|
By Pam Garrett
President,
Garrett Consulting Group, Inc.
Converting checks into electronic transactions is an emerging movement
in the payment industry that breaks down the geographic barriers of
traditional check clearing. If you are a retail biller that
receives paper check payments, you have probably heard about the
potential of Accounts Receivable Conversion (ARC). But to truly
evaluate if ARC is right for your organization, you need to understand
the rules surrounding ARC and how it works, including the benefits,
risks, and the impact of Check 21.
What is ARC?
ARC, the acronym, is a Standard Entry
Class (SEC) code used by the Accounts Receivable Entry application that
was introduced by the National Automated Clearing House Association
(NACHA) in March of 2002. This new application was designed to convert
checks drawn on consumer accounts and received as payment at lockboxes
or drop boxes to one-time Automated Clearing House (ACH) debits.
|
|
With ARC, and under Federal Reserve Board
rules, billers must give prior notice to a
consumer (on a billing statement or bill insert) that his or her payment
will be processed electronically. After notification, the consumer’s
signature on the check submitted for payment serves as authorization for
the conversion to a one-time ACH debit. The check is considered the
source document for authorization, and no other form of authorization is
required. While the decision to implement ARC is entirely up to billers, consumers do have the right to opt-out of the conversion
process.
What are the rules surrounding ARC?
ARC check conversion
is governed by NACHA Operating Rules, the Federal Reserve Board’s
Regulation E, and the Electronic Funds Transfer
Act. ARC entries
are not subject to the Uniform Commercial Code (UCC) for check law. The NACHA Operating Rules
for ARC check conversion are as follows:
·
The
consumer must receive notice prior to the conversion of each payment.
·
Only
consumer checks are eligible for conversion. This excludes corporate
checks, checks without serial numbers, third-party checks, demand drafts
and third-party drafts without the payer’s signature, credit card access
checks, cashier’s checks, money orders, traveler’s checks, and
government checks.
·
Copies
of the front of converted checks must be retained for at least two years
from the settlement date of the transaction. But the original,
converted checks must be destroyed within 14 days of conversion.
·
The
payer has 60 days from the settlement date of the transaction to dispute
the payment and amount.
·
Effective March 2004, billers must offer an opt-out process to
consumers.
How does ARC work?
The consumer receives
a bill containing notification that his payment will be processed
electronically. The consumer writes a check as payment and sends it to
the biller’s payment center by mail or drop box. The payment center
captures the MICR information from the check and matches it to a
database to determine if the check is eligible for ARC conversion. Currently, ineligible items follow the traditional paper-check clearing
channel. ARC-eligible items are written to a file containing MICR
information, payment amounts, and the payee name. The file is
transmitted to the Originating Depository Financial Institution (ODFI)
or third-party service provider of your choice for MICR parsing,
MICR-to-ACH conversion, and ACH origination. The Receiving Depository
Financial Institutions (RDFIs) post the entries to the consumer
accounts. Forward and returned items are worked electronically, with
manual intervention required only for those items that cannot clear
through the ACH network. The consumer’s bank statement will show an
electronic debit to his account with the date, amount, payee name, and
check number, but a copy of the check will not be available.
The converted checks
are typically stored by the payment center for three to seven days, but
must be destroyed with fourteen days. The front image of the check is
kept in archive for two years.
What are the potential benefits?
The primary drivers
for ARC adoption vary between organizations. A large biller with a
nationwide client base may benefit greatly from next-day settlement,
while a credit card issuer may be more concerned with the reduction of
credit losses. In the ACH network, same-day settlement typically
applies to those items within your ODFI of choice. All other items will
settle the next business day after submission. ACH clearing is
typically cheaper than paper check clearing and the geographical
boundaries of paper check deposits are lifted, so you can originate ACH
items through any ODFI you choose. Payment centers no longer have to be
geographically disbursed to minimize deposit float. Because of the
automation within the ACH network, the deposit windows are extended.
Returned item
processing offers many benefits under ARC. Returns are automated with
standardized return reason codes and they are received within two days,
instead of the seven- to 14-day turnaround for paper checks. An
additional re-presentment is allowed with Non-Sufficient Fund (NSF)
returns under ARC, and re-presentments can be timed for optimal
collection. Organizations that extend credit can reduce credit losses
through expedited returns.
What are the potential risks?
While ARC offers some
exciting benefits, the risks must not be overlooked. Regulatory issues
continue to evolve as ARC volume increases. Effective March 2004, NACHA
is making opt-out a mandatory requirement for billers. NACHA’s Rule
Group #35 has drafted a Request for Information on Network Return Entry
Fees that could impose fees on ODFIs for invalid and unauthorized
returns. As the volume of ARC entries grows and more customers are
impacted, other rule changes could arise that negatively impact ARC.
Customer satisfaction
could be impacted if consumers do not understand ARC or have issues with
not receiving their physical checks or check copies. As previously
noted, not all items are eligible for ARC conversion, and the
eligibility decision process is not 100% accurate. Issues involving MICR parsing, MICR-to-ACH conversion, and Notification of Changes (NOCs)
from RDFIs result in administrative returns, which have to be manually
corrected and resubmitted or possibly converted to paper drafts. In
addition, the NACHA Operating Rules for the ACH network place the
liability for check validity on the ODFI, which is typically shifted to
the originator of the ACH debit (biller or processor).
How does Check 21 impact ARC?
The
electronic payment industry continues to evolve, with the Check
Truncation Act, also known as CTA or Check 21, taking effect on October
28, 2004. With Check 21 on the horizon, should ARC still be
considered? ARC is available now. The standards and interoperability
issues related to image exchange under Check 21 must be worked out, and
this will take time. ARC returned items offer some great benefits. But
the real answer lies in the breakpoint analysis of your payment
dynamics. There is an amount at which the cost to clear a check
outweighs faster funds availability. If the amount of the check is less
than that breakpoint amount, least-cost check clearing options such as
ARC make sense. If the amount of the check exceeds that breakpoint, the
expedited funds availability potential of Check 21 could outweigh cost. And until Check 21 is fully operational, traditional paper check
clearing may still offer benefits for local items.
In summary, it all
depends on your situation, but the use of multiple check clearing
channels certainly offers the best and most competitive approach to
effective cash management. ARC and Check 21 simply broaden those
channels.
|
