How to Convert Paper Checks into Savings

1
How to Convert Paper Checksinto Savings
EEI/AGA DataSource Best Practices Workshop
Louisville, Kentucky ? October 25-27, 2006

• Jeff FeudnerSenior Business Analyst, Treasury
  Department

2
Presenter
Jeff Feudner
Senior Business Analyst Treasury
Department FirstEnergy Corp. 330-384-5767 feudnerj
_at_firstenergycorp.com
3
Presentation Agenda

• Introduction
• Background FirstEnergy Corp
• What is ARC and the Rules
• Evaluation
• Provider Selection
• Project and Implementation
• Benefits Realization
• Lessons Learned
• Additional Information
• QA

4
Introduction

• Implementing ARC (Accounts Receivable
  Conversion)at an electric utility remittance
  processing center
• This presentation will
• Describe FirstEnergy and its remittance
  operations
• Explain what ARC is, the process, and the rules
• Describe the evaluation and provider selection
• Detail the project and implementation
• Identify benefits achieved
• Discuss lessons learned

5

• Headquartered inAkron, Ohio
• Seven electric utility operating companies
• 5th largest investor-owned electric system in the
  U.S.
• Ranked 184 among Fortune 500 companies in 2006

6

• More than 12 billion in annual revenues and more
  than 31 billion in assets
• 4.5 million customers
• 20 generating plants
• 128,000 transmission distribution miles
• Approx. 13,800 employees in electric utility
  operations

Rankings amongElectric Utilities
Assets 9 Customers 5 Revenues 8 Market Cap 7
7
FirstEnergys Customer Mix
Customer Base
Electric Customers 5th Largest
Balanced Sales Mix
Ohio2.1 million
Commercial32
Residential35
Pennsylvania1.3 million
New Jersey1.1 million
Industrial33
8
FirstEnergy Remittance Statistics

• Volume
• Process on average nearly 3 million checks per
  month
• Average of 40.5M deposited per day
• On largest single day, processed 336,000 items
  91.7M
• Equipment
• Unisys RPS software version 7.4.1
• Two Opex 150s with IEM, open and image 18,000
  envelops per hour
• Unisys NDP 500 NDP 850
• Processing
• Two overlapping shifts with 38 full-timeand 7
  temporary employees
• RPS processes data in 2 passes

9
What is ARC?

• Accounts Receivable Conversion (ARC) Consumer
  checks received by the Remittance Processing
  Center are converted into an electronic ACH
  (automated clearing house) for improved
  collections and reduced operating costs.

? MICR line data is captured and transmitted to
financial institution ? Data is converted to an
ACH transaction and sent through the ACH network
for normal processing ? Check is imaged and
destroyed within 14 days ? Image is retained for
2 years
10
History of ARC

• March 2002, the National Automated Clearing House
  Association (NACHA) instituted a new ACH
  application, (accounts receivable entry and
  identified by the code ARC) specifically designed
  to convert consumers checks received at
  lockboxes and remittance centers into electronic
  ACH debits
• Key to ARC is the Federal Reserve Board
  interpretation thatif prior notice is given to a
  consumer that their check will be converted, then
  the check that the consumer subsequently submits
  to the biller constitutes a source document
  authorizing conversion of that check into an ACH
  debit

11
Why ARC?

• Reduced processing costs
• Deposit and return item processing fees much
  lower than paper
• Reduced number of returns
• Improved collection percentage/loss reduction
• ACH priority posting
• Earlier presentment vs. paper for accelerated
  funds availability
• Earlier notification of returns
• More efficient process at remittance
• Early conversion in processing cycle
• Reduced paper handling and supplies expense
• Compete for consumer dollars
• Other billers ARC (e.g., credit card, phone, etc.)

12
ARC vs. Check 21

• ARC is the conversion of a consumers paper check
  into an electronic settlement (ACH debit)
• No longer considered a check
• Consumer checks only
• Payee receives notice on bank statement that
  check was converted to an ACH (check not
  returned)
• Check 21 is the process of capturing an image of
  a paper check to create a substitute check that
  is used in place of the original paper document
• Substitute check still considered a check
• All checks eligible
• Substitute check image can be returned to payee

13
ARC Process Flow
MICR information captured ARC decisioning
performed
Check mailed to RPC
Not ARCEligible
Deposit Prep
Biller notifies Consumer
Opex 150/Unisys Transport
Note API ApplicationProgramming
Interface ERF ElectronicRemittance File
ARCEligible

• Checks convertedto ACH
• Checks destroyed

ERF
Non-ARC cash letter deposit
Financial Institution
14
ARC Rules

• Legal framework
• NACHA rules on check conversion
• Governed by Regulation E transaction(legislation
  on consumer EFT)
• Key NACHA Rules provisions
• Biller must provide notice of conversion
• Image/copy of check must be retained for 2 years
• Original check must be destroyed within 14 days
• Must provide ability for consumer to opt out
• Ineligible items
• Corporate checks with specific field
• Travelers checks/cashiers checks/money orders
• Credit card access checks, third party checks

15
ARC Rules

• Notice about Electronic Check Conversion
• When you provide a check as payment, you
  authorize us to use information from your check
  to make a one-time electronic fund transfer from
  your account or to process the payment as a check
  transaction.
• In an ARC environment, the notice must be
  provided with the billing statement and must be
  clear and readily understandable.
• Additional REQUIRED Disclosures
• When we use information from your check to make
  an electronic fund transfer, funds may be
  withdrawn from your account as soon as the same
  day we receive your payment, and you will not
  receive your check back from your financial
  institution.
• In an ARC environment, the notice must be
  provided with the billing statement and must be
  clear and readily understandable

