The back-office conversion format for turning checks into automated clearing house transactions will observe its one-year anniversary Sunday, but unlike its predecessor, accounts receivable conversion, it has not emerged as a quick success.
Bankers say that even though there is plenty of room for growth, the format is more complicated than ARC and may not offer the same immediate benefits.
The two formats, along with point of presentment, allow banks, billers, and merchants to turn checks into ACH transactions at just about every place in the payment chain, so payments experts say future ACH growth from check conversion will come from services that are already available.
ARC took off rapidly after its March 2002 introduction. In the fourth quarter of that year there were more than 7.5 million payments with the format, according to Nacha, the electronic payments association, and it is now one of the biggest sources of ACH transactions.
By contrast, in the fourth quarter in which back-office conversion was available, there were only 3.1 million transactions using the format.
Though it must compete with image exchange networks — a settlement mechanism that was not available when ARC was introduced — some observers also said that the idea of turning paper checks into electronic payments was less familiar in 2002, whereas back-office conversion was introduced at a time when the banking industry has become very comfortable with doing so.
Robert W. Johnston, Bank of America Corp.'s product executive for check and ACH, said that ARC provides next-day fund availability, a valuable service for the large credit card and telephone companies that have been the fastest adopters.
The format's advantages have made it an easy choice for billers, he said; the ARC process takes place at the retail lockbox, where millions of consumer bill payments are processed by machines at only a few locations in a tightly controlled, highly automated environment.
BOC, by contrast, is designed to occur in the back offices of many individual stores, with many people involved, and the companies must have well-coordinated systems for processing, archiving, and disposing of the checks.
"Many of these retailers were depositing locally with their banks, so they are getting one-day availability anyway," Mr. Johnston said.
Also, ARC also offers billers savings on bank fees, but with BOC, "they're still having to pay to image those items and to archive those items," Mr. Johnston said. "The cost savings are not as great."
B of A is the nation's largest receiver of ACH transactions, and so far BOC represents "an infinitesimal amount" of its receiving volume, he said.
Craig T. Vaream, a managing director with JPMorgan Chase & Co. and the product executive for domestic ACH and global check deposits in the company's treasury services group, said back-office conversion has potential for accelerated growth in its sophomore season.
Several large retail chains are conducting pilot tests to see if they can get financial benefits from the format, Mr. Vaream said. "In most cases they are."
But the complicated process requires merchants to change the way they handle checks, he said. "How do you roll that out with a logical approach, across hundreds of locations, in an orderly process?"
Amy Gutierrez, the vice president of strategic business development in U.S. Bancorp's Nova Information Systems, said that large retailers are starting to use back-office conversion, and that she expects adoption to increase this year.
"The greatest demand we're seeing is among national, multilane retailers, and it is because of the BOC rules," which allow the merchant to convert checks in the back office rather than at the register, where the checkout process can slow down, Ms. Gutierrez said. "I see the momentum building for the hockey-stick effect to happen for BOC."
But some executives are skeptical about the business case for BOC, because people are writing fewer checks, especially at the point of sale.
Samuel R. Robb, a vice president in Fiserv Inc.'s CheckFree Global Payment Solutions, said that BOC adoption by merchants has been "slower than expected," and that it "remains to be seen" whether the format will duplicate ARC's success.
With credit and debit cards becoming more common payment options at the point of sale, retailers must weigh the expense of check-scanning equipment, as well as need to train employees and change their business processes, Mr. Robb said. "I think they're having difficulty in justifying the investment."
The adjustment process for ACH transactions is more cumbersome than the one for checks, so if a clerk accidentally entered a payment amount as $1,000 instead of $100, back-office conversion would require more work to correct the error, Mr. Robb said.
Another factor is that not all checks are eligible for ACH conversion under the various formats. Those that not eligible include business checks, money orders, and checks for low-income consumers participating in Women, Infants, and Children benefits programs.
John Leekley, the chief executive of RemoteDepositCapture LLC, an independent observer of the imaging business, said that many banks are offering decisioning services, accepting digital images of all of their merchant customers' checks, and converting the eligible items into ACH transactions, and settling the rest of the items through other means such as image exchange networks.
Corporations will look for "an 'all-in' processing solution" that uses the same process regardless of how the payment clears, Mr. Leekley said. "I see BOC as a complementary add-on to an overall remote deposit capture suite."
Ms. Gutierrez compared the situation today with that of credit cards 20 years ago, when merchants would imprint embossed credit card data onto paper drafts for the customer to sign, then deliver those drafts to the bank along with their check deposits.
"You never see that any more," Ms. Gutierrez said. "It's all electronic. The same thing is going to happen with checks."
