Payments executives are weighing whether to meld three formats for converting checks into automated clearing house transactions.
The three formats were developed at different times to meet what were perceived as different needs, but bankers say their uses are starting to converge.
Amy Gutierrez, the vice president of strategic market development at U.S. Bancorp's Elavon merchant processing unit, said the industry could promote more check conversion by consolidating the three standard entry class codes for check conversion into two, or even one.
"Do we really need all these SEC codes? The industry needs to take a look at that," said Ms. Gutierrez, who is a member of Nacha's Electronic Check Council. "What is in the marketplace today is very confusing."
Merchants today have a choice between two check conversion options: POP, for point of purchase conversion, and BOC, for back-office conversion. Under POP, merchants scan the magnetic ink character recognition lines on customers' checks at the point of sale, using a relatively simple scanner, and hand the checks back to the customers. Under BOC, merchants scan checks in bulk in their back offices, using a more complex digital imaging scanner.
The two formats have different requirements for customer notification, authorization, and opt-out.
The third format, ARC, for accounts receivable conversion, is similar to BOC and is used at lockboxes to convert consumer bill payments into ACH payments. It has its own notification and opt-out rules.
Ms. Gutierrez said three formats produce unnecessary complexity for merchants and billers.
"They look at the ARC rules, the BOC rules, and the POP rules, and they try to assess what is best for their business. It's very confusing," she said.
As check conversion has evolved over the last several years, customer preferences have changed. For instance, when POP, the original check conversion code, went into effect September 2000, bankers were nervous about how consumers would respond when a checkout clerk ran their checks through a scanner and handed them back.
"There were significant concerns early on about consumer acceptance," said Peter Hohenstein, a senior vice president in Bank of America Corp.'s global product solutions unit. "That concern has fallen off. Consumers have gotten very used to it."
Likewise, the use of separate codes has enabled the industry to track the growth and performance of the various conversion formats, Mr. Hohenstein said.
But now that all three are considered common payments tools, those concerns have waned. "I admit, it does cause some confusion for merchants," he said.
The idea of consolidating ACH formats has come up several times this year, and gained some momentum during a Nacha conference in Baltimore last month. Though it was not formally on the agenda, it was a frequent topic of informal discussions.
Mr. Hohenstein stressed that any proposed changes will need to be studied carefully.
"While we like the idea of bringing them together, we also need to figure out the business case, the impacts to the parties, to whichever standard entry class codes go away," he said. "There are retailers out there that are using one or the other of these. There's going to be some impact on them, whichever standard entry class code is chosen."
He also said that the ACH system is changing, from its original mission of supporting recurring payments between known parties to a much more flexible system that can accommodate a variety of one-time payments among a broader universe of participants, which might warrant a broader review of the Nacha rules to identify other areas of redundancy. "It's part of a larger discussion in the Nacha family," he said.
Two other ACH formats are currently being phased out; the CBR and PBR formats used for international payments have been superseded by the IAT standard entry code, a format developed to ease compliance with the Treasury Department's rules on money laundering and terrorist financing. IAT will take effect next year.
Elliott C. McEntee, Nacha's chief executive officer, said any changes to the conversion formats would affect not only merchants but also the financial institutions that originate payments.
"There are some people on the originating side who believe that combining these standard entry class codes might improve the efficiency of the system, but no one has looked at what the impact might be on the receiving side," Mr. McEntee said. "We haven't even touched that process."
Procedurally, a proposal to change the operating rules would go first through the Electronic Check Council, then to Nacha's rules and operations committee, then out for comment by the industry. After balloting by Nacha's voting membership, an effective date would be set, which typically is nine months to a year after the vote, he said.
In the meantime, bankers are marketing services to streamline check processing on behalf of merchants. Elavon's Electronic Check Service is experiencing "triple-digit growth" by offering merchants a single approach to handle all their check payments, Ms. Gutierrez said.
This BOC-based service is not an ACH product alone, she said. "We're able to take all the checks that the merchant has, not just a subset," she said. By imaging the checks and letting Elavon make the decision about how to pay them, whether via ACH or as images, merchants can have a single approach for clearing all check payments, she said.
