Merchants Check 21

What is an Image Cash Letter (ICL)?

Image Cash Letter is a fast, simple and efficient means of making electronic payments. Using ICLs, payments can be deposited electronically, eliminating the need to prepare and transport paper-based cash letter payments. The image cash letter deposit saves you time and money by allowing you to work directly from images without having to run additional passes of checks and documentation, and extends deposit times to 8:00 p.m.

Some of the key features of ICLs are:

  • Optimal routing of your image items to achieve the lowest possible clearing cost
  • Duplicate detection at the item and file level
  • Secure delivery of forward files
  • Automated notification of file receipt
  • Automated notification of cash letter adjustments

What is check truncation?

Check truncation refers to removing an original paper check from the check collection or return. With Check 21, electronic images of the original paper check (front and back) replace the original check in the collection or return process and are cleared through the check-clearing network. Financial Institutions (FIs) are allowed to reconvert such images to paper items called substitute checks, aka Image Replacement Documents (IRDs).

What is check conversion?

Check conversion is a term that generally refers to converting a “source document” (a check) into an Electronic Funds Transfer (EFT) transaction for clearing through an electronic payment network, such as the Automated Clearing House (ACH) or debit card networks. In the process, the check is used only as a source of information and is not processed as a check payment. Check 21 provisions do not apply to EFTs. Instead, EFT clearance is subject to Regulation E and NACHA rules. The types of check conversions you may be familiar with might include:

Accounts Receivable Check (ARC) conversion: This occurs when a consumer mails a check (e.g., the consumer’s payment of his or her monthly phone bill) to a company that, in turn, converts it to an electronic transaction and clears it through the ACH network. Generally, the consumer’s financial institution lists the item on the consumer’s monthly statement as an electronic debit item and does not provide an image of the item.

Point of Purchase (POP) conversion: This occurs when a check is submitted for an over-the-counter transaction. Usually, the cashier swipes the check to capture account information and returns the voided check to the check writer, and the transaction is cleared through the ACH or debit card network.

Are all paper checks eligible for truncation and reconversion to a substitute check?

Yes. All paper checks are eligible for truncation and reconversion (by any bank involved in the clearing process) to a substitute check including, but not limited to, corporate checks, consumer checks, money orders, travelers' checks, convenience checks, and government warrants.

Why should I use Check 21 EPO by Payment21®?

With Check 21 EPO by Payment21®, you can now eliminate time-consuming manual deposit preparation and trips to the bank, improving the speed and efficiency of both collections and returns.

Do you carry out due diligence on merchants using your Check 21 EPO-technology?

For Check 21 EPO, Payment21® performs due diligence in a commercially reasonable manner. However, we are not obliged to carry out credit checks on merchants. Payment21® has a BSA / AML Risk Assessment Process and a BSA / AML Compliance Program in place. Our merchant approval policy is fully compliant with the PATRIOT Act and all Anti-Money-Laundering (AML) provisions including proper Know Your Customer (KYC) practices.

What is the difference between Check 21 and ACH from a technical perspective?

When paper checks are scanned and remotely deposited to the bank, they are required to go via one of two methods: Check 21 or ACH. Both Check 21 and ACH transmit check payments electronically. There are two differentiating factors that define whether a check is sent through as a Check 21 or an ACH transaction.

1. Type of Check

a. Check 21 = Business, bill pay, cashier, money order, travelers', official, third party, credit card and government checks and consumer check writers that have requested to opt out of ACH processing. These checks can be rerouted and sent through as a Check 21 transaction.

b. ACH PPD (prearranged payment and deposits), conversion to ACH is used for consumers only. No usage for businesses. However, there is ACH CCD (corporate credit or debit). It eliminates the needs for paper checks, and is designed for transfers to or from corporate accounts.

2. Transmittal Method

a. Check 21 – Image of the front and back of the check is captured. The image plus the MICR line data (bank account DDA and routing number) is transmitted.

b. ACH – Image of the check is captured, but only the MICR line data (bank account DDA and routing Number) is transmitted.

What if consumers opt out of ACH processing?

In such a scenario, merchants and banks are required to create a check draft based on the original electronic entry. This is common business practice within the retail sector as well as banking industry whereby check items are printed at the bank’s own discretion. To qualify for Check 21 law, the item has to be printed and digitized, and as a result the former ACH-entry can be processed as an electronic image and later in the process can be reconverted into a substitute check, i.e. Image Replacement Document (IRD) in compliance with the Check 21 Act.

