Hoping to wring more electronic transactions from the shrinking pool of paper checks, Nacha is rethinking its stance on converting business checks into automated clearing house payments.
Turning checks into ACH files generates billions of transactions every year, but growth rates in some key conversion formats have slowed as consumer payment habits have shifted in favor of electronic payments.
Even accounts receivable conversion, one of the ACH network's biggest success stories, dipped last year as the growth in online bill payment meant there were fewer checks for billers to convert.
All of this has e-payment execs looking at business payments, one of the last bastions of paper. Not only do many companies prefer to cut checks, Nacha's rules explicitly bar banks from turning them into ACH transactions. Businesses have opposed converting their checks to ACH because they say it is easier to track and receive invoice data using paper checks.
"Without moving into that corporate-to-corporate market, there's not a huge growth potential for the conversion" of checks to ACH, said Susan Goold, a vice president and product manager with The Clearing House Payments Co. LLC, which operates one of the two ACH networks (the other is run by the Federal Reserve banks).
Nacha, the Herndon, Va., trade group that oversees the ACH industry, recently surveyed business and banks, asking for suggestions on how to goose check conversion volume using the accounts receivable conversion, back-office conversion and point of payment formats. Though it plans to share the results only with its internal Electronic Check Council, and has no plans to modify its rules regarding business checks, insiders said the issue is a priority.
Chris Huppert, the chairman of Nacha's Council for Electronic Billing and Payment, said there "is an active discussion" about whether Nacha should "allow some small-dollar business checks to be converted to ACH debits."
Billers and merchants have embraced systems that convert consumers' checks into ACH files. But as the rules for these formats were drafted, businesses resisted the idea, largely out of fraud concerns and because they had well-established processes for including invoice data with paper checks.
Convincing businesses to revisit check conversion remains a challenge.
Businesses "are comfortable with the way those paper-based services are working," said Huppert, who is also a senior vice president in the wholesale Internet and treasury solutions group at Wells Fargo & Co. "They may not be aware that some banks have actually stepped up and made the changes that maintain the integrity of those services."
One major concern is how conversion would affect positive pay, a service banks use to match up checks written by business customers with corresponding debit requests from a recipient's bank.
If a business pays a vendor with a check and the vendor converts it to ACH, the business' bank might block the payment per its customer's instruction to prohibit ACH debits against its account.
"There are some, myself included, who think broader business check conversion is really going to be more trouble than it's worth," said Bob Meara, a senior banking analyst with Celent. "A corporation that issues check payments and relies on positive pay as a security mechanism would find that short-circuited, if you will, if those checks were suddenly converted to ACH transactions."
Huppert said that some banks have upgraded their technology to address those problems.
Wells Fargo, for instance, changed the systems that handle ACH transactions and positive pay, so they would communicate with each other.
"If transactions are converted that shouldn't be converted, they do have the ability to post the transactions and review them and make sure they show up on the positive pay reports and show up on image files that were delivered to the customer," Huppert said.
Costco Wholesale Corp., a Wells Fargo customer, is in favor of converting business checks to ACH payments, said Rue Jenkins, assistant treasurer for the Issaquah, Wash., retailer.
While many retailers have adopted back-office conversion for processing customers' checks, Costco has not.
The reason, Jenkins said, is because Costco has many small-business customers who pay with checks at the point of sale. Those checks typically contain an "auxiliary on-us" field, an additional string of identifying numbers within a check's magnetic ink character-recognition line that consumer checks lack. Technically, the presence of this field is what makes a check ineligible for ACH conversion.
"If I wanted to do check conversion in the back office, then I have to train someone to separate the checks into two piles," those with the extra field and those without, Jenkins said. "That becomes a training issue and just a process I would prefer not to have to go through."
Converting checks, consumer or otherwise, would help Costco save time processing payments, Jenkins said, but "when you begin to fragment the process and you have those two piles of checks," it diminishes the potential savings.
But David Bellinger, the director of payments at the Association for Financial Professionals in Bethesda, Md., questioned whether such technology upgrades offer enough security "so that any ACH item that came in could automatically be verified against the check information."
"Until all banks have that kind of capability in place, I just don't see it happening," Bellinger said. "If it's changed, it hasn't changed nearly enough to where they feel comfortable with any proposal to allow business checks to be converted."
Brad Larson, a vice president and global treasurer for Claire's Stores Inc., a Hoffman Estates, Ill., teen accessories retailer, said business check conversion is a good idea if the proper technology is in place to handle any issues that arise with accounts payable and receivable.
"If we just started doing that today, there would be a lot of holes in the positive pay system, which is doing a fairly good job of controlling fraud," Larson said.
And because converted checks would likely clear faster than paper ones, businesses could face problems properly funding and tracking major payments to vendors or service providers.
"If you have to worry about a utility bill that may clear for $1 million late in the afternoon … you have to end up funding the account for the unknowns," Larson said.
Wells Fargo, other banks and vendors are trying to make such concerns moot.
Huntington Bancshares Inc. in Columbus, Ohio, is working with its ACH vendor, Fiserv Inc., to integrate its back-end systems to ensure that its positive pay service can sync with its ACH system for business customers.
"It wasn't prompted by any specific customer," said Larry Matteson, a vice president and the product group manager for the holding company's Huntington National Bank. "As you look down range at where the payment systems need to be, we need to cut checks out of the equation."
Matteson realizes that businesses are very comfortable with checks, and weaning them from paper will be tough.
"They've been doing something the same way for 25 years, and it's still a very difficult" thing to change, he said.
Fiserv is developing software that would let a bank's corporate customers more efficiently track payments through a single portal, said Brian Abele, a senior product manager for the Brookfield, Wis., banking technology provider.
"Right now what you have is separate platforms for handling" payment reconciliation, Abele said. Fiserv is trying to provide a "much more cohesive payment solution."
