March 16 felt like any other day in the back offices of retailers and other businesses with sizable volumes of small checks, but on that day the lowly check marched one step closer to extinction. Oh sure, bankers have been predicting the end for years. But this time, with the new NACHA (National Automated Clearinghouse Association) rule that allows back-office conversion of expensive, troublesome paper checks into cheap, predictable ACH debits taking effect, payment professionals promise that this is really the beginning of the end. The BOC (back-office conversion) program rounds out a NACHA check conversion menu that already includes POP (point of purchase) and ARC (accounts receivable conversion). POP has been used for years, with modest success, to make the conversion at the cash register where the clerk passes a blank check through a scanner and hands it back to the payer. POP now accounts for 280 million transactions a year. ARC has been used for fewer years with greater success (2.2 billion transactions annually) to convert checks that arrive by mail at lockbox operations. POP, ARC and now BOC are intended for consumer checks, but can be used to convert any check that is under $25,000, not a third-party check and does not contain an extra segment in the MICR line.
Retailers won't talk yet about their BOC strategy, but companies are looking closely at the business case for launching pilots, reports Keith Theisen, senior vice president and head of product management in the treasury services operation of Wells Fargo Bank. "We have a business case tool that shows them the impact on transaction costs, float and returned check notification," he says. "They're very interested in running models and making decisions based on what they see." A few have already decided to embrace BOC and are training staff and equipping back offices or pilot testing with their banks, he reports.
Most companies want to pilot carefully before they roll out any BOC program, reports Craig Vaream, vice president and ACH product executive at JPMorgan Chase. "They have to understand the impact BOC will have on their processes. They need to train staff. They need to provide for the safe storage of converted checks until they are destroyed. It takes careful planning to get ready to use BOC." For this reason, he adds, some of the first adapters are likely to be retailers with fewer locations and a simpler job of getting ready.
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BOC can work for any payee that receives eligible checks that are presented in person. That means retailers, broadly defined, which would include colleges and universities that receive in-person check payments for tuition, room, board, books or student activities. It also includes governments, which receive in-person payments of taxes, auto registration, hunting and fishing licenses or parking tickets, and charities that accept a lot of checks at fundraising events.
The benefits of BOC could ultimately be substantial. They include:
- Lower transaction fees–according to Federal Reserve statisitcs, each conversion from check to ACH saves the U.S. economy $1.62;
- Better risk control given its quicker notification on NSF checks;
- Fewer bank relationships and accounts as the need for local depositories disappears; and
- In some cases, better availability of collected funds.
Cost reduction will be proportionate to check volume, says Danne Buchanan, CEO of NetDeposit Inc., a leading vendor of remote check deposit solutions. High volumes will translate into the biggest savings, but even low-volume conversions offer advantages–eliminating trips to the bank to make deposits, quicker notice of bounced checks and sometimes quicker, more consistent availability of funds, he suggests. A bad check should be discovered in just two business days under BOC conversion, compared to seven or eight days under normal check-clearing schedules, he adds.
BOC offers important advantages over POP, the other option for converting eligible checks that are presented in person. With POP, the conversion takes place at the cash register, where the payer hands over a blank check, the clerk scans it and hands it back to the payer. Some retailers, notably Wal-Mart Stores Inc., like POP and have indicated that they intend to stick with it. But many retailers never were happy with POP and didn't adopt it: They believed it would ultimately slow down the checkout process and increase certain costs, because each clerk would have to be trained; each point-of-sale (POS) station would have to be equipped; and customers might resist a significant change in the POS routine.
Now, they have a BOC option that avoids most of those problems. Only a back office has to be equipped and only a small conversion staff has to be trained. The customer has the familiar POS experience, and transactions are processed in batches at convenient times, explains treasury consultant Craig A. Jeffery, managing director of Strategic Treasurer, Atlanta. But security for the scanned checks rests on the converting company.
"A lot of retailers are excited about BOC," Theisen reports. "It's a very attractive new option. They can simply accept checks on the front end, without doing anything to change the existing process, and then send the checks to a back office, either at the retailer or at the bank, for conversion to ACH debit if the checks are eligible, as most will be," he explains. "And it's quicker and cheaper than clearing check images under Check 21 in most cases."
While BOC could cannibalize POP volume if retailers actually decide to switch, most electronic payments experts think it will take more business away from remote check deposit. Think of BOC and image check clearing as two clearing pathways under remote capture, advises Joe Cornelius, senior product manager for remote capture and image cash letter products in the global treasury management department of KeyBank. Most companies will scan the checks, create images and then decide which items will be converted to ACH debits and which will be cleared as checks under image exchange, he explains.
Technically, a check must be scanned and a high-quality digital image captured for image exchange under Check 21–an image good enough to create an image replacement document (IRD) that can be processed physically just like a check. For BOC conversion, like POP conversion, a payee need only lift the MICR line information, not create a digital check image. But most BOC operations will image all checks and support the choice of clearing channels, Cornelius predicts.
Wells offers desktop scanners as part of its Commercial Electronic Office (CEO) platform that can be used to convert checks under BOC or image them for Check 21 clearing, Theisen explains, and the bank offers least-cost routing under its Smart Decision service. Smart Decision applies rules to sort checks into ones that maximize savings under BOC and those that are most efficiently cleared under image exchange. "Under Smart Decision, we convert more than 90% of the checks we receive," Theisen reports.
Wells is not alone, Jeffery reports. Several leading cash management banks are aggressively selling their least-cost routing service in which they receive all checks, either physically or as a scanned image file, and then apply rules to clear each item in the least expensive way, he explains. That normally means converting all checks that are eligible to ACH debits under BOC and clearing the rest as images under Check 21 authority, which applies to all checks, he points out.
However, there could be other reasons for not converting eligible checks, Jeffery notes, like local checks that would clear with same-day availability as checks but get next-day availability as ACH debits. In some cases, large checks might be cleared as check images because quicker availability would be worth more than lower ACH transaction costs, he says.
While BOC acceptance will be gradual, the business case is compelling and BOC will prove to be a big hit, payments pros predict, which means that declining check volume will take another big hit. That's good news, Jeffery insists. "BOC allows companies receiving checks to move check conversion to an efficient back-office operation and receive next-day availability. It will remove one of the last big pockets of check payments and may be the final step before checks simply disappear and all payments are originated electronically, he predicts "It is taking us where we all want to be."
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