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Evolution of Image Exchange in Canadian and US Banking Systems

This article discusses the evolution of image exchange in Canadian and US banking systems, including the introduction of the Image Replacement Document (IRD) and the migration to check image exchange. It also highlights the Canadian Payments Association and the different types of clearers in the Canadian banking system.

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Evolution of Image Exchange in Canadian and US Banking Systems

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  1. Canadian Cheque ClearingReturn & Adjustment IssuesMay 7, 2015

  2. Evolution of Image Exchange - US • ECP with Paper to Follow • Pre - 9/11 Activities to foster improvements in US Payment System • The Check Clearing for the 21st Century Act (Check 21 Act) • Introduced the Image Replacement Document (IRD) • Facilitated migration to check image exchange • Not mandatory • Rules – Reg CC, Reg J, OC3, ECCHO • Standards – X9.37DSTU, X9.100-187, Companion Documents • Bilateral Agreements

  3. Image Exchange - US • FRB Services – FedForward, FedReceipt, FedReturn, FedReceipt Returns • Exchange Networks – Endpoint Exchange, SVPCO, Viewpointe, OnWe • Correspondent – Bankers Banks, Commercial Banks, Fiserv Clearing Network

  4. Banking in Canada • Banking in Canada is under Federal Jurisdiction • A variety of legislation and statutes manage national banking • Bank Act: Defines ‘bank’ • Bills of Exchange Act: Defines ‘cheque’ and other payment instruments • Extended in 2007 to add image of a cheque as a Bill of Exchange • Canadian Payments Act - Establishes the Canadian Payments Association • Canadian Payments Association • IS - The operating body that governs payments clearing and settlement in Canada at a national level • Manages the central settlement system (ACSS) for cheque and EFT. • Manages the network for exchange of EFT • Will make the existing network available for exchange of Image Captured Payment (ICP) files • - IS NOT - A standards development organization • Provides standards specific to its mandate, supporting its members in participating in the national payments process and owns the standards

  5. Banking in Canada • Canadian banks and financial institutions are divided into • ‘Direct Clearers’ (DC) and ‘Indirect Clearers’ (IC) • Direct Clearers (DC) – Participate directly in interbank exchange and settlement • Indirect Clearer (IC) - contracts the services of a DC to represent it for the exchange of other bank items that the IC has taken on deposit • There are 12 Direct Clearers : • There are approximately 120 Indirect Clearers

  6. Banking in Canada Canadian Law and Canadian Payment Rules Canadian Law and Canadian Payment Rules Canadian Law and Canadian Payment Rules U.S. $ Image Exchange * U.S. $ Image Exchange * U.S. $ Image Exchange * Canadian Check Canadian $ Image Exchange Canadian $ Image Exchange Canadian $ Image Exchange CUSTOMER IDC #1 DC - TD Canadian Paying Bank IDC #1 Bank of First Deposit IDC #2 DC - RBC Relationship Between IDC and DC is for Deposited, Inclearing and Return Items Relationship Between IDC and DC is for Deposited, Inclearing and Return Items *Separate US ABA and CDN RT Source: ECCHO

  7. Evolution of Image Exchange • Truncation and Electronic Cheque Presentment (TECP) Project • 2002 – 2008 • Mandated exchange AMONG ALL BANKS AND FINANCIAL INSTITUTIONS • Complex integration among and between banks (direct clearers and indirect clearers) • Canadian Payments Association Image Rule Project • Phase I – December 2009 – approved Rule A10 images of chequesand rule A12 image security standard both effective June 1, 2010. • Phase II– December 2010 – approved amendments to rule A10 related to the creation and use of Return Replacement Documents (RRD) effective June 1, 2011. • Phase III– March 2012 – approved amendments to rule A10 related to the creation and use of Clearing Replacement Documents (CRD) effective October 1, 2012. • Phase IV– June 2013 – approved final rule amendments to allow Direct Clearers to exchange electronic payment files containing Image Captured Payments (ICP) with a partner that has agreed to participate in ICP Exchange, effective August 12, 2013. • ICP Standard 015 – Companion Document to X9.100-187 • Bilateral Agreements

