A Treasury Department proposal that cashiers at federal agencies and federal lockboxes convert all the corporate checks they handle to automated clearing house debits is drawing sharp criticism from banks and their business customers.
Since most banks dont have a direct link between their check and ACH systems, some banks fear that conversion would disrupt the same-day cash management and fraud prevention services they provide for business customers.
The proposal doesnt take into account the impact upon our accounting systems and check handling services like control disbursement, account reconciliation, and positive pay, said Bill Fitting, the senior vice president of operations and processing services at Allfirst Bank in Baltimore, an $18 billion-asset unit of Allied Irish Banks PLC.
It would cause us, and I think a lot of banks, major problems, because the Treasury essentially would take a check and turn it into an almost unrecognizable transaction, and it would be very difficult to apply the various fraud filters to the transaction, he said in an interview last week.
Banks that offer positive pay services match a companys check issue file each day against checks received for payment, and the company typically instructs the bank to return nonmatches.
The service is designed to help companies guard against check fraud, (such as cashing a photocopy of a check). Because most banks check systems are not connected with their ACH system, the banks would be unable to match payments with checks after theyve been converted.
Banks also offer control disbursement services, in which the bank sends a corporate customer information each evening on all the checks that are going to be presented against its account. This service is meant to help the customer make sure that enough funds will be in the account to cover the checks, and the rest of its cash can be put to work elsewhere.
No such service currently exists for ACH debits.
If banks couldnt offer these services to corporate accounts, they would risk losing these customers, especially large ones that rely on the check handling services, Mr. Fitting said.
The pain corporates would feel is indistinguishable from the pain we would feel, because the bank would lose customers, he said. Allfirst already has spoken to some large corporate customers that indicated they would consider moving their accounts if the proposal forces the bank to eliminate the filters, he said.
Another major concern is that payers would lose control over their payment methods.
Janet Boyst, a senior vice president and the group executive of commercial services operations at Wachovia Corp. in Winston-Salem, N.C., said the check issuer may have a variety of reasons for wanting the payment processed in that form.
As we move from paper to electronic, we still have to take into consideration the desires of the payer, she said. The only way we would feel supportive of the Treasury proposal is if the payer, our customer, has the opportunity to say, I dont want my checks under any circumstances to be converted.
Corporations may want to keep paper checks because they contain information that may be lost during the conversion to ACH debits, Ms. Boyst said. Its not just a matter of the payment. Its a matter of the information that is flowing with that payment that our customers need to have back, including the name of the payee, the endorser, and the signer, she said.
The Treasury currently requires that only consumer checks be converted to ACH debits at the agency and lockbox locations. According to the proposal, the department wants to expand that requirement to corporate checks, because separating corporate from consumer checks is time-consuming and costly, and it reduces the efficiency of the conversion process.
The more efficient processing of payments at the agency and lockbox locations could result in substantial savings for the federal government and taxpayers, the agency says.
Gary Grippo, the chief architect of e-commerce at the Treasurys Financial Management Service, said extending the rule to corporate checks would improve the cash management for banks and businesses.
The conversion would allow banks and corporate customers to track and account for transactions, manage databases more readily, and feed information about transactions into accounting systems more readily, he said. You also avoid manual processing of physical items.
The notice for proposed rulemaking was issued on April 12. During a comment period, which lasted until July 31, the Treasury received 32 comment letters, from financial institutions, associations, corporations, and government agencies.
The Treasury cannot discuss the status of the proposal or the content of the comment letters until it files its response to them, Mr. Grippo said. No filing date for the response has been set, he said.
Bankers are not the only ones expressing concern about the proposed rule change. The Association of Financial Professionals in Bethesda, Md., is also urging the Treasury to drop the plan.
Though the group has generally supported the migration from paper to electronic payments, the conversion of corporate checks to ACH debits would seriously disrupt cash management practices, the group said in a letter to the Treasury.
Early last month the group surveyed its corporate members about the conversion of corporate checks to ACH debits. Of the 782 members who responded, 81% said they opposed it.
If this was initiated, it would undermine the way corporates do their banking today, said Donald L. Hollingsworth, the chairman of the trade groups payments advisory group.
To protect against check fraud, 89% of respondents said they use banks positive pay or reverse positive pay services, in which the customer receives a list of checks issued from the banks and matches it with its own list of issued checks.
The proposed rule change also would nullify the common use of ACH debit blocks by businesses, Mr. Hollingsworth said. To protect against unauthorized debits, 54% of the groups respondents said they either forbid the use of ACH debits to make payments or put filters on such payments.
The system that has been developed by banks in the course of the last 20 years or so is very well utilized and important to corporations that use them, said Patrick M Montgomery, the chairman of the groups government relations committee. It helps in reconciliation and helps to safeguard against fraud.
Companies are not well suited to all of a sudden have some transactions taken out of the normal processing stream and sent elsewhere, he said. It would be a prescription for fraud and for errors and overall lack of control.
The group also opposes a similar proposed change to operating rules by Nacha, the electronic payments association, which requested comment on the proposal on June 1. The comment period expired on July 18.
Nacha rules currently permit only consumer checks to be converted to ACH debits at point-of-purchase locations. Consumer checks also are being converted at lockbox locations under a pilot program.
Despite their criticism of the Treasury plan, the bankers and the trade group said they may accept it if banks were able to link their check and ACH systems and install provisions requiring explicit authorization by companies whose checks are being converted to ACH debits.
Fifty-eight percent of the companies that responded to the trade groups survey said they would actually favor the conversion of checks to ACH debits if their bank could establish controls and communication between its check and ACH systems.
If banks could link their check and ACH systems on a same day basis, there would be reason to consider this option, said Arlene Chapman, the trade groups vice president of government relations and technical services. Until they can, our position is we are against it.
William B. Nelson, the executive director of Nacha, said that the integration of banks ACH and check systems is a prerequisite for the conversion of ACH debits at POP and lockbox to become widely accepted.
However, its a chicken and egg problem, because the industry may need to at least begin conversion in some capacity such as a pilot program to get banks to begin building those connections, he said. You need the rule approved first and then some kind of implementation date thats reasonable that the banks could comply with.
Nacha has a work group analyzing the issue, and it hopes to work with the Treasury to find a solution, Mr. Nelson said.
