NCP 2017 Exam Cycle Core Training Series Session

NCP 2017 Exam Cycle Core Training Series Session 4 National Check Payments Certification Standards and Formats Copyright© 2016 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 materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO. Copyright© 2016 by the Electronic Check Clearing House Organization (Certain contributed content subject to third party copyrights) National Check Payments Certification 2

NCP Exam Registration Reminder • Free ECCHO / NCP study aids upon registration! – Jump. Start Reading Program üLinks to all program resources – NCP Roadmap üDirection on establishing a personalized study plan – P. R. E. P. Guide üTraining guide, glossary of terms, sample exam HO – Question of the Day & Summary th ECC o. org i w r e t Regis : store. ecch üNew daily question & detailed answer to at online o prior day’s question • Exam Fees: $400 ECCHO member inf xam e d e l i pc deta View. eccho. org/nc w at : ww $500 non-ECCHO member – Not sure about membership? üCheck current status at: www. eccho. org/memberships o Enter financial institution name in search box on left National Check Payments Certification 3

Topics – This Session • X 9. 100 -140 • X 9. 100 -160 – Parts 1 and 2 • X 9. 100. 181 • X 9. 100 -187 • X 9. 100 -188 (new) • TR 47 (new) National Check Payments Certification 4

X 9 Standards

Payments Standards • What are standards? – Set of specific documents, defined as either Standards or Technical Reports (TRs), to give the industry guidance üGoal: To provide a structure to facilitate electronic movement or exchange of check-related data and images – Standards enable interoperability in check payments processing • Standards may be updated from time to serve the changing needs of the industry National Check Payments Certification 6

Payments Standards • Who provides standards? – Accredited standards body for Financial Services: Accredited Standards Committee (ASC) X 9, Inc. – X 9 creates American National Standards (ANS) üStandards are accredited by the American National Standards Institute (ANSI) • Standards are available from either X 9 or ANSI – Please visit the websites for additional information www. X 9. org and www. ansi. org National Check Payments Certification 7

Check Payments Standards • X 9. 100 -140: Specifications for an Image Replacement Document – IRD • X 9. 100 -160: Magnetic Ink Printing (MICR) – Part 1: Placement and Location: Includes size limits for checks üPersonal-size (6” x 2. 75”) üBusiness-size checks (8. 75” x 3. 667”). – Part 2: EPC Field Use • X 9. 100 -181: TIFF – Tagged Image File Format • X 9. 100 -187: Electronic Exchange of Check and Image Data • X 9. 100 -188: Return Reasons for Check Image Exchange and IRDs National Check Payments Certification 8

Image Replacement Document – IRD (X 9. 100 -140)

IRD Standard • X 9. 100 -140 – 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 • Many other X 9 standards and technical reports are referenced by this IRD standard – See NCP P. R. E. P. Guide for more details National Check Payments Certification 10

Substitute Check or IRD? • What’s the difference between an IRD and a Substitute Check? • Nothing! – Image Replacement Document (IRD) üDefined in technical standard X 9. 100 -140 – Substitute Check üDefined in Reg CC o Reg CC definition references the X 9. 100 -140 standard National Check Payments Certification 11

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 12

IRD MICR Line and Magnetic Ink • Magnetic ink required? – Reg CC requirement üAll checks (including substitute check) must have routing number of the Paying Bank preprinted or postencoded in magnetic ink (MICR characters/E-13 B font) – However, not required if IRD is created for paid item returned to issuing institution’s customer as a properly paid item üMICR characters may then be printed in non-magnetic ink üSubstitute check used for this purpose must still conform to all other requirements of X 9. 100 -140 standard National Check Payments Certification 13

Substitute Check Forward Substitute Check - Front Creating Institution Routing Number, Creation Date & Sequence Number Legal Legend *011500120* 01/03/2002 8587408979 This is a LEGAL COPY of your check. You can use it the same way you would use the original check. Optional Area No branding or marketing Original Scanned Front Image 1800539446 [053000183] 01/03/2002 Original Truncating Institution Routing Number, Date & Sequence Clipped Area 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. 14

Substitute Check 15

Return Substitute Check - Front Return Reason Overlay *011500120* 01/03/2002 8587408979 This is a LEGAL COPY of your check. You can use it the same way you would use the original check. Return Reason Printed on Return Substitute Check National Check Payments Certification Return Substitute Check Identifier ‘ 5’ can only appear on the 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. 16

Magnetic Ink Printing (MICR) (X 9. 100 -160)