  8. Migration - Current • Direct Clearer to Direct Clearer • Separate Cash Letters for: • Canadian Dollar Funded Accounts • US Dollar Funded Accounts • US ABA • Regional Clearing – Traditional Paper Method • Halifax Winnipeg • Montreal Calgary • Toronto Vancouver • Settlement • ACSS/USBE - Systems managed by CPA • Regional based settlement • Net Settlement

  9. Migration - Future • CRD and RRD Print Capability • Infrastructure Changes • Single Electronic Processing Site • Preparing for All Source Channel Capture • Preparing for Image Exchange • National Clearing (Optional) • Cash letter per region included in one ICP (x9) • Preparing for Day 2 • Movement Away from Outsourcing • 3 of largest moving to in-house • 1 of largest moving to a new outsourcing provider • Technical and, more importantly, Operational Impact

  10. Migration - Status Source: Tramore Group STRICTLY CONFIDENTIAL

  11. Image Exchange – Cross Border Canadian Law and Canadian Payment Rules Correspondent Agreement ECCHO Rules One or Two Streams ?? U.S. $ Image Exchange * U.S. $ Image Exchange * Image Exchange Canadian Check Canadian $ Image Exchange Canadian $ Image Exchange CUSTOMER Canadian Correspondent Bank “Point of Entry” ECCHO Member Bank B Receiving Bank Gateway Receiving Bank Returning Member Canadian Paying Bank ECCHO Member Bank A Sending Bank Returnee Member • ICL Deposit vs. Exchange • Depositary Agreements – Cross Border • Exchange Rules / Depositary Agreements – within US • ECCHO Developing Rules for clearing of Canadian Cheques *CDN RT Source: ECCHO

  12. Image Exchange – Cross Border • Standards • Northbound – Receiver Companion Document to follow Standard 015 • Southbound – Receiver Companion document to follow x9.100-187 • BiTonal image – 200 dpi in tiff - standard to both countries • R/T Format • Retain “dash” in RT Field ex. 12345-010 • Populate X9 Record 25 Field 4 - 12345-01 • Populate X9 Record 25 Field 5 - 0 • US Dollar vs Canadian Dollar Funded Accounts • Both have XXXXX-YYY RT format • US Dollar Funded Accounts – “45” in tran code field • US Dollar Funded Accounts – see appendix A & B for list of other characteristics • Canadian Funded Accounts – “Hand-written” – US FUNDS • Canadian Cheques without TC 45 will likely require operator review for proper designation

  13. Image Exchange – Cross Border • Forward Presentment - Northbound • Canadian Cheques (CDN $ and US $) deposited in a US Bank • Separate ICL for each currency type • US Correspondent Bank will have a Depositary Agreement with Canadian Correspondent Bank – potentially will define specific rules • Canadian Correspondent Bank has to identify themselves as “Point of Entry” - Return Location Identifier to Paying Bank • Item Acceptance • Some discussion exists that Canadian Correspondent Bank will only accept cheques where the US Correspondent Bank is in physical position of the item • Impact on bank’s RDC channels • Impact on bank’s downstream correspondent program • Does not appear to be the KYC issue with all Canadian Banks – point of discussion if entertaining Canadian Cheque Clearing • Some US Banks have indicated unwilling to accept Southbound items from an Indirect Clearer

  14. Image Exchange – Cross Border • Return Item Collection • Canadian Bank Return Item Reason Codes to NOT map directly with US Return Item Codes – see appendix C for details • US BOFD bank cannot represent a returned Canadian cheque • Exceptions to the representment rule: • the US Correspondent Bank specifically instructs the Depositary Bank to send the Electronic Image to the Receiving Bank, or • the Canadian Item (or an Image of a Canadian Item) was returned due to • incorrect currency. or • incorrect settlement amount, or • the Canadian Item (or an Image of a Canadian Item) was returned due to a missing or non-usable item in the original forward exchange of the item. • In addition to the next day return deadline for most cheques, Canada allows • 90-days and 6 years for some cheques. See appendix D for details. • Thiswill cause items to be considered a “late” return by US practice • Most of the extended delay items exist in current paper exchange

  15. Image Exchange – Cross Border • Adjustments • An adjustment, as known in the US, is not used in Canada • Canadian Banks enforce the use of the Return process • ECCHO rules will permit debit or credit adjustments to respective depositary account • ECCHO Adjustment code to be created for adjustments within US

