The Takoma Group

Payments Technology - Trends and Analysis

New ACH Rules: A Tipping Point for EFT

By Patricia A. Murphy

Use your browsers back button to navigate the ACH article menu below.

• Moving From paper to EFT
• EFT tipping points
• Scanning the payment options
• Selling check services

Checks may be everyone’s first choice for making payments, but Americans continue to write billions of checks every year at the point of sale and elsewhere. A confluence of events now underway, however, is tipping the balance of preference in favor of electronic payments, even in situations where those payments start out as old fashioned paper checks.

Celent LLC, a New York-based research and consulting firm, expects that by the end of this year 45% of paper checks in the U.S. will be cleared electronically, and that 12% of Americans’ checks will clear as checks converted to ACH debits.

Bob Meara, a senior analyst with Celent and other of the report, “Check Electronification: Roads to Rome Revisted”, credits a pending change in ACH rules, known as back-office check conversion (BOC) with some of the anticipated increase in ACH check conversions. The rule change, which takes effect in March, removes cumbersome customer notice requirements that have been blamed for lackluster merchant adoption.

BOC doesn’t get all the credit for setting the POS check truncation trend in motion. “Merchants want to reduce risks and eliminate paper inefficiencies,” explained Michelle Graff, marketing vice president at Nova Information Systems, the acquiring arm of US Bancorp. “BOC doesn’t really do anything to address the risk.”

BOC prompts acquirers and their partners to develop new and improved check services – turnkey offerings that combine real-time check authorization and electronic clearing. These new offerings are intended to support POS check acceptance alternatives that are transparent to merchants and customers, as well as offer enhanced fraud protection and improved funds availability for merchants.

In November, Nova announced one such offering – an enhanced version its electronic check service (ECS) designed specifically for multi-lane retailers. The service combines the benefits of real-time check authorization and risk mitigation with back-office image conversion and uploading.

Customer checks get handled at the check out the same as they always have: the paper is passed through MICR readers that connect to POS card terminals and support real-time authorization and/or guarantee routines. Then the paper placed in the cash draw. Later, in the store’s backroom, the paper checks get run through a tabletop image capture device, and the images are uploaded to Nova.

Nova determines how best to clear each payment, and is responsible for backend handling, such as exceptions processing, returns management and reporting, Graff said. Clearing options include: direct debiting of a customer’s checking account; imaged-based electronic check clearing; or converting checks to ACH debits.

Like many acquirers, Nova already had an ECS for smaller retail locations. These solutions typically rely on countertop imaging devices ported to (or actually built into) card terminals.

Moving from Paper to EFT

Under BOC, merchants that want to convert customer checks to ACH debits need not mark checks “void” and return the voided documents to customers, as had been the case under previous ACH rules. Instead, they can retain the voided checks in their cash drawers, then batch image and convert those payments to electronic checks or ACH files.

The voided check requirement had been intended to provide written disclosure to customers that their checks had been used to create electronic payments. But merchants complained that the requirement left them vulnerable to bad checks unless they also invested in POS imaging technologies. With that rule eliminated, merchants can simply run checks through standard POS MICR reading devices to support authorizations and retain the paper for imaging later. A simple sign at the POS notifying customers of the store’s electronic check acceptance will now suffice for customer disclosures.

EFT Tipping Points

Meanwhile the 2005/2006 Study of Consumer Payment, conducted by Dove Consulting and the American Bankers Association, found that 11% of the average 46 in-store purchases consumers make each year are paid for by check.

And perhaps of greatest interest to proponents of electronic payments, 34% of Americans told Dove in a 2003 survey they would use checks less often if stores always truncated check (and two-thirds of those said they’d probably switch to using debit or credit cards).

Consumer preferences have already reached a tipping point in favor of electronic payment options. In 2005, 56% of consumer in-store purchases were made using some form of card (credit, prepaid, online debit or off-line debit cards), whereas cash plus checks accounted for only 44% of POS payments, according to the Dove/ABA research. Just four years earlier, a similar Dove/ABA survey found the split to be 51% to 49%, with cash and checks dominating consumers’ in-store purchases.