X 9. 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 of one digit optional field (EPC) code – Conveys special information for correct handling or routing of check/check data to financial institutions or other processors – Primarily used for qualified returns or identification of substitute checks National Check Payments Certification 18

Magnetic Ink Character Recognition • MICR line: Band along bottom edge of check reserved for magnetic encoding – Common fields divided into character spaces, organized into several areas or fields • Fixed format for all users: – Amount, Routing, and optional EPC fields Drawer’s Signature National Check Payments Certification 19

Magnetic Ink Character Recognition • Variable fields: – On-Us: Issuing financial institution determines format – Auxiliary On-Us (Aux On-Us) üMay appear at extreme left side on business-size check Drawer’s Signature National Check Payments Certification 20

TIFF Image Format for Image Exchange (X 9. 100 -181)

X 9. 100 -181 – TIFF Standard • Standard defines specific fields and parameters for check image exchange and allowable values for those parameters – Image data must comply with X 9. 100 -181 standard • TIFF standard file contains image data and set of “tags” that describe how the image data is to be interpreted – Key fields include: üImage width and Image length üCompression (DPI must be 200 or 240) üB&W or grayscale (Images must be black and white only) • Check processing systems must understand TIFF tags to be able to view what’s in the file • Consider TIFF as “envelope” around the image – TIFF “tags” describe the image National Check Payments Certification 22

Return Reasons for Check Image Exchange and IRDs (X 9. 100 -188)

X 9. 100 -188 – Return Reasons • Approved May 6, 2016, standard establishes process to add, change or delete a Return Reason code – Includes return reasons previously listed as Annex in two other standards: ü X 9. 100 -140 – Image Replacement Document (IRD) ü X 9. 100 -187 – Electronic Exchange of Check and Image Data – Provides list of Return Reason codes for both Customer and Administrative Returns for image exchange and IRD creation • Standard includes both: – Short name for each Return Reason with abbreviation; and – Guidance for the proper use of Return Reason codes • Standard does not address operational, implementation or settlement considerations • See “Exceptions – Returns and Adjustments” session of this training series for discussion of common Return Reason codes National Check Payments Certification 24

Universal Companion Document

Universal Companion Document • Industry needed common edit practices for image files being exchanged • UCD developed to formalize the use of the industry standard for check image exchange – Designed to clarify how financial institutions should use/apply that image exchange standard • Uniformat that provides flexible approach to identify data elements critical to payment processing and establishes: – Business practices for image exchange – File-level and item-level rejection criteria National Check Payments Certification 26

Image Standard and UCD • Establish industry consistency in use of the X 9. 100 -187 standard – Standard defines which records must be used for check image exchange (forward and return) – UCD explains how to populate the fields in those records • UCD details each record deemed to have critical payment data – Lists all associated fields contained in standard National Check Payments Certification 27

UCD and TR 47 • UCD will be released as a new technical report through X 9: – “TR 47 Universal Companion Document Industry Adoption of X 9. 100 -187” • ASC X 9 recently voted to approve TR 47 – Anticipated release date – November 2016 • Will be a free document available at: – www. X 9. org; and – Linked via Check. Image Central website National Check Payments Certification 28

Cash Letters

What is a Cash Letter? • Group of negotiable instruments, usually checks • Includes instructions for handling – Who it’s from (Presenting Bank) – Where it’s going (Receiving Bank) • Describes what kind of items are included – Forward collection – Return • Includes control totals – Number of Items – Total $ Value National Check Payments Certification 30

Cash Letters and Bundles • To manage balancing and controls for large check volumes, paper cash letters sub-grouped into bundles – Approx. 300 items in each bundle • Separate instructions for each bundle: – From/To – What’s included – # Items – $ Value National Check Payments Certification Source: JPMorgan Chase 31

Cash Letter Structure • Representation of Physical Cash Letter (CL) File – One file – three (3) Cash Letters – Cash letter may have one or more bundles File-1 Bundle 2 Bundle 1 • Image file/record formats: CASH LETTER #3 WITH TOTAL – X 9. 100 -187 record formats mirror paper environment in many ways, as shown in example Example: FILE-1: ü Cash Letter #1 § 3 Bundles – forward debit Item(s) ü Cash Letter #2 § 1 Bundle – forward debit Item(s) ü Cash Letter #3 § 2 Bundles – forward debit Item(s) National Check Payments Certification Bundle 1 CASH LETTER #2 WITH TOTAL Bundle 3 Bundle 2 Bundle 1 CASH LETTER #1 WITH TOTAL 32

