To the editor:
I read through a front-page article in your Aug. 23 issue, Banks, Biz Clients Ask Treasury to Kill Check Conversion Plan, several times, with a growing sense I had slid down a rabbit hole into the Mad Hatters tea party.
The payments community should have applauded Treasurys proposal to convert corporate checks into ACH debits for its creativity and sound economics; the community should have responded with positive suggestions for dealing with the proposals implementation problems, which are real but less challenging than the people interviewed in the story suggest. In my opinion, the community did itself a disservice in peppering the article with misinformation and half-truths.
Bill Fittings, Allfirsts senior vice president of operations and processing services, described ACH debits as almost unrecognizable transactions, as though they were uncontrollable, pernicious little viruses hell-bent on destroying the integrity of the check processing system. Nothing is further from the truth.
Collectively, the people interviewed for the article raised four objections to the Treasury proposal. They argued that most banks check systems are not connected with their ACH systems; that there is no electronic analog to controlled disbursement; that there would be difficulties applying fraud fillers to ACH debits; and that payers would lose control over their payment methods. These are specious objections, in my opinion.
Check and ACH systems may not be fully integrated at U.S. banks, but neither are they processed on separate planets. Both are linked to banks demand deposit accounting systems, and both are linked to clients via common information-reporting mechanisms. Furthermore, leading cash management banks routinely combine lockbox (that is, check), ACH, and Fed/Wire information for input to their clients treasury management systems.
Large corporations use controlled disbursement for bill payment. They write checks on zero-balance accounts (ZBAs), accounts with no money in them. Every business day, banks tell corporations the number and amount of debits presented for clearance and settlement. Corporations have options for examining transactions before funding the ZBAs from an external source. We present ACH debits that began life as paper checks against the same ZBAs as checks, albeit with slightly different settlement rules. I fail to see why adapting the controlled disbursement process to accommodate both ACH debits and checks presents such a daunting or dangerous challenge. I would be surprised if solving this problem industrywide took more than six months, assuming, of course, there was genuine interest in getting it solved.
Concerns about fraud protection are valid, but overstated. The U.S. automated clearing-house system provides rich functionality for delivering information with debits and credits by attaching addendum records to transactions. Banks converting paper checks to ACH can provide information for fraud filtering or account reconcilement via these records. And if current formats are inadequate, creating new ones is not exactly rocket science. One solution would be a new kind of ACH addendum, a record delivering images of converted checks as part of the debit transaction and whose presence signals a conversion has occurred. Virtually every major bank in the country uses image technology in check processing, and most lockbox processors, certainly those sophisticated enough to serve the U.S. Treasury, routinely provide clients with check image outputs.
One of the people quoted in the story observed: 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. These problems go away with image delivery. We can still have controlled disbursement, we can still have positive pay (forward and reverse), and we can still have account reconcilement. We can also have lower transportation and processing costs and next day presentment, reducing, not increasing, fraud risk. That strikes me as a win-win situation: Instead of meandering for days through the conventional check processing system, check images arrive routinely the morning after deposit, regardless of where the deposit takes place. There would be benefits for payors and payees alike, with no increase in risk, no changes in corporate operations, and only marginal changes for banks.
I found the fourth objection, that payors will lose control over their payment methods, especially nettlesome. The issue is about clearing, not payment methods, and payors have no real control over clearing processes. Payee banks, not payors, are in charge in that regard. Payee banks decide if checks are presented directly to payors, or through clearing houses, correspondent banks, or the Federal Reserve. Payees also determine how return items are handled. True, payors ultimately decide which items will or will not be paid, but with a little fine-tuning they can have the same control over ACH debits and use the same information to inform their decisions, except they can do it faster and at lower cost.
I cannot but wonder if bankers object to ACH conversion because they fear a loss of revenue. Corporations will expect lower bank charges if electronic debits replace paper. Banks will almost certainly lose negative float with electronic settlement (negative float is generated when banks clear checks today but defer passing availability to clients until tomorrow). And if ACH conversion works for the Department of Treasury, it may also work for the more than four billion payments processed through internal corporate remittance shops. That may prove costly for banks that base their lockbox profitability on high-margin clearing fees and negative float.
I found negative comments by the Association for Financial Professionals particularly disturbing and uncharacteristically ill-informed. Since its founding in 1979 as the National Corporate Cash Management Association, the AFP has encouraged electronification initiatives because they offered powerful benefits to corporate members, lower costs, and reduced fraud risk among them. Both its comments about ACH conversion and member feedback reported in the article reflected lack of understanding, in my opinion, and misperceptions about payment system developments, generally.
The AFP asserted ACH conversion would seriously disrupt cash management practices and undermine the way corporates do their banking today. There is no basis for these statements. As indicated earlier, ACH conversion can be user-transparent and cost-effective even as it provides greater, not lesser, fraud protection. The only requirements for success are ingenuity and willingness to change a few rules.
Also as noted earlier, the AFPs assertion that companies are not well-suited to all of a sudden have some transactions taken out of the normal processing stream and sent elsewhere belies a lack of understanding about what is really going on. With little work and the right kind of support, corporations would continue writing checks, just as they do today, clearing items would continue being presented against the same bank accounts currently in use, and payment documents (check images) would continue being delivered by banks through the same channels that are used today. The sent elsewhere part is just plain wrong.
I acknowledge the AFPs assertion that 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. There is no doubt our system works well. Americans write more checks each year than the rest of the world combined, and our payment system is a model of efficiency. At the same time, check fraud costs banks about $600 million a year, and it is estimated that fraud reduces business profits more than $10 billion a year. Bad timing is the major facilitator of fraud. Businesses receive and deposit checks, then wait three or four days to learn if they have cleared. It takes even longer to identify fraud on the payors side. By the time a problem is identified, thieves are long gone, positive pay and fraud filters notwithstanding. Again, with ACH conversion, the entire process takes place overnight. Even more reason AFP members should be challenging their banks, bank regulators, and Nacha to make it work.
The Internet and e-commerce are forcing us, the American payments community, to confront the realities of a payment system that is growing in complexity and cost. Our system is hybridizing on an almost a daily basis, creating more options and channels for transferring value, and it is doing so without a great deal of leadership. While Chairman Greenspan publicly endorsed the concept of ACH conversion in a speech last year at Nacha, the Fed has not stepped to the plate and made it happen. It is unlikely the Fed will do so in the future, either, and it is equally unlikely that private-sector banks will mount initiatives that shrink their revenues and profits. The AFP is well positioned to lead this charge, but it needs to abandon its negative rhetoric, it needs to educate naysaying members, and it needs to do more than sit on the sidelines waiting for someone else to craft acceptable mechanisms for ACH conversion. Benefits, after all, will accrue to its members more than anyone else.
Richard J. Poje
President and Chief Executive Officer
R. J. Poje & Co., Barrington, Ill.
