Choosing the best way to process a check as a customer hands it over is like laying out your wardrobe weeks in advance. The weatherman can't tell you if it'll rain next month, and a merchant can't judge the most cost-effective route for a check-ACH conversion, imaging, traditional or Check 21-while it's still at the register.
Is the check eligible for automated clearinghouse conversion? Where is the paying bank? Does a one-day float advantage through Check 21 mitigate the cheaper per-item cost of ACH? Would a point-of-sale conversion provide better value than remote deposit capture or accounts receivable conversion (ARC)?
"The point-of-sale conversion practically does not allow least-cost routing," says Celent senior banking analyst Bob Meara. "You stamp void on the front of the check, proclaim it a source document and hand it back to the check writer. Once you do that, it's done."
In answer to POS conversion shortcomings, members of NACHA-The Electronic Payments Association approved a new rule effective next spring that will permit consumer checks (and business checks lacking an auxiliary on-us designation for opting out) to be converted behind the scenes. The back-office conversion (BOC) rule will give businesses an additional option-beyond POS and ARC-on choosing how they convert checks.
"One of the things that NACHA is looking at is where do we work together in both of these venues," says George Thomas, svp at The Clearing House Payments Co. "It's to try to see where it makes sense to use ACH for some of it, not work at odds on the check side, and try to figure out ways of using the ACH where the image networks may not meet the needs."
Companies and billers have long complained they lacked a business case for investing in POS conversion, despite the efficiencies it brought to the lockbox and remittance processing arenas. Least-cost routing absence, customer intrusion, training and heavy systems interface costs hardly justified the effort to tame what amounts to perhaps only 10-15 percent of a business' total POS payments, according to Meara. "If you're a small depositor, it's not big dollars. But if you have hundreds of thousands of checks, it adds up," he says.
The BOC rule was announced at May's NACHA Payments 2006 conference, and is scheduled for implementation in March. NACHA says it will launch industry training and education programs on the new rules later this summer, starting with training materials financial institutions can share with commercial clients.
BOC is expected to help accelerate the electronic payments trend that within a few years may see ACH and card payments exceeding check volume. Currently, ACH volume of 14 billion annual items is still outnumbered by the approximate 30 billion checks that carry through the Federal Reserve each year. Like with existing check-to-ACH rules, opt-out features must be available to check writers and no checks exceeding $25,000 are eligible for conversion. Business check conversion, widely opposed by large merchant organizations and still disallowed without specific opt-in procedures, remains a troublesome arena in both ACH and ARC.
"Businesses employ things like positive pay, that are not available for items converted to ACH," says Meara. "Moreover, reconciliation of those paid items gets more difficult, because then you've got to figure out where these items go."
Even without clearing up the B2B check dilemma, Thomas says the BOC rule laying the groundwork for important linkages in disparate processing settings. Imaging systems still cannot independently handle remittance features, especially since current networks don't map all institutions together. The BOC could facilitate the ability for systems to transmit MICR data over the ubiquitous ACH networks, and maintain image transmissions in an "on-demand" environment. "The ACH really is the most powerful payment mechanism in the United States because it's accessible by every consumer business and financial institution," says Thomas.
BOC is one of the latest efforts, through either NACHA or the Fed, to encourage electronic transactions, particularly with ACH.
The Fed recently introduced a risk monitoring service for ACH transactions, and NACHA is testing a program with banks that would utilize consumer payments over ACH through online banking channels. Both organizations are working on a joint research project in how to utilize B2B payments in the wire transfer networks, like Fed Wire.