Image Cash Letter Standard

Overview • Standard for image files exchanged today – Started with Draft Standard for Trial Use: DSTU X 9. 37 (2003) – X 9. 100 -187 emerged as “New” standard üEssentially the X 9. 37 standard with known errors addressed – More robust documentation – Intent was to be compatible with X 9. 37 • Fed OC 3 references DSTU X 9. 37 (2003) “. . . as amended from time to time” – “Amended” standard referenced is the X 9. 100 -187 standard National Check Payments Certification 34

X 9. 100 -187 • Cash letter structure that supports exchange of: – Posting data only – Posting data and check images – Posting data followed by additional data & image file – Variable length records to accommodate images • Utilizes UCD as guideline for industry consistency • Defines records for both: – Forward image exchange (20 -series records) and – Return image exchange (30 -series records) üWill discuss both in this section o Focus on specific records that carry indorsement information National Check Payments Certification 35

X 9. 100 -187 Selected Record Views Cash Letter Hierarchy Diagram File Header (01) Cash Letter Header (10) LEGEND M Mandatory Record Forward Presentment Bundle File Control (99) Cash Letter Forward presentment bundles and/or return bundles Return Bundle Cash Letter Control (90) Multiple Logical Entities National Check Payments Certification 36

File Records • File Header Record (Type 01) – First record of file containing: üOrigin / Destination Routing Numbers and Names üCreation Date and Time • File Control Record (Type 99) – Contains file control information: üCash Letter count üItem count üTotal amount – File Header Record (Type 01) associated with File Control Record (Type 99) • Examples of Type 01 / Type 99 records on next slides National Check Payments Certification 37

File Header Record (Type 01) • Data as stored in Image Cash Letter (ICL) file: • View using image viewer National Check Payments Certification Source: www. All. My. Papers. com 38

File Control Record (Type 99) • File Control Record (via image viewer) • Note: One cash letter only in this file National Check Payments Certification Source: www. All. My. Papers. com 39

Cash Letter Records • Cash Letter Header Record (Type 10) – First record of cash letter containing: üDestination and ECE Institution Routing Numbers üVarious dates and time – Codes to indicate üForward (01) or Return (03) cash letter üInclusion (or “to follow”) image records üType of returns • Cash Letter Control Record (Type 90) – Provides control totals for cash letter including: üBundle Count, Item Count, Total Amount • Cash Letter Header Record (Type 10) associated with Cash Letter Control Record (Type 90) • Examples of Type 10 / Type 90 records on next slides National Check Payments Certification 40

Cash Letter Header Record (Type 10) • Cash Letter Header Record (via image viewer) – Note: Two bundles are included in this cash letter National Check Payments Certification Source: www. All. My. Papers. com 41

Cash Letter Control Record (Type 90) • Cash Letter Control Record (via image viewer) – Note: Two bundles are included in this cash letter National Check Payments Certification Source: www. All. My. Papers. com 42

X 9. 100 -187 Selected Record Views Forward Presentment Bundle Diagram Forward Presentment Bundle M Bundle Header (20) Check Detail “ 25” Record “ 25” record contains check MICR DATA One ” 26” record to identify return location National Check Payments Certification Addenda Records Check Detail Add. C Add. A “ 28” Record “ 26” Record One “ 28” record to identify each subsequent endorser C Bundle Control (70) Item(s) Logical Entity LEGEND Mandatory Record Conditional Record Multiple Logical Entities C Multiple Conditional Records 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 43

Bundle Records • Bundle Header Record (Type 20) – First record of bundle containing: üDestination and ECE Institution Routing Numbers üVarious dates üBundle ID üBundle Sequence Number üCycle Number – Code to indicate forward or return bundle üNot mixed in same cash letter • Bundle Control Record (Type 70) – Provides control totals in bundle for: üItem count, Total amount, Images within Bundle count • Bundle Header Record (Type 20) associated with Bundle Control Record (Type 70) • Examples of Type 20 / Type 70 records on next slides National Check Payments Certification 44

Bundle Header Record (Type 20) • Bundle Header Record (via image viewer) – Note: Ten items are included in this bundle National Check Payments Certification Source: www. All. My. Papers. com 45

Bundle Control Record (Type 70) • Bundle Control Record (via image viewer) – Note: In this example, 300 items are included in bundle National Check Payments Certification Source: www. All. My. Papers. com 46

Check Detail Record (Type 25) • 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 • For business-sized check, would carry the auxon us field in this record National Check Payments Certification 47

