Payments Operations Potentials for Modernizing the Check Process

Payments Operations:
Potentials for Modernizing
the Check Process
•David Walker, NCP
•Tiller Endeavors, LLC
April 26, 2018
AFP, Association for Financial Professionals and the AFP logo are registered trademarks of the
Association for Financial Professionals.

NOTICES
Nothing in these comments should be understood as
legal advice!
I am not an attorney and I am not providing legal
advice!
Should you or your company require legal counsel, you
should consult with competent legal counsel!
The opinions expressed here are mine unless
otherwise noted!
AFP, Association for Financial Professionals and the AFP logo are registered trademarks of the Association for Financial Professionals. 2

Who Is Tiller Endeavors?
• New Consulting Company
– Formed when ECCHO sold its assets to The
Clearinghouse
– My relationship with ECCHO
• Formerly the President & CEO for 17 years
• Currently have a short-term consulting agreement
with ECCHO
• Why Tiller Endeavors?
– Is this about gardening?
– Tiller is also a sailing term and a tiller is used in
steering the boat
– Tagline: To steer the course you need a Tiller!

Topical Agenda
• Payment Trends
• Business Payment Options
• Faster Payments in the United Kingdom
• Debit vs. Credit Payments
• Economics of Changing Business
Payments
• Alternative Business Payments
• Concluding Comments

Measuring the Value of
Payments
• How to Measure the Importance of
Payment Systems?
– One measure is the volume of payments
• This is most important in managing the
cost/capacity of the system for the providers
– Another is the $ amount of the payments flowing
through a system!
• This is most important in managing the value of the
system to the users

$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$20,000
In$Billions
2016 Comparative GDPs*
AFP, Association for Financial Professionals and the AFP logo are registered trademarks of the Association for Financial Professionals.
GDP – Gross Domestic Product is
the monetary value of all finished
all goods and services
*Source: GDP –Bureau of Economic Analysis, Dept of Commerce
U.S. GDP is approximately 172%
of the 2nd largest economy
6

$-
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
2015 2016
$27.3 $27.4
$18.0 $18.6
$ Amount of Checks vs. US
GDP*
*Sources: GDP –Bureau of Economic Analysis, Dept of Commerce Check Image Collaborative
At $27.4 Trillion,
Checks Totaled 147%
of U.S. GDP in 2016!
*GDP- Gross domestic
product is the monetary
value of all finished goods
and services.
$inTrillions
GDP
ChecksPaid
7

US Check Vs. World GDP*
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
U.S.Checks
U.S.
China
Japan
Germany
UK
France
India
Italy
Brazil
Canada
Korea
Russia
Australia
Spain
Mexico
U.S.Checks2016
Aggregate GDP of These 7 Countries
= < U.S. Check Dollars
In 2016 UK Faster Payments
Totaled $1.5 Trillion or 5.5% of
U.S. Check Dollars
In$Billions
2016 GDP Comparisons
*Sources: GDP –Bureau of Economic Analysis, Dept of Commerce and 2016 Federal Reserve payments Study

Current Check System
• Current Check Payment System
– FIs and intermediaries are all processing electronics –
only paper handled is for exceptions
• Fed reports 99.9% of checks cleared through it are
cleared electronically
– Check users are the only parties with paper
processes
CHECK
WRITER
PAYING
BANK
INTERMEDIAR
Y BANK
COLLECTING
BANK (BOFD)
Image Statement
Image
RDC
DEPOSITOR
CHECK
WRITER
Remittance
Data
Image Image

Current Check System
• Comments on Check Payments
– “Check are now effectively all processed
electronically once they enter the banking system and
are increasingly being scanned and deposited
electronically by businesses…”- From Federal
Reserve
– “The decline of checks over the period (2012 – 2015)
was slower than previous studies had shown for prior
periods since 2003” – From AFP
– On interbank checks – “…fell at an annual rate of
3.4% while growing at an annual rate of 1.1% by
value from 2012 to 2015”

AFP - Business Checks
Percentage of Organization’s B2B
Payments Made by Checks
(Percentage of B2B Payments Made by Organizations)
What Has Happened?
• “Declining Trend from 2004 is Broken!"
• “Check Use is Not Declining Anymore!”
• “To Switch from Checks to Electronic
Payments May Be More Difficult Than
First Anticipated.”
81%
74%
67%
50% 51%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
2004 2007 2010 2013 2016
Source: 2016 Electronic Payments, Association for Financial Professionals
11