The requirement to provide this additional
disclosureexpires December 31, 2009
16
ARC Rules

• Business Check Conversion
• Approved November 2005 Effective September 2006
• Use Auxiliary/On-Us field to determine
  eligibility checks withthis field are
  ineligible for conversion (see examples, below)
• 60-day return timeframe available to businesses
  for improper conversion
• Sets dollar threshold of 25,000 for ARC
  transactions
• Businesses can opt out similar to consumers that
  choose to opt out

Typical Corporate-style Check
Aux/On-Us Field(check number)
Bank Routing Nbr.
Payors Account Nbr.
Typical Consumer-style Check
Payors Account Nbr.
Bank Routing Nbr.
Check Number
17
ARC Evaluation

• FirstEnergy is committed to improving efficiency
  ofits Remittance Processing Center (RPC)
• Bank fees were analyzed to determine opportunity
  for cost savings and improved efficiency
• Depository services account for largest portion
  of bank fees
• Per item check clearing fees
• Re-presentment and returned item fees
• Potential for increased funds availability
• Reduce operational costs at RPC
• Leverage existing infrastructure at RPC

18
ARC in the Utility Sector

• Several large utilities have implemented ARC
• Dominion
• FPL Group

• FirstEnergy
• SCANA

• Key drivers
• Cost savings
• Improved return item processing
• Accelerated collections
• Eligibility rates of 8090 of total paper items
• Opt out rates less than 0.25

19
ARC Impact Points

• Planning
• Operations
• Financial/Treasury
• Legal
• Communications
• Customer service
• IT infrastructure
• Customer System
• Opt-out
• Installation
• Install ARC functionalityfrom Unisys and Opex
• ARC modules, image archive
• File transfer process

• Production
• Revised document handling
• Dual balancing
• Daily file transmissions
• Electronic remittance file (ERF), returns,
  database updates
• Image storage
• Opt-out
• Check destruction
• Check storage

20
Major Steps to Implementing ARC

• Submit business case to senior management
• Prepare RFP for ARC provider
• Prepare project timeline for schedulingof IT
  resources
• Organize a cross-functional project team
• Define clear project milestones
• Pilot and final implementation

21
ARC Provider Selection Criteria

• Previous ARC implementation experience
• Quality of proposal
• Price of ARC services
• Remittance Processing integration
• Award fee-based compensation to major credit bank
• Excellent customer service

22
ARC Project Goals Objectives

• Leverage existing infrastructure
• Establish a common vocabulary
• Ground rules established early and enforced by
  all
• Weekly project status call
• Accountability across all organizations
• Deliver early anything that can be delivered
  early
• A sense of urgency and focus on results
• A carefully choreographed end-to-end test plan
• Define clear project milestones, we all succeed
  together or we all fail together

23
Project Roles Responsibilities

• FirstEnergy
• Project Lead
• RPC process alignment
• Business decisions
• SAP configuration
• Coordinate new technologies/upgrades
• Manage testing process
• Training
• Communications
• Legal review
• Audit review
• Contract administration
• System acceptance
• Production migration

• Unisys
• Project management
• RPS solution
• Archive solution
• Wachovia
• Project management
• ARC decision engine
• ARC MICR conversion file
• ARC Admin returns service
• ACH originator
• OPEX
• OpenIEM for ARC decision
• Stub rules file for opt out
• Enhancements to rules file format

24
Project Milestones

• Define Project (1 month)
• Develop project milestones
• Develop resource plan
• Finalize SOW/contracts
• Open new bank accounts for ARC receipts
• Requirements Analysis (1 month)
• Define requirements
• Statement changes
• Opt-out decision
• Handling of admin returns
• SAP configuration changes
• Electronic file exchange strategy
• ACH file format
• Submit final plan scope to sponsor

25
Project Milestones

• Design, Construct, Test (2 months)
• RPS development/coding/testing
• New technology process alignment at RPC
• Integration testing
• Consumer notification
• Perform training (operations, CS, etc.)
• Implementation (1 month)
• User acceptance testing
• Responsibility transfer
• Migrate Systems Into Production
• Post-Implementation (1 month)
• Production support
• Turnover documentation
• Lessons Learned

26
Project Ingredients for Success

• Cross-departmental Team
• Dedicated to a common purpose and performance
  objective
• Members are responsible and accountable for
  managing their portions of the work
• Members work together to improve their
  operations, planning and controlling their work
  and handling day-to-day problems, including all
  decision making within their defined boundaries
• Frequent communications
• Leveraged relationships

27
ARC Benefits at FirstEnergy

• Payment Processing
• 85 of all checks are ARC processed
• 600K annual reduction in bank fees
• RPC able to handle more check volume
• Opt-out rate less than 0.20
• Returns
• ACH return item cost approximately 86 less
  thana paper check return
• Quicker notification on returns (re-present every
  Friday)
• An ACH re-presentment cost substantially less
  than paperre-presentment
• Accelerated Funds Availability

28
Lessons Learned

• RPC workflow changes
• Ensure sufficient internal controls on payment
  process flow once payments converted at RPC
• Engage Customer Contact Center early
• Opt out
• Emphasize training and documentation

29
Additional Information

• NACHA www.nacha.org
• Check Conversion Education www.checkconversioneduc
  ation.org information and tools about check
  conversion, consumer information,
  trainingvideos, etc.
• NACHA Electronic Check Council
  www.ecc.nacha.org
• TAWPI Remittance Processing Check Conversion
  Council www.tawpi.org operations and business
  focused
• Electronic Check www.electronic-check.org a
  site for consumers with check conversion
  information and common questions
• Remittance Directory www.remittancedirectory.com
  a site dedicated to remittance processing
  information

30
(No Transcript)