Much ink has been spilled about the implications of Check 21 for banking and how it will increase efficiencies and lower costs for banks. But there is a growing revelation that accounts-receivable check conversion, implemented two years ago, has stolen Check 21's thunder.
While Check 21 adoption has been moving slowly out of the gate since its launch last fall, ARC has taken off rapidly since 2003. The number of ARC payments grew 5.6 times, from 220 million payments to 1.25 billion, between 2003 and 2004, according to TowerGroup.The firm projects that growth will rise to 1.8 billion payments in 2005-up 44 percent-and to 2.9 billion by 2006-up another 61 percent.
Annual ARC volume accounted for 54 percent of all Automated Clearing House transaction growth in 2004. In just its third year in the marketplace, ARC has surpassed one billion payments faster than any other payment application in the 33-year history of the ACH Network, according to NACHA, the electronic payments association.
Beth Robertson, a senior analyst at TowerGroup, says ARC is used when checks are received at a mail deposit location, like a lock box, not at the point of sale. Instead of being cleared and processed like a physical check a la Check 21, the checks are imaged and an ACH transaction is created and cleared. It is a much more rapid process, taking two or three days for clearance instead of five to seven for a physical check. And since ARC transactions are fully converted to ACH, they are governed by Regulation E, instead of the check laws that govern Check 21.
Despite the rapid growth of ARC, Robertson says that opportunities for widespread adoption of ARC technologies by banks is probably limited to those that already have lock-box relationships with companies-those firms that process large volumes of consumer checks. It is a natural upgrade of service with immediate returns. But for banks that don't already play in the space, the prospect of paying for the technology and then looking for clients is a tougher business case.
Mellon, Wachovia, JPMorgan Chase and Bank of America are among big banks involved with ARC. "The tremendous growth in ACH payments is the result of the substantial benefits that consumers, companies and financial institutions receive when moving from manual, paper-intensive processes to electronic payment processes," says Steve Ellis, chairman of NACHA and evp of Wells Fargo & Co.'s Wholesale Banking Group, in a statement.
ARC growth has been checked by NACHA rules that do not allow business checks to be processed via ARC. The genesis of that prohibition is that many corporations were concerned that expensive fraud protection technologies put in place over the years would be circumvented by ARC and put systems at risk, says Stuart Williams, director of business development for the software division of CheckFree, which sells ARC technologies.
But there are three drivers pressing skeptical corporations to accept the idea of ARC for business checks. The first is the emergence of technologies that can link the established fraud protection techniques with ARC. Second, he says, is the macro trend of shrinking check volume. As check volumes decline, the cost of the infrastructure to support physical check processing will increase. And, finally, there is the realization that no filter system can stop all business checks from being converted to ARC. "No factor can unequivocally ID a corporate check versus a retail check," says Williams. In other words, mistakes in conversion are daily and inevitable, so ARC business checks must be dealt with no matter what. Williams says one bank executive told him that 2,000 to 2,500 checks are erroneously converted at his bank daily. Mistaken business check conversion is especially vexing for NACHA, Williams says, since its top goal is to implement rules that can be easily followed. As such, Williams says NACHA should OK business check conversion to ARC within the next 18 months.
CheckFree estimates only 10 percent to 12 percent of checks are ineligible for ARC conversion, with about half being business checks. Checks that remain ineligible include convenience checks from credit card firms, teller checks, money orders and government checks.
How the adoption of ARC will coincide with Check 21 is debatable. Robertson says most in the industry consider the two "complementary," though now Check 21's advantage over ARC is its mandate to image large-dollar business checks. However, as more banks without lock-box lines of business adopt Check 21 to handle individual checks and move to full image exchange, they will start netting out their positions daily, clearing checks faster than ARC.
