Less than a year after an effort to clear checks over the automated clearing house network failed to take off, Nacha has come up with a revised version of the plan and is planning a test for next quarter.
Zions Bancorp., one of the initial project's early backers, has signed on to participate in the electronic payment association's test.
Elliott C. McEntee, the president and chief executive of Nacha, the rulemaker for the ACH system, said that about 20 large and collecting and paying banks are interested in the 18-month test, which he called a "closed-loop pilot."
The basic idea is to convert low-value checks into images, and then use the data from the images to create ACH files that settle across the ACH network. However, unlike other check conversion formats, these payments will still be considered check payments, rather than ACH transactions.
The goal is twofold: to enable banks that are already using image exchange networks to settle payments electronically with other banks that are not ready to send and receive check images, and to cut costs by sending the transactions over the ACH network.
"It's not going to replace image exchange. It's going to complement image exchange," Mr. McEntee said Tuesday.
If the new system works, it would be a vindication of sorts for a group that called itself the Check ACH Coalition and spent much of 2006 studying ways to use the ACH system to clear checks. The coalition dropped its efforts in January.
One of the barriers to the earlier effort was bridging the legal gap between Regulation CC, the Federal Reserve Board's rule governing checks, and Regulation E, which covers ACH payments.
This time, Nacha has constructed a set of rules that would allow check law to apply, and it has received at least provisional approval by the Fed, Mr. McEntee said, though he warned that it might not constitute a formal legal opinion.
"The staff that works on Regulation E has informed us that, in their view, these transactions would not fall under Regulation E," he said.
Under the rules the collecting bank must make an image of the check, which would be available on demand to the paying bank or its customers. But allowing the collecting bank simply to store the check in its own archive avoids the technical complexity of the coalition's approach, which involved providing the paying bank with access to the collecting bank's archive.
Nacha, of Herndon, Va., posted a notice of its planned "Deposited Check Truncation" pilot test on its Web site last month.
Oliver Ireland, a partner in the law firm Morrison & Foerster LLP and a payments expert, said he believes the industry can clear checks this way under existing law.
"In the current state of the law, it is possible to construct a program for people to truncate checks and collect them by providing presentment notices through the ACH system," Mr. Ireland said. "Pilots like this have long been used to test out new ideas."
Nacha has "basically got it right," Mr. Ireland said. "We've got a cost problem with small-dollar checks," and tests like this one aim to solve that problem. "The law should not drive the way the payments are made. People should find a way to make those payments. The law is there to clarify people's rights."
However, some payments executives said that this effort will face some of the same glitches that made the coalition's project founder last year. David Walker, the president of the Electronic Check Clearing House Organization, the rulemaker for image exchange, voiced misgivings about Nacha's plan. "While the concept is good, making the system more efficient by using electronics, the approach has a host of problems associated with it."
For example, he said banks need to figure out how they could later retrieve a specific check image that had been used to send debit instructions over the ACH network.
But more fundamentally, it is an open question how the courts might view the issue in case of disputes, he said. "It wouldn't be the legal equivalent, because it hadn't gone through the process."
Danne Buchanan, Zions' executive vice president of e-business, said his company plans to participate in the test. The three other major sponsors of the Check ACH Coalition — Bank of America Corp., JPMorgan Chase & Co., and Wells Fargo & Co. — did not make executives available to comment.
Zions, of Salt Lake City, plans to begin with consumer checks of less than $25, Mr. Buchanan said. "We're not ever going to convert a very large-dollar item to ACH," he said. "The risk is too high."
Low-value payments of less than $100 comprise 50% of the volume of checks that Zions sends to other banks for collection, and payments of less than $250 are 70%, he said.
"This transit work is low-value stuff which I would consider low risk stuff," Mr. Buchanan said. "So what's the fastest, cheapest way to collect it? Our view is that ACH is an effective way to do that."
Zions expects some operational challenges, such as devising a way to identify the payment in its customers' statements, but Mr. Buchanan said it would make its "best effort to get the payee name on that transaction."
Mr. McEntee said he expected banks to join the pilot program in a process that he called "rolling participation," as they adapt their internal systems.
The Deposited Check Truncation project will rely on an existing Nacha standard entry class code, TRC, which Mr. McEntee said has existed for years for check truncation.
Banks could participate by sending and receiving transactions, or receiving only.
At the end of the pilot program, Nacha hopes to have enough information to judge what effect the approach has on customer service, check float, fraud and risk management, and financial institution profitability.
It also plans to identify hurdles to developing a full application, including determining whether financial institution participation should be opt-in, opt-out, or universal.
Consumer reaction will be a key consideration. "Some of our banks believe the experience the paying bank will see will be similar to ARC transactions," which use accounts receivable conversion at the retail lockbox and generated almost no consumer objections, he said. "That would be very positive."
