Nacha, the electronic payments association, has authorized banks to turn some business checks into automated clearing house transactions through accounts receivable conversion.
Though banks have used ARC to convert billions of consumer checks, businesses have opposed using the process for their checks, and banks were initially reluctant to impose the practice on corporate customers.
But the rules Nacha issued Wednesday signal an about-face for banks, which now appear wiling to support using ARC on some business checks. The rules, which will take effect Sept. 15, also reflect the fact that many of these checks, which are hard to distinguish from consumer ones, are now being converted by accident.
However, the business community still has concerns that converting their checks could interfere with their bookkeeping and efforts to prevent fraud.
"We have serious reservations about these rules," said Judy Schub, the managing director of public policy at the Association for Financial Professionals, a trade group for corporate treasurers.
ARC has become wildly popular since it was introduced in March 2002. More than a billion consumer checks were converted last year, and 1.15 billion were converted in the first nine months of this year. The current rules specifically prohibit converting business checks, in part in response to concerns raised by businesses.
The key issue for businesses is that when a check becomes an ACH payment, the original check disappears, and it is hard for a company to reconcile its books when it is waiting for a check that never appears to settle.
Also, many companies use positive pay services in which banks compare incoming business checks against a list provided by the company, to verify amounts and sometimes payee names. Checks that have been converted can circumvent this process.
However, the growth in ARC volume has prompted banks to reconsider the idea of using ARC for business checks, and Nacha executives have said several times this year that letting banks convert business checks was an important goal.
Nacha, of Herndon, Va., said Wednesday that its 38 voting members - 19 financial institutions and 19 regional payment associations - had approved rules for converting business checks that are the same size as the six-inch ones used by consumers. The new rules, like the current ones, will exclude checks that contain an "auxiliary on-us field" in the magnetic ink character recognition line; the nine-inch checks commonly used by businesses include that field.
Checks valued at more than $25,000 will also be excluded, and payers that do not want their checks converted will be able to opt out.
Elliott C. McEntee, Nacha's president and chief executive officer, said that many six-inch business checks, which are almost identical to consumer ones, are inadvertently run through the ARC process now. The new rules will simply formalize what is already happening, he said.
Only one of Nacha's members voted against the new rules, he said. "We've been working closely with the banking industry and the corporate community" on the rules.
However, Ms. Schub said that the new rules do not address the positive pay issue, and that members of her trade group have also voiced concerns that ARC could cause a "reconciliation nightmare" as treasurers try to match potentially thousands of ACH debits against checking records.
"AFP members continue to be concerned about fraud control," she said.
The trade group opposed previous attempts by Nacha, in June 2001 and November 2002, to let banks convert business checks. Mr. McEntee said those efforts failed because banks refused to support changes that their customers opposed.
He acknowledged the trade group's misgivings, but he also said, "The AFP did agree to work with us on this particular proposal, if it did pass, to educate the business community about what they need to do. We viewed that as a change in position on the part of the AFP."
Ms. Schub said her group was going along with a sense of resignation; it acknowledges that business checks are being converted, anyway, and that the new rules at least will provide companies some measure of control over the process.
"We would have preferred them to go with an opt-in, and not an opt-out," she said.
Leonard J. Heckwolf, the immediate past chairman of Nacha and the global head of ACH and retail lockbox at the No. 1 ACH originator, JPMorgan Chase & Co., downplayed the significance of the new rules. "This is not a major change. It's a clarification."
The change "allows for smoother processing," said Mr. Heckwolf, a JPMorgan Chase senior vice president. "It's not an endorsement of check conversion for businesses."
Only a small number of businesses use six-inch checks, he said. "This is not going to move over into the big business-check arena. We don't see the compelling value to that compared to consumer check conversions."
Banks should encourage their corporate customers to move toward electronic payments, Mr. Heckwolf said, but the banks must provide incentives to help those customers make the move.
Ms. Schub said that "a significant part" of the AFP's members were using six-inch checks in 2001, when the group last surveyed its members, and that she did not know whether many companies have since shifted to the larger checks to avoid conversions. "The real issue is whether business practice has caught up with what this rule is saying."
David C. Robertson, a partner at Treasury Strategies Inc., a Chicago consulting firm that serves banks, corporations, and other large organizations, applauded the new rules.
"Anything that adds more clarity to conversion is a good thing," Mr. Robertson said. Only a few businesses use six-inch checks, and they might need to upgrade their check stock if they want to avoid conversion, but the check needs to be "something that can easily and objectively identified, and this is a way to do it."
