution images of the front and back of each check and records the magnetic ink characters located at the bottom of each check that direct their route to the financial institution it was drawn on. As the scanner captures the checks, it keep a running total to assist the operator in balancing the deposit.

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http://www.frbservices.org/eventseducation/education/check21_act.html (accessed 11/04/13) Only items drawn on U.S. financial institutions can be processed using RDCP. 1|P age


After balancing, the checks are transmitted at Internet speed to the Member’s Credit Union for deposit. After capture, the checks should be stored in a safe location for a period determined by the Member and then destroyed to prevent them from accidently being re-processed. When received by the Credit Union, a computerized process separates the checks drawn on the Credit Union and electronically forwards the other checks, called transit items, to their paying institution. This part of the process highlights the value of Check 21; financial institutions have the option of creating, processing and exchanging digital images of checks rather than actually transporting the original paper checks. When needed, an image can be printed in a special format, Substitute Check, and is given the same legal status as the original paper check. American consumers and businesses write billions of checks each month and this technology significantly reduces the processing time required to process checks. In cases where the paying account has insufficient funds, returning it electronically reduces the collection time by several days. Although processing paper checks has been streamlined several times to make it work as smoothly as possible, it is still one of the most expensive components for a Credit Union. Like Remote Deposit Capture, Mobile Deposit Capture, is also simple to operate and provides the same benefits to a Member. Using a Smart Phone, you take a picture of the front and back of a check and using the MDC Application (“App”) you simply transmit the item to the Credit Union where it is applied to your account. If the check is drawn on another institution, software at the Credit Union will automatically route it through the Image Exchange Network. Image Exchange Networks Financial institutions cannot transmit check images to another institution unless they have an agreement with them. To avoid having each financial institution execute thousands of image exchange agreements with other financial institutions, the Check 21 Act allows the Federal Reserve Bank and qualified Clearing Agents, commonly called Image Exchange Operators, to execute agreements that allow them to obtain permission from other institutions and Clearing Agents to perform the image exchange for participating financial institutions. Across the U.S., multiple Clearing Agents have formed a latticework of high-speed, encrypted networks to send and receive check images constantly for financial institutions. Advanced technology, similar to systems used in ATM networks, keeps track of each item from the time it enters the network to the time it is delivered to its final destination. Each financial institution that participates in Check 21 Act processing is a member of a participating network that tracks the check image, amount, routing information, etc., for final settlement at the end of each business day. The connectivity ensures that a check image is transmitted via the fastest, most efficient route for payment. If for any reason a check cannot be processed via the Image Exchange Network, it is printed in Substitute Check format and transported by courier to the paying institution. In today’s environment, most check exchange is accomplished using “batch processing,” which means the financial institutions, or their service bureau processor, hold the checks until the end of the business day 2|P age


and transmit them at the same time. This method is used primarily because it is easier to settle the checks once per institution rather than having to track and aggregate multiple transmissions. Long-term, Check 21 processors may send individual checks at the time they are received. The design of the networks and opportunity to mitigate fraud seems to indicate that transmissions will eventually parallel ATM processing, which is normally operated in a real-time mode. Debits = Credits Each night the participants in the Check 21 exchange network settle the checks sent and received and forward the settlement totals to the Federal Reserve Bank or a correspondent institution, which enables each financial institution to determine their daily starting balances for the next business day. As each business day begins, checks that could not post at the paying institutions across the U.S. from the previous day begin the return process. The most common reasons that checks are returned is insufficient funds, closed account and stop pay order, etc. As electronic entries, these tasks are now being handled very quickly and inexpensively–as compared to paper checks. The Federal Reserve Bank announced an electronic image service that obsoletes the paper-check return system that has been used for decades. This fast turnaround on bad checks allows businesses and consumers that use RDC to know sooner that a check they deposited has been returned, their account charged and they can begin the collection process. Check Image Powers Check 21 The trend in item processing has changed dramatically since Check 21 from centralized item processing to distributed processing at branches and Member locations. The trend was fueled by difficulty in keeping reasonably-priced and reliable couriers. The power of the Remote Deposit Capture Products, faster and more reliable Internet service, stronger security and the legal provisions allowed by Check 21 Act were also major driving factors. During the decade preceding Check 21 Act, retaining reliable courier service became a problem. The rates keep increasing beyond normal inflation and many companies assigned too many pickups on a route, which meant the checks could arrive late at the processing center, which caused serious Member issues. Check images have been used in financial institutions for more than two decades, but until Check 21 they did not have the legal status to replace paper checks. Imaging represents and stores a check as a series binary zeros (0) and ones (1). When stored on a computer using this technique, the pristine quality of the image is maintained indefinitely. If a digital image is printed after being digitally stored for ten, fifty or even a hundred years, the quality is the same as the first day. Since check images are typically stored on a hard drive, they can be immediately accessed from any authorized workstation in the Credit Union. Tasks, such as amount correction are simplified as the operator can see the image of the check, the amount in error and the correct amount written by the check writer. Research is fast and easy as most systems take advantage of Boolean search capabilities, such as a specific amount, check or serial number or ranges of information. Once found, check images can be printed on a high-resolution laser printer. Check 21 Accelerates Image Usage After technologists learned how to harness to the power of check image and Check 21 Act bringing the legal tools to the financial industry–older products were significantly enhanced and new uses of technology were launched. 3|P age

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