  16. Image Exchange – Cross Border • Northbound Workflow Forward • US BOFD  US Correspondent Bank  Canadian Correspondent Bank (POE)  DC or IDC (Paying Bank) • Northbound Workflow Return • IDC  DC  Canadian Correspondent Bank (POE)  US Correspondent Bank  US BOFD • Southbound Workflow Forward • IDC  DC (Canadian Correspondent Bank)  US Correspondent Bank (POE)  FRB or Paying Bank • Southbound Workflow Return • US Paying Bank  FRB  US Correspondent Bank (POE)  Canadian Correspondent Bank  DC or IDC • US Paying Bank  US Correspondent Bank (POE)  Canadian Correspondent Bank  DC or IDC

  17. Image Exchange – Cross Border 2014 – 715.3 M cheques * WHEN 2012 – 18.3 B Paid as checks ** * - CPA Website ** - 2013 FRB Payments Study

  18. Questions? Bill Saffici ManagingDirector Saffici Payment Consulting Bill@SafficiConsulting.com 610-494-3630

  19. Appendix A – Currency Designation • Standard 006 – page 53 http://www.cdnpay.ca/imis15/pdf/pdfs_rules/standard_006.pdf • Transaction Code Section • Subject to the exceptions listed below, the Transaction Code Section may be blank or consist of a maximum of four (4) digits located between the closing symbol of the amount field and the opening symbol of the Account Number Section. Where applicable, spaces should be provided to accommodate combinations of pre-encoded and post-encoded information. • Exceptions: • • Transaction code 96 shall be encoded on bill payment remittances; • • Transaction code 28 shall be encoded on Returned Item Carrier Envelopes, in • accordance with CPA Rule A4; • • Transaction code 45 shall be encoded on all U.S. Dollar Items2 except items having an ABA routing number in the Transit Number Field, paper pre-authorized debits, and certain other items that may use a different transaction code in this field. • 2The following Institutions are temporarily exempt from the requirement to encode transaction code 45 on U.S. Dollar items: La Caisse centrale Desjardins du Québec (currently using transaction code 11) and its members, the Credit Union Central of Nova Scotia (currently using transaction code 90) and its members, and the Central 1 Credit Union (currently using transaction codes 644 and 6404) and its members. These institutions will work towards migrating to the new transaction code on a best efforts basis as soon as possible.

  20. Appendix B – Currency Designation • Standard 006 – page 29 http://www.cdnpay.ca/imis15/pdf/pdfs_rules/standard_006.pdf • Currency designation (e.g. CDN Funds, U.S. Funds or U.S. Dollars). A currency designation is required on all US Dollar cheques drawn on a domestic branch of a CPA member and encoded with a Canadian transit number. The currency designation is to appear to the right • of or below the word “Dollars”, not interfering with any areas of interest. On cheques where the word “Dollars” is integrated into the machine-printed Amount in Words, the currency identifier (e.g. U.S. Funds) may be printed below the Convenience Amount Rectangle, leaving a minimum • 0.64 cm (1/4”) of clear space between the bottom of the Convenience Amount Rectangle and the currency identifier. A currency identifier is not permitted to be printed beside the Amount in Figures.

  21. Appendix C – Return Reason Codes Full content In embedded Excel file 1 of multiple pages • Standard 015 – page 162 • http://www.cdnpay.ca/imis15/pdf/pdfs_rules/standard_015.pdf

  22. Appendix D – Return Time Limitations Return Time Limitations Three Forms Of Returns • Extracted from Rule A4 • https://www.cdnpay.ca/imis15/pdf/pdfs_rules/rule_a4.pdf

  23. Appendix E – Return Items Eligible for Presentment as a New Item • The embedded file represents the author’s thoughts on how the depositary bank can: • Provide the depositing customer with a “picture” of the deposited cheque when a chargeback condition occurs • Provide an eligible return item to be presented as a “new” (first-time) cheque

  24. Appendix F – Canadian Rules & Standards A4 – Return and Redirected A10 – Image Rule (also contains Return component) http://www.cdnpay.ca/imis15/eng/Act_Rules/Automated_Clearing_Settlement_System_ACSS_Rules/eng/rul/Automated_Clearing_Settlement_System_ACSS_Rules.aspx

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