What is the advantage of using Check 21 over ACH from a legal perspective?

Check 21 transactions are governed by the Check 21 Act, Uniform Commercial Code (UCC), federal and state check laws, whereas ACH transactions are regulated by NACHA rules and the Federal Reserve.

Banks and payment service providers are subject to rules and regulations when processing ACH transactions. This means that Payment21® can only provide services to merchants who are fully compliant with all applicable laws.

You can find more information about the NACHA regulations on the responsibilities of Financial Institutions towards consumers by clicking on this link.

What are ARC and BOC?

ARC and BOC are Standard Entry Class Codes (SEC) as specified by NACHA – The Electronic Payments Association governing the Automated Clearing House (ACH) in the United States. More specifically, an ARC is a consumer check converted to a one-time ACH debit. The difference between ARC and Point of Purchase (POP) is that ARC can result from a check mailed in, whereas POP is made in-person.

A BOC is a single-entry debit initiated at the point of purchase or at a manned bill payment location to transfer funds through conversion to an ACH debit entry during back-office processing. Unlike ARC entries, BOC conversions require that the customer be present, and that the vendor post a notice that checks may be converted to BOC ACH entries.

How does one know if an item is a substitute check or a copy of a substitute check?

A substitute check must meet the X9-financial industry standards as defined by the American National Standards Institute (ANSI). Some of these standards include type of paper stock, the use of MICR ink, and size requirements. Staff training is a critical part of assuring that substitute checks are identified and treated in an appropriate manner. Sometimes, a copy of a substitute check will be printed on standard 8.5” by 11” paper without the warranty language or added MICR line, and some paper checks may even have optical security features indicating that the document is an original or a copy.

Does a substitute check require a full MICR line?

Under both Regulation CC and the X9-financial industry standards as defined by the American National Standards Institute (ANSI), a substitute check must contain the complete MICR line as it appeared on the original check at the time the original check was issued and any additional information that was encoded on the original check's MICR line before an image of the original check was captured; all fields present on the original MICR line must be present on the substitute check. Under the X9-financial standard, a special code in what is known as the EPC (External Processing Code) field or Position 44 is required on all substitute checks. This identifies that the item is a substitute check and that the image of the original check has already been reduced once for printing on the substitute check, and should not be reduced again. The digit aids subsequent parties in processing and potentially creating another substitute check from an image of a prior substitute check.

What kind of check paper should I use to print a check draft?

Drafts should be printed on Federal Reserve Board of Governors Regulation CC Security Bond Blank Check Stock. Paper features include chemical alteration protection, erasure protection, 'original document' security screen, and an authentic watermark.

When will my funds be available?

Since you can deposit every day, and do not have to wait for a weekly trip to the bank, your money gets into your account faster. Funds are typically available on the day of deposit!

Can I make deposits from outside my local area?

Absolutely! This is one of the best features of Remote Deposit Capture (RDC). Items can be scanned and deposited electronically from anywhere - even from another state.

What authorization verbiage do I have to use for electronic payment orders?

The law does not specifically define authorization verbiage for electronic payment orders and/or check drafts. In fact, no signature is required. Merchants are requested to obtain preauthorization in a commercially reasonable manner. Consumer's consent has to be provided in writing (mail, fax, online, by contract or implication) or as a recorded message. For check drafts, a disclaimer is applied on the signature blank. In addition, merchants are required to maintain customer identity verification procedures.

Who uses Check 21 Image Cash Letter and Image Payments Networks?

To name a few, here is a list of banks participating in the country’s largest Image Payments Network:

  • American Chartered Bank
  • Bank of America
  • Bank of New York Mellon
  • BB&T
  • Citi
  • City National Bank
  • Comerica Bank
  • Eastern Bank
  • Fifth Third Bank
  • First Citizens Bank
  • First National Bank of Omaha
  • HSBC Bank
  • JPMorgan Chase
  • M&T Bank
  • PNC Bank
  • RBS Citizens
  • Regions Bank
  • TD Bank
  • Union Bank
  • US Bancorp
  • Wells Fargo Bank

 Payment21® publishes a banking guide listing more than 2000 banks that support ICL. Feel free to ask for more details.

