Fed announces details for moving toward Check 21

Northwestern Financial Review, Jul 1-Jul 14, 2004

The 12 Federal Reserve Banks jointly made several announcements in May regarding the implementation of Check 21, the law designed to speed the processing of checks through the payments system. Passed last October, the law becomes effective Oct. 28, 2004.

The Fed will adopt the use of TIFF-formatted black-and-white check images (22 to 240 dots per inch). The Fed will not accept image cash letter files containing gray-scale or lower resolution black-and-white images.

The decision to move exclusively to black-and-white images was based on image quality concerns and baseline industry practices, according to Fred Herr, senior vice president at the Federal Reserve Bank of Atlanta. "Under Check 21, image quality will no longer be completely managed inhouse. Instead, banks and their customers will receive images and substitute checks created by others," explained Herr. "Consumer and corporate accountholders will need consistent, high-quality image-based services. We believe that the Reserve Banks will best serve this need by providing high-resolution black-and-white images.

"Substitute checks created from black-and-white images seem to be more consistently usable, which will help prevent production bottlenecks and potential indemnification issues when the law takes effect," added Herr. "We also believe that use of a black-and-white image standard will improve compatibility for exchange between collecting and paying banks."

When Check 21 takes effect, the Reserve Banks plan to employ an image quality assurance package that will screen all images captured by the Reserve Banks for defects and allow corrective action when these defects affect their ability to use the images to support payment processes.

Images in all-image cash letters deposited with the Federal Reserve will also be checked for quality, effective Oct. 28, 2004. Images that do not meet pass/fail criteria will be charged back to the depositor through the check adjustments process. These pass/fail criteria, which will be developed using the quality standards identified through industry efforts, will include checks for document length, height, validity, missing or torn corners, document skew, image brightness and compressed image size.

The Fed also announced it will use the Accredited Standards Committee X9's specifications for electronic exchange of check and image data (DSTU X9.37-2003) in providing its suite of Check 21 services. The Fed standard will:

* Support endorsement addendum records to enable image exchange and substitute check creation;

* Include the image view record (addendum record 54) to carry information on the results of image quality analysis;

* Limit image exchange format and compression to TIFF 6.0 CCITT Group IV black/white images to facilitate interoperability between collecting banks and paying banks; and

* Limit incoming and outgoing image files to a maximum size of two gigabytes.

And the Fed announced it will no longer accept items in carrier documents in high-speed forward and return cash letters. This includes carriers containing photocopies in lieu, notices in lieu of return and foreign or mutilated items.

"It is important that these items are not included in high-speed processing cash letters," said Bob Price, senior vice president at the Federal Reserve Bank of Cleveland. "Industry experience shows that image quality for these types of items often doesn't meet a high standard for readability, which prevents conversion to substitute checks."

Once Check 21 takes effect, these types of items must be deposited in a separately sorted cash letter (for forward collection) or a raw return cash letter (for returns processing). Depositors who include these types of items in high-speed forward and return cash letters will assume all Check 21 liability for losses.