The business community's rapid adoption of check conversion has led to widespread use at merchants' cash registers and billers' lockbox sites.
Will conversion at the corporate back office be the next frontier? One of the biggest sources of buzz at the Payments 2005 conference last week in San Antonio was word that Nacha, the Herndon, Va., trade group that oversees the automated clearing house network, was mulling a policy change that could lead to just such a development.
Back-office conversion process is still just a concept. But bankers are already expecting a faceoff with the popular remote-capture deposit systems being used in corporate back offices to convert checks into digital images and transmit them to a bank for processing.
The choice would probably be easy for corporate customers, said Ted Umhoefer, a senior vice president for product management and industry relations with Fiserv Inc.'s item processing services unit. "The economics of ACH will trump image," he said
The idea of back-office conversion is still in the very early stages and may never be approved, but some companies are not waiting around. Last week JPMorgan Chase & Co. announced a service that sidesteps the lack of a back office ACH rule by using two other ACH formats to bring the same function to the back office. Fiserv, of Brookfield, Wis., is planning to roll out something similar in July.
Mike Herd, a spokesman for Nacha, said its board has put a task force to work on developing a business case for a back-office ACH format. Though he could not say when the task force will be able to report back to the board, in the past similar projects have taken three to six months.
Once the business case is complete, the board will review it and decide whether the economics merit a new format. If the answer its yes, the board could start drafting the new rule right away or arrange for a pilot test for further study.
Back-office conversion would be similar to the accounts receivable conversion, which enables lockbox operators to create ACH payments from consumer checks, and to point of purchase conversion, which retailers use to convert checks into electronic payments at the cash register
A back-office ACH conversion would also be very similar to the remote-capture deposit systems, according to Mr. Umhoefer.
Remote-capture systems allow corporate customers to convert checks into digital images and transmit them to a bank. Some banks forward those files to a Federal Reserve bank or a check processor such as Fiserv. These transmit them to a printing site near the receiving bank, to which they deliver image replacement documents. The long-term goal is to route the images over image exchange networks and settle the checks electronically, though this is uncommon now.
Remote capture has become one of the first imaging applications to hit it big since the Check Clearing for the 21st Century Act took effect last October, and Mr. Umhoefer said it is both faster and cheaper than processing paper checks. However, he said that the low usage of image exchange networks today means that almost all remote-capture images are eventually converted back into paper as IRDs, which are more expensive to process than electronic payments.
And even when image exchange systems become more widely used, they will still be more costly than ACH payments, Mr. Umhoefer said. "ACH is pennies, which is better than paying nickels for images and dimes for IRDs," he said.
Another advantage is that banks are required to settle ACH payments before checks; IRDs and image files delivered via exchange networks are technically still considered check payments.
If a customer's account does not have enough money to cover some outstanding payments, ACH transactions always go through first, so the checks are more likely to bounce.
Last week at the Payments conference Fiserv announced iLink Remote Deposit, an image-based service that also has built-in ACH capabilities. Banks' corporate customers currently must use the image component, but Fiserv will switch on the ACH functions as well in July, enabling companies to use the ARC or POP formats for back-office check conversion.
This is exactly the approach that JPMorgan Chase is using with its ACH Distributed Payment Capture service, which was also introduced last week at the conference. Alan Koenigsberg, a vice president at the New York banking company and its global ACH senior product manager, said the service also uses the ARC and POP payment formats.
He said one initial market is billers that receive checks from walk-in customers. Though these checks might have been run through the ARC process if they had been received by mail, the company's walk-in site is often separate from the lockbox. Rather than sending the paper check to the processing facility, Mr. Koenigsberg, said the company could now convert it into an ACH payment in the back office.
Though ACH payments are more economical, a significant limitation is that they cannot be used with business checks. Under Nacha's rules, only consumer checks can be converted into ACH payments.
Mr. Koenigsberg said this is why JPMorgan Chase has combined the back-office ACH capabilities with its remote-capture system.
"For eligible items, we will convert them to an ACH," he said. The corporate customer will the business checks into images. "At the end of the day, the clients don't view ACH and Check 21 as different things," because both are ways to turn a check into an electronic payment, Mr. Koenigsberg said.
JPMorgan Chase Bank developed the Distributed Payment Capture service last year, and began pilot testing in the third quarter. It has eight customers plus 25 in the pipeline, Mr. Koenigsberg said.
Not all bankers are convinced that back-office ACH will make sense. Woody Tyner, a senior vice president with BB&T Corp. of Winston-Salem, N.C., and the president of its Creative Payment Solutions Inc. subsidiary, said that in an informal poll of about 10 bank executives last week at the Payments conference, only half said they were in favor of the proposal.
His company introduced an image-based remote-capture service last month, he said, and a back-office ACH service would directly compete with it. Though he agreed that an ACH version would probably be less expensive, he is reserving judgment.
"I haven't seen the business case yet, so it's hard to say," Woody Tyner said. "It's still real early, and we don't know how this will shake out."