Check Detail Record (Type 25) • Sample check MICR line: • Type 25 record using image viewer: National Check Payments Certification Source: www. All. My. Papers. com 48

Check Detail Addendum A Record (Type 26) • Associated with previous Check Detail Record – Multiple Type 26 records if check re-presented • Identifies/provides information on return location for customer returns – typically BOFD – Fields conform to Reg CC requirements • Codes indicate: – Whether / how MICR line repaired – Institution that truncated original check üTruncation indicator set to ‘Y’ o Only one truncation indicator set to ‘Y’ o Note: If value of ‘ 4’ in EPC field in Type 25 or Type 31 record indicates this is an image of a substitute check, ALL truncation indicators set to ‘N’ National Check Payments Certification 49

Check Detail Addendum A Record (Type 26) • Type 26 record (via image viewer) – Truncation Indicator = “Y” in example indicating the institution that truncated the original physical check National Check Payments Certification Source: www. All. My. Papers. com 50

Check Detail Addendum C Record (Type 28) • Associated with previous Check Detail Record – May have multiple Type 28 records – subsequent endorsers – Fields conform to Reg CC and other endorsement requirements (e. g. ; ECCHO Rules) • Record carries codes to indicate – Institution that truncated original check – Whether / how MICR line repaired – Defines bank’s role in collection process – Carries Return Reason (on re-presented item) • Two purposes for Type 28 records – Carry Return Reason from prior 35 record (re-presented items) – For subsequent indorsements: Identifies and provides information for each endorsing institution üRequired for IRD creation National Check Payments Certification 51

Check Detail Addendum C Record (Type 28) • Type 28 record (via image viewer) – Note the Truncation Indicator = “N” üOnly one institution that is the Truncating Bank National Check Payments Certification Source: www. All. My. Papers. com 52

Image Cash Letter Standard – Returns

X 9. 100 -187 Selected Record Views Return Bundle Diagram Return Bundle M C “ 31” and “ 33” Return Detail records contain MICR data Return Detail “ 31” Record Bundle Header (20) Return Detail Add. A “ 32” Record One ” 32” record to identify return location National Check Payments Certification Mandatory Record Conditional Record Multiple Logical Entities C Multiple Conditional Records Bundle Control (70) Return Item(s) Return Detail Add. B “ 33” Record Logical Entity LEGEND Return Detail Add. D “ 35” Record 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 54

Return Records • Different set of records used to return items in image cash letter file (30 -series records) • Return records correspond to forward records – Type 25 to Type 31 üWith Type 33 if Aux on-us value present – Type 26 to Type 32 – Type 28 to Type 35 • When returning an item: – Forward records convert to return records by copying the data from/to corresponding fields üGenerally referred to as “flipping the records” National Check Payments Certification 55

Return Record (Type 31) • 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: üReturn Reason üArchive available üNumber of Times Returned National Check Payments Certification 56

Return Record (Type 31) • Example: Type 25 data copied to Type 31 record – Note Return Reason Code – “A” National Check Payments Certification Source: www. All. My. Papers. com 57

Return Addendum B Record (Type 33) • Used in conjunction with Return Record (Type 31) • May contain Auxiliary On-Us field – Auxiliary On-Us: Optional field left of routing number field on MICR line üUsed on business-sized checks for: o Consecutive serial numbers o Account control information o Product codes/ other information – Carried in Check Detail Record (Type 25) on the Forward presentment file National Check Payments Certification 58

Return Addendum Records • Return Addendum A Record (Type 32) – Mirrors Check Detail Addendum A Record (Type 26) – Type 26 record identifies return location for customer returns • Return Addendum D Record (Type 35) – Carries Paying Bank identification; and – Return Reason code üSame Return Reason as Return Record (Type 31) – For re-presented items üRecord mirrors Check Detail Addendum C Record (Type 28) which identifies and provides information for each endorsing institution in the forward collection process National Check Payments Certification 59

Return Addendum A Record (Type 32) • Example: Data copied from Type 26 to Type 32 record Record 26 National Check Payments Certification Record 32 Source: www. All. My. Papers. com 60

Return Addendum C Record (35) • Type 28 to Type 35 record (via image viewer) – Note: Two Type 35 records for this item üReturn Reason Code (“A”) in last Type 35 record National Check Payments Certification 61 Source: www. All. My. Papers. com

