Solutran SOLUTIONS Newsletter: The Current State of Check Electronification: Check 21 and Check Conversion to the ACH

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Spring 2005

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Check Electronification: Keys to New Efficiencies

Never in the recent history of the check and ACH worlds have we seen as much turbulence as we see today. At the same time, we have never had as great of an opportunity to create an environment that fosters the electronification of the check.

NACHA, the governing body of the ACH network, and the Federal Reserve Board of Governors, responsible for Regulation E (the regulation covering electronic consumer payments) have an opportunity to make slight modifications to the existing rules (in the case of NACHA) and maintain the current interpretation of Regulation E (in the case of the Federal Reserve) and the market place will follow – electronifying checks and bringing efficiencies to the industry that have never been seen before.

One of the most attractive options being talked about is back office conversion (BOC), also known as remote capture. BOC is an application whereby the merchant (or any company accepting the check) would take checks at the point of sale and then convert them in the back office at the end of the day.

Looking at the current ACH rules, BOC is not allowed. If you accept a check at the point of sale (POS) and want to convert that check to an ACH, you must scan it at the POS and return the check to the consumer; furthermore, you must obtain a signature from the consumer authorizing the transaction. This business practice, known as POP (point of purchase check conversion) has not been widely adopted at the Tier 1 and 2 merchants because it is too difficult to implement at the POS.

The Balancing Act of Rebate Management

Check 21 - On a Slow, but Steady, Path

Fall 2004
Back Office to the Future: Check 21 and Back Office Conversion
Summer 2004
Taking the Admin Out of Your Returns: Introducing MICRefine™

Spring 2004
Reconciling ARC with Check 21

Fall 2003
Check 21 Becomes Law, Invites
Big Questions

In a related check conversion application, utilized by many billers, known as accounts receivable conversion (ARC), a signature is not required to convert the check payment to an ACH transaction; in this case, simply posting a notice on the invoice suffices. Today, ARC is the most successful check conversion application as measured by volume – over 941 million checks were converted in 2004, a 489% increase over 2003.

The opportunity for NACHA is to simply extend the current ARC rules to the BOC application – allowing merchants to post a notice at the POS and convert the checks in the back office at the end of the day. While there are slight nuances that differentiate the POP and ARC applications, they are only relevant in the world of policy making. In the environment where policy meets the real world, the difference is academic.

Shifting gears to the Federal Reserve Board of Governors and their interpretation of Regulation E (Reg E), it is critical that the current interpretation of notice equals authorization for one time consumer payments does not change. In the POP applications of check conversion, a signature must be obtained because the NACHA rules require it – Reg E does not. If, for some surprising reason, the new interpretation requires a signature, this will severely hamper BOC. We will be reliving the restrictive, and unnecessary, rules around POP that have caused it to be a lost opportunity to make check payments at the POS a much more efficient process.

NACHA is currently analyzing a rule change to accommodate BOC. The Federal Reserve Board of Governors will be releasing their new interpretation of Reg E by the end of June, 2005. Input from the user community, particularly the large retailers, is critical to gain the kind of change that will allow you to maximize your payment options for the future.

Solutran remains vigilant in representing our clients’ interests in these industry developments. Our clients are strongly encouraged to make your voices heard. Along with notifying your banks of your position, Natalie Taylor is a contact at the Federal Reserve Board of Governors (natalie.taylor@frb.gov) and Dan Miner is a contact at NACHA (dminer@nacha.org).