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The US payments industry has taken the first step toward allowing business checks to be converted to electronic Automated Clearing House (ACH) transactions.
NACHA – The Electronic Payments Association approved an amendment to its Operating Rules last fall that allows banks to automatically convert 6-inch business checks under $25,000 to ACH transactions through Accounts Receivable Conversion (ARC).
The amendment, which takes effect on September 15, 2006, provides methods for originators to identify checks that are ineligible for conversion and for receivers to opt out of check conversion.
Sanctioning Current Practice
In effect, the amendment sanctions an existing situation: Business checks are being inadvertently converted due to some originators' inability to distinguish between standard 6-inch consumer checks and small-format business checks.
For those checks that are converted to ACH debits, the NACHA amendment provides for the same right of recredit for the receiver and 60-day return time frame that is currently associated with unauthorized or improper consumer entries.
Checks containing an auxiliary on-us field in the magnetic ink character recognition (MICR) line and those for amounts of more than $25,000 will be ineligible for conversion. These on-us field checks can be readily identified because they are 9 inches long.
Don't Want Your Checks Converted?
Companies that don't want the checks they issue to be converted to ACH items can use the 9-inch check stock containing the auxiliary on-us field. Many larger businesses already use these checks in their standard operations, but other businesses could be affected by the need to change check stock or printing software systems.
Issues to be considered in deciding whether to go to 9-inch checks include the amount of small-format check stock you have on hand, and the amount of IT resources it would take to change printing software on your back-end system.
In a member survey conducted by the Association for Financial Professionals (AFP), 86% of respondents reported using checks greater than 6 inches in length. Yet they also noted two major concerns about conversion of business checks. First, they cited the inability of banks to link their checks to ACH systems on a same-day basis so that information can flow between them to facilitate reconciliation. Second, they were worried about the impact of check conversion on the fraud-fighting effectiveness of their positive pay reconciliation services.
Opening the Door to ARC
Deutsche Bank clients should be largely unaffected by the new rule amendment since, consistent with the AFP findings, less than 1% of you use small-format business checks. However, the rule change will provide an opportunity for many to choose ARC for their lockbox remittances, because the concerns raised above are being addressed.
One of the obstacles to electronic conversion has been companies' concerns about their ability to reconcile checks that are truncated in the ARC process. In many banks, the automated check clearing and ARC systems do not communicate, which causes manual labor and time-consuming reconciliation.
However, Deutsche Bank's partner, CheckFree, has devised a solution to address this concern: a bridge that routes ACH transactions through the check clearing system. It will be available after the new amendment takes effect. This opens the door for clients to sign up for lockbox ARC, while maintaining their ability to automatically reconcile converted items.
Although no check images would be available for exception items, the bridge allows a partial positive pay on checks if ACH provides payee information and the client is on Payee Match (our name for positive pay with payee name verification).
Furthermore, disbursement accounts at Deutsche Bank are automatically blocked from incoming ACH transactions to prevent fraud and reconciliation issues. However, clients have the option to remove the block and allow ACH activity to flow through the account. Funding notifications to the client include ACH activity as a separate total from check activity, making reconciliation easier. NACHA's new opt-out procedures and guidelines also address another obstacle to clients choosing ARC—concerns that checks can be mistakenly converted.
Why ARC?
The advantages of choosing Accounts Receivable Conversion are:
- next day settlement
- a two-day return window
- automatic two-try NSF recollection
- more cost effective than traditional check clearing
Financial institutions and trade groups alike continue to advocate migration from checks to electronic payments. NACHA's rules amendment is viewed by many in the industry as the next step toward the full conversion of business checks to electronic processing—and another positive development in the payments migration process.
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