Banks in the Check Collection Process

Bank of First Deposit (BOFD) - A Bank that accepts a check for deposit from a customer. It is also the institution to which a check would be returned if the check is not paid. Also called Depositary Bank.

Claimant Bank - A Bank that submits a claim for re-credit to an Indemnifying Bank.

Collecting Bank - Any Bank handling a check for collection except the Paying Bank.

Converting Bank - The Bank that has truncated the original check or substitute check to a digital image. Preferred term: Truncating Bank.

Indemnifying Bank - A Bank that is providing an indemnity with respect to a substitute check.

Paying Bank - The Bank that pays the check. The Bank of the customer who wrote the check.

Reconverting Bank - (1)The Bank that creates a substitute check; or (2)If a substitute check is created by a person other than a Bank, the first Bank that transfers or presents that substitute check.

Returning Bank - A Bank (other than the Paying Bank or BOFD) that handles a returned unpaid check or a notice in lieu of return.

Truncating Bank - The Bank that truncates the original check. Also Called: Converting Bank, but this is not the preferred term. See Truncate.

Substitute Checks

Substitute Check - A paper reproduction of the original check that: (1)Contains an image of the front and back of the original check; (2)Bears a MICR line containing all the information appearing on the MICR line of the original check, except as provided under generally applicable industry standards for substitute checks to facilitate the processing of substitute checks (regulations may contain exceptions); (3)Conforms, in paper stock, dimension, and otherwise, with generally applicable industry standards for substitute checks; and (4)Is suitable for automated processing in the same manner as the original check. Also called Image Replacement Document (IRD). This term is used by the Accredited Standards Committee in the technical specification for substitute checks (X9.90).

External Processing Code (EPC) - A number placed in Position 44, just before the ABA routing number, of the MICR line. Check 21 and the proposed Federal Reserve regulations require changes to the EPC field for processing substitute checks.

Whenever a substitute check is created, a "4" is always printed in the EPC field. ANS X9.90 requires that a "4" be placed in the EPC position identifying a substitute check. On an original check, Position 44 generally is left blank for forward collection. When a substitute check is created to return the check to a depositor, the substitute check will have a "4" in the EPC field. This holds true when an image of an unpaid check is returned to the bank of first deposit and a substitute check is created or sent back to the depositor of the original item.

A "2" is placed on a qualified return strip or carrier document if the item is an original check being sent as a qualified return. ANS X9.90 requires that a "5" be placed in the EPC position for qualified returns of a substitute check. In the return process, a "5" is placed on the qualified return strip, carrier document or perforated strip attached to a substitute check.

Endorsement - Information used to record the transfer of a negotiable instrument from one holder to another. Endorsements are placed on the check by payee(s), by the Bank of First Deposit, and by Banks subsequently handling the check. Electronically associated endorsements may also accompany electronic check records without being physically placed on the check. Endorsements are used to track the routing of the check in electronic or paper form. Also called: Indorsement.

Legend - A substitute check must bear the following legend to be the legal equivalent to the original check: "This is a legal copy of your check. You can use it the same way you would use the original check."

MICR (Magnetic Ink Character Recognition) Line - Numbers printed in magnetic ink near the bottom of the front of the check to facilitate automated processing. These numbers identify the Bank the check is drawn on, the account at that Bank, the amount of the check and other information. The position and content of the MICR line are governed by X9 industry standards.

Check Imaging

Binary Image - A black and white image of a check where each pixel can be stored in memory by one bit of information since it is binary - either black or white.

Black and White Image - The print of the image of an original check or substitute check is only in black and white tones.

Check Image - An electronic or digital image of an original check that is created by a depositor, a Bank or other participant in the check collection process. Check images can be exchanged electronically by banks, printed for customer statement purposes, displayed on Internet banking websites, and used to create substitute checks.

Gray Scale Image - The print of the image of the original check or substitute check is in black or shades of gray.

Image - A digital representation of all or part of an original check or substitute check.

Image Exchange - The Bank that pays the check. The Bank of the customer who wrote the check.

Forward Collection and Returns

Capture - Reading and storing data from the check MICR line to enable the funds represented by the check to move between banks and their customers.

Cash Letter - A group of checks packaged and sent by a Bank to another Bank, clearinghouse, or a Federal Reserve office. A cash letter is accompanied by a list containing the dollar amount of each check, the total amount of the checks and the number of checks in the cash letter.

Electronic Check Presentment (ECP) - An electronic record governed by check law, created from the entire MICR line on a check and suitable for posting to a customer's account. ECP transmissions may stand alone or may be followed by or accompanied by check images or paper checks. ECP transmissions are governed by check law.

Forward Collection - The transfer of a check by a Bank to a Paying Bank for payment. That is, the Bank forwards the check to another Bank directly or through an intermediary.

Qualified Return Check (QRC) - An unpaid return check prepared for automated processing. This means that either an additional strip of paper is added to the check, or the item is placed in a carrier envelope, and the strip or carrier is encoded with the routing number of the Bank of First Deposit, the dollar amount of the check, and the value "2" or "5" in the EPC field of the MICR line.

Truncate - To remove an original check from the forward collection or return process and send to a recipient, in lieu of such original check, a substitute check or, by agreement, information relating to the original check.

Electronic Checks

Electronic Check Terms - Transforming a payment initiated by paper check that has not been negotiated to an electronic payment.

Electronic Check (e-check) - Used to refer to several types of electronic transactions that debit a checking account. An electronic check is not a substitute check.

ACH-Based Electronic Check - A payment that begins as a source document is converted into an ACH debit entry; or a payment that begins as a paper check is truncated to an ACH debit entry. Also referred to as an eCheck. See Check Conversion.

Check Conversion - The processes of converting a source document (a paper check) to an ACH Debit or ATM/POS debit. Check conversion is different from check truncation, which is facilitated by the Check 21 Act. When a check is truncated, the transaction remains subject to check law. When a check is converted to an ACH debit, the rules of the National Automated Clearing House Association apply.

Internet- or Telephone-Initiated Payments - A transaction that is initiated over the Internet or via phone, which is processed as an electronic debit, usually an ACH debit. Some users categorize a payment initiated via Internet or telephone as an electronic check, even though the debit was not initiated by a source document (a paper check).