Business Payments
• Sources Other Than AFP
– Show that use of check payments:
• Among large businesses total about 50% of all
payments
• Among mid-size businesses total about 66% of all
payments
• Among smaller businesses check payments are >
80% of all payments
• Phoenix-Hecht
– Over 40 years of market research
– Conducts an annual survey of businesses to
determine how they use payments

Business Use of Checks
2013 - 2016
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
Check ACH Wire Cards
66.1%
19.0%
8.0% 6.7%
65.5%
19.7%
6.6% 8.2%
“Although there is a slight
movement down in the use of
check in the middle market, we
would argue that it is no more
than 1% per year…”
Middle Market Corps ($20 - $500 MM in Sales)
Note: In 2016,
checks = 3.3 times
the next largest
payment type
%ofTotalPayments
*Phoenix-Hecht 2016 Treasury Management Monitor
2013
2016
2014
2015

0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
Check ACH Wire Cards
50.6%
33.7%
9.5%
5.8%
48.7%
35.3%
9.7%
6.3%
Business Use of Checks
2013 - 2016
%ofTotalPayments
Large Corporate (>$500 MM in Sales)
“The documented trend of little or
no contraction in B2B check
usage over the past three years
may continue into the future.”
Note: In 2016,
checks = 1.4 times
the next largest
payment type
2013
2016
2014
2015
*Phoenix-Hecht 2016 Treasury Management Monitor

Polling Question #1
• What Type of Organization is Your
Organization?
– Depository financial institution (FI)
– Non-FI

Polling Question #2
• Are Significant Savings Available to
Businesses that Transition from Paper
Payments to Electronic Payments?
– Yes
– No

Potential Business Savings
• 2016 Fed Payments Study reported:
– 5.3 billion B2B paid checks for $18.4 trillion
• 2015 AFP Payments Cost Benchmarking
Survey reported:
– Estimated median costs B2B checks $4.57
– Estimated median cost to initiate and receive an ACH
debit $.11 to $.25
• Potential savings if all B2B payments were
electronic rather than paper
– ~$23 billion per year
• $4.32 X 5.3 billion payments

Business Payment Options
• Current Business Options
– Paper check
– ACH debit
– ACH credit
– Wire transfer
• Future Business Options:
– Credit push, real-time faster payments
• Alternative Option
– Complete the electronification of the check

0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
May 2008 May 2017
334 332
UK Faster Payments
Growth in volumes 9 years
after FP implementation:
Total Payments - 730.9 million/mo.
Faster Payments - 140.7 million/mo.
SI Payments - 79.7 million/mo.
May 2017 - SI Payments only 4.5% of Total
Non-Cash Payments
Market demand for non-
cash payments grew 9.2
times faster than demand
for SI payments
*Source: UK Payments Council – www.paymentscouncil.org.uk
InThousandsofPayments
*Total Non-Cash Payments
AllFasterPayments
SingleItemImmediate(SI)FP
141,012
79,998
1,051,667*
1,782,527*
19

0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
May 2008 May 2017
802,095
1,460,965
249,573
321,562
UK Payment Trends
*Sources: UK Payments Council & UK Cards Association
*Total Debits vs Total Credits
Growth in volumes 9
years after FP
implementation:
Total Debits - 658,870
Total Credits - 71,989
Demand for debit pull
payments grew 9.2
times faster than
demand for credit push
payments since
introduction of Faster
Payments
DebitPulls
CreditPush
DebitPulls
CreditPush
#ofPayments/Month(inthousands)

Debit vs. Credit Payments
• Payments Flow - Debits
Payment & Remittance Data Together
• Payment & Remittance Data Flow Together to
Payee
– Directly between payor & payee
– Without the need for a directory
PaymentDeposited
&DatatoA/RSys
Payor
PAYOR’S
BANK
INTERMEDIARY
BANK
PAYEE’S
BANK
Payee
Payment
Payment&Data
FromA/PSys
Payment Payment Payment
21