Image Views

X 9. 100 -187 Selected Record Views Forward Presentment Bundle Diagram Forward Presentment Bundle M Bundle Header (20) Check Detail “ 25” Record “ 25” record contains check MICR DATA One ” 26” record to identify return location National Check Payments Certification Addenda Records Check Detail Add. C Add. A “ 28” Record “ 26” Record One “ 28” record to identify each subsequent endorser C Bundle Control (70) Item(s) Logical Entity LEGEND Mandatory Record Conditional Record Multiple Logical Entities C Multiple Conditional Records 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 63

Image View Records • Image View Detail (Type 50) / Image View Data (Type 52) Records • Conveys image data and image: – On forward collection for Check Detail Record (Type 25); or – On return for Return Record (Type 31) • Records occur together; for each check imaged, must have: – Pair of 50/52 records for front view and – Pair of 50/52 records for back view üPartial views permitted by agreement National Check Payments Certification 64

Image View Records • Contain very technical information that describes the item (Type 50 record) and contains the view of the imaged item (Type 52 record) – Type 50 Record – Image view üContains codes that describe the image including: o Format o Compression o View side (front or rear) o View descriptor (full or partial view) o Digital signature and security information, if included – Type 52 Record – Image Data üIncludes the image and: o Reference Key information o Security information o Clipping information o Digital signature, if included National Check Payments Certification 65

Image View Records Type 50 / Type 52 • Variable length records – Example shows Type 50/52 records (via image viewer) üLength = 80 for detail about the image (Type 50); and üLength = 5742 for the image view (Type 52) Source: www. All. My. Papers. com 66

Record Formats – Processing Flows Build an Image Cash Letter (ICL)

Build the ICL – Overview National Check Payments Certification 68

Which Electronic Records? Processes 1 – 3: • Deposit and image presentment (1) • Image return (2) • Image re-presentment (3) – BOFD A may re-present item automatically What X 9 record types would be required on: – Initial image presentment (1) – First return (2) – Re-presentment (3) Processes 4 – 6: • Second image return (4) • BOFD A provides a substitute check to customer • Customer re-deposits substitute check at a second depositary bank - BOFD B (5) • BOFD B presents item as image (6) What X 9 record types would be required on: – Second return (4) – Presented image from BOFD B to Paying Bank (6) National Check Payments Certification 69

Which Electronic Records? Forward Presentment and Initial Return Processes 1 – 3: • Deposit and image presentment (1) • Image return (2) • Image re-presentment (3) X 9 record types required on: • Initial image presentment (1) – Type 25 – Type 26 • First return (2) – Type 31/33 – (33 only if aux on-us from business-sized check) – Type 32 – “flipped” from 26 record – Type 35 – New record to carry Return Reason Code • Re-presentment (3) – Type 25 – Type 26 – “flipped” from 32 record on first return (2) – Type 28 – “flipped from 35 record on first return (2) – Type 26 – New for second presentment (3) National Check Payments Certification 70

Which Electronic Records? Second Return and Re-Presentment Processes 4 – 6: • Second image return (4) • BOFD A provides a substitute check • Customer re-deposits substitute check at second depositary bank - BOFD B (5) • BOFD B presents item as image (6) X 9 record types required on: • Second return (4) – Type 31/33 – (33 only if aux on-us from business-sized check) – Type 32 – “flipped” from first 26 record (1) – Type 32 – “flipped” from second 26 record (3) – Type 35 – “flipped” from first 28 record (3) – Type 35 – New record for this return (w/current return reason code) • Substitute Check deposited at BOFD B (5) – Item has been dropped to paper when IRD created – Substitute check (IRD) carries all prior indorsements • Image presented from BOFD B (6) – Type 25 - New – Type 26 – New w/BOFD B indorsement information National Check Payments Certification 71

Questions National Check Payments Certification 72

Recommended Resources • Standards available at: www. X 9. org • Supplemental Handout: X 9 File-Records Example • Universal Companion Document (UCD) – Currently available at Check. Image Collaborative website: www. checkimagecentral. org – Check. Image Central website üReviews various papers on Technical and Operational topics – examples: o “Endorsements: Information and Usage” o “Proper Use of Return Codes in Image Exchange” National Check Payments Certification 73

Standards and Formats Thank You! Electronic Check Clearing House Organization 3710 Rawlins Street; Suite 1075 Dallas, Texas 75219 www. eccho. org NOTICE This NCPC Program document contains copyrighted materials of its publisher. These materials may not be reproduced or published, in whole or in part, without the express permission of ECCHO Copyright© 2016 by the Electronic Check Clearing House Organization