Who should I contact in the bank?

Image Cash Letter (ICL) is a standard banking product for corporate clients with high-volume of consumer payments - or -more specifically Accounts Receivables (AR). Usually, the bank's treasury department and cash management team are able to assist you with electronic Remote Deposit Capture (RDC) / Lockbox services / Image Cash Letter (for Check 21) / Electronic Cash Letter (for ACH).

How do lockbox applications work with Check 21?

Billers and corporations collect remittances today by either collecting the original paper check through the traditional check collection process or by converting the checks to ACH debits. With Check 21, remittance processors can image, capture the original check and send images to their bank, and create substitute checks, aka Image Replacement Documents (IRDs). The biller/processor will need an agreement with their bank to perform these services. Under ACH only consumer checks can be collected through the ACH network, while with Check 21 any check can be collected through image and/or substitute checks.

What is Remote Deposit Capture?

Remote Deposit Capture (RDC), in its most simple form, is a service which allows a user to scan checks and transmit the scanned images and / or ACH data to a bank for posting and clearing. Checks you receive at your corporate or bank location can be scanned to create a digital deposit. This digital deposit is then transmitted (usually over an encrypted Internet connection) to your RDC bank or service provider who then accepts the deposit, posts the deposit to your account and assigns availability based upon your availability schedule.

RDC often has different names depending upon how the service is applied within a particular environment. These names include “Corporate Capture”, “Merchant Capture”, “Image Deposits”, “Image Cash Letters”, etc.

The Check 21 legislation allows banks to clear checks based on images of the original items rather than having to transport the original check all the way back to the paying bank for clearing. The benefits of RDC can be substantial: convenience, reduced transportation risk & cost, better availability, processing efficiencies, the ability to consolidate banking relationships and more.

If you’d like to know more about RDC process, please follow this link.

How does the process of Remote Deposit Capture (RDC) work?

Depending upon functionality and degree of incorporation into your corporate or bank operations, the RDC process can range from extremely basic to becoming a part of your automated receivables processing platform. With RDC, instead of physically going to the bank to deposit the checks, you can scan the checks and deposit tickets using a desktop scanner. This manual process is recommended for low volumes of check items. Processing of high volumes of check payments can be automated by utilizing Cloud-based services such as Check 21 EPO by Payment21®. Once the check images are captured, an Image Cash Letter  (for Check 21 items) or an electronic cash letter (for eligible ACH items) is prepared. The RDC system can then transmit (usually via FTP over the Internet as a 128-bit encrypted file) the deposit to your bank. The bank receives the image deposit and / or ACH file, posts it to your account and assigns availability based on an agreed-upon availability schedule.

Behind the scenes, the bank has a few different options on how to clear the items. Checks converted to ACH transactions are processed electronically. It is important to note, however, that for any and all checks converted to an ACH, NACHA rules apply. Effectively, there are two main issues to consider: 1) The writer / depositor of the check being converted must be notified that the check is being converted to an ACH transaction; 2) Not all checks are eligible for conversion.

What are the benefits of RDC?

There is a host of benefits using RDC - below is a brief list of the main ones:

  • Accelerated clearing
  • Improved availability
  • Enhanced cash flow from cash management operations
  • Reduced return item risk
  • Reduced transportation costs/greater convenience
  • Reduced processing costs

How can I start using RDC?

In order for a bank or corporate user to employ / deploy a RDC service, there are several basic requirements. The basic pieces of the RDC puzzle are:

  • A depository bank
  • A remote deposit capture service provider
  • Low volume: remote deposit capture hardware (check scanners)
  • High volume: Lockbox services and / or Cloud-based service such as Payment21®
  • Updated legal agreements

Do you offer Consolidated Returns Accounts?

Consolidated returns accounts are special return-only accounts set up to catch all of your returned deposited items before they reach your bank. They are set up for many different reasons. Whether you do not want your bank to see your return rate, or you have multiple locations and bank accounts, this option might be the right choice for your business.

Payment21® supports consolidated returns accounts by creating your check images with the proper consolidated returns federal coding.

To set up a consolidated returns account, consult with your Financial Institution (FI). When speaking to the banks, make sure you are speaking with an experienced business banker. Most tellers, account reps, and regular branch managers will not understand your request, and will require assistance from corporate banking to get you to the correct department.

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