Payment
& Data
Payment
& Data
• Payments Flow - Credits
Payor
PAYOR’S
BANK
INTERMEDIARY
BANK
PAYEE’S
BANK
Payee
• Data Flows through Payment System
– Volume of remittance data significantly larger than the volume of
payment data!
– Potential to increase cost of payment system!
– Potential to exceed capacity of payment system!
– Potential for increased holdovers!
– Requires a national directory!
Payment
& Data
Payment
& Data
Payment&Data
FromA/PSys
Payment&Data
Reconciliation
22

• Payments Flow – Credits (Alternative)
• Payee Reconciliation
– For large volume remittances, increases complications of reconciliation
Remittance Data & Payment Separate
Payment&Data
Reconciliation
Payor
PAYOR’S
BANK
INTERMEDIAR
Y BANK
PAYEE’S
BANK
Payee
Deposits
PaymentPaymentPaymentPayment
Payment&Data
FromA/PSys
23

• Payments Flow – Credits (Alternative/Debit
Request)
Remittance Data & Payment Separate
Payment&Data
Reconciliation
Payor
PAYOR’S
BANK
INTERMEDIARY
BANK
PAYEE’S
BANK
Payee
Deposits
PaymentPaymentPaymentPayment
Payment&Data
FromA/PSys
Payor
PAYOR’S
BANK
INTERMEDIARY
BANK
PAYEE’S
BANK
Payee
Deposits
PayeeSends
Payment
Request
FirstSecond
24

Credit Payments
• Considerations/Requirements
– One or more universal directories with bank account
information
• Expensive/difficult to establish and expensive and
risky to maintain
– Standard format for remittance data
– Changes in the businesses process and control
• Universal Question Is
– How to achieve a predictable ROI with the front-
loaded investments listed above?

Economics of Changing
Business Payments
• Payments Decisions by Businesses
– Payments for businesses are overhead expenses
– Businesses will spend money on reducing overhead
expense if:
• There is a pressing problem impacting their ability
to do their normal business, or
• There is return on investment that is greater than
the normal return on investment from their normal
goods and services – where their profits are
generated
– Especially true for publicly traded corporations

Economics of Changing
Business Payments
• Payments Decisions by Businesses
– New investments must be made by both
payer and payee
• Sending with no receiver does not achieve
savings!
• Today no mandate exists to create
business certainty of return!

Polling Question #3
• How Likely is it that Businesses’
Investments in Credit Push Payments will
Create Greater ROIs Than from Their
Normal Goods and Services?
– Highly likely
– Likely
– Somewhat likely
– Not likely

Polling Question #4
• How Likely is it that Real-Time Payments
will Sufficiently Increase ROI for
Businesses to Encourage the Transistion
from Paper Payments to Credit Push
Payments?
– Highly likely
– Likely
– Somewhat likely
– Not likely

Business Payment Options
• Current Business Options
– Paper check
– ACH debit
– ACH credit
– Wire transfer
• Future Business Options:
– Credit push, real-time faster payments
• Alternative Option
– Complete the electronification of the check

Electronically Created
Items (ECIs)
• What is an ECI?
– Debit payment
– Never existed in paper form
– Flows through the existing check system as if it
were a check – Uses X9.100-187
– Soon to be defined in Reg CC as of July 1, 2018
Originator
PAYING
BANK
INTERMEDIARY
BANK
COLLECTING
BANK (BOFD)
Statement
ECI
RDC
Receiver
Originator
Remittance
Data
ECI
ECI ECI ECI

Payment Options
• Replace an entire existing payments
system that works with a completely new
system, or
• Enhance a small piece of an existing
payment system that businesses prefer by
margin of 3 to 1 over other payment
options

Potential Business
Investment Dollars
• New Investment Required for Businesses?
Minimal
– Reformat data on AP system and transmit to
payee
– Interface ECIs with electronic deposit
application; e.g. RDC

Polling Question #5
• Would Businesses Like the Option to Use
ECI Payments?
– Yes
– No
– Not sure, would like additional discussion

Closing Comments
• Best Course for Businesses
– Continue to enhance all payment systems including
the check system
– Encourage market forces to determine which
payments and payment functions are most valued by
users
– Eliminate paper checks by replacing them with
electronic payments
– Create significant cost savings for businesses by
check electronification
– Support ECIs

Thank You
David Walker
David.walker@tillerendeavors.com
214.642.9268
AFP, Association for Financial Professionals and the AFP logo are registered trademarks of the
Association for Financial Professionals.

Payments Operations Potentials for Modernizing the Check Process

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