In the lead up to its March start, BOC is seen further tipping the balance. “ISOs and transaction acquirers have contacted us in the past year at an increasing rate,” said Leekley. “They believe that combining [remote deposit capture] with their credit card services will provide a complete receivables solution to their clients.”

“Already, there are check scanners [available in the marketplace] which also accept credit cards,” Leekley noted.

“Scanners today are like flat screen televisions were three years ago; prices are plummeting,” said Dan Fisher, president and CEO of the Copper River Group, Fargo, ND

Scanning the Payment Options

The Bankserv device (known as the SB-1000) was developed for clients using the company’s DepositNow accounts receivable system for QuickBooks. Additional versions of DepositNow are soon to be released for users of Peachtree and Microsoft small business accounting packages, said Andrew Torre, Bankserv chief operating officer.

Most POS terminal developers have integrated check imagers from the leading vendors -- MagTek and/or RDM Corp – into their terminal lines.

MagTek offers both single-sided and dual-sided check image scanners. The dual-sided model (known as Excella STX) costs in the $400 to $500 range, according to John Arato, at MagTek.

RDM, headquartered in Waterloo, Ontario, offers an extensive line of check image scanners. One model, called Synergy, combines card acceptance and check imaging functionality in a box about the size of a traditional card terminal.

Larger, more sophisticated devices for back office check imaging are available from Unisys and from Panini; prices start at about $1,000. First Data’s Tasq unit offers Pinini scanners as part of its equipment line for remote check capture and depositing.

From the merchant and acquirer perspectives dual-sided imaging is crucial to the success of any check truncation program. Merchants also want the same (if not better) POS decisioning, backend processing and funding that’s available from traditional check services.

BOC, alone, misses the mark because under ACH rules only consumer checks can be converted to ACH debits. That’s why companies like Nova are fortifying POS check acceptance offerings with options for image-based check clearing and real-time access to DDAs.

Nova can access, directly, about 30% of consumer checking accounts using a Visa service called POS Check, according to Graff. First Data has a similar offering, dubbed STAR Chek. Both services can directly access checking accounts using the ATM/POS debit card networks for real-time authorization and DDA debiting.

Imaged-based check clearing takes advantage of an inter-bank clearing process known as electronic check presentment (ECP) which expedites traditional check clearing routines by replacing hand offs of paper checks with electronic file exchanges. ECP adoption among banks has been on a steep upward trajectory since the Check 21 Act took effect.

SVPCo, an ECP network made up of 17 of the country’s largest banks (including giants Bank of America and JP Morgan Chase Bank), reported a 15-fold increase its image clearing work last year. SVPCo the largest ECP network in the U.S. was used to clear 747 million images of checks worth an estimated $2 trillion last year, a spokesman said. This year SVPCo is bracing for 2 billion check image exchanges.

Selling Checks Services

In a business like merchant services, customer stickiness is paramount. So it’s not surprising that vendors are marketing electronic check services as a customer retention tool.

“An ISO selling credit card services and a remote [check] deposit product integrated with an accounting package like QuickBooks should have better chances of retaining customers,” said Andrew Torre, COO at Bankserv.

Dan Fisher, president and CEO of the consultancy Copper River Group, Fargo, ND adds that programs using ATM networks or the ACH to clear payments often offer a better value proposition for price-conscious retailers. ATM and ACH networks typically assess flat, per-transaction fees. He refers to ACH check conversion as an “interchange avoidance system.”

Nova uses that pitch. Amy Gutierrez, Nova vice president for strategic market development, said the all-in per-transaction cost of the company’s ECS product is less than the per-transaction cost of accepting credit cards. Guarantee services are priced additionally at a percentage of the check amount, Gutierrez said.

[Top]

[ adapted from article prepared for The Green Sheet (www.greensheet.com) ]

The Takoma Group © 2007

Payments Articles

Mobile Phones as Electronic Wallets

New Era for Check to ACH Conversion

Check Payments & Technology

Fighting Payments Fraud

Check Electronification

Debit Facts: A Debit Card Tutorial