Bankers anticipate significant changes in payment processing, especially among large merchants, as a result of rules that will take effect in March and will authorize a new way to convert checks into automated clearing house transactions.
Some experts say that the back-office conversion format could do for retailers what accounts receivable conversion did for billers; the ARC format, which took effect in 2002, has become one of the payments industry's biggest hits.
But some observers say that the new format's greatest payoff might not be for banks, but for nonbank check authorization companies such as First Data Corp.'s TeleCheck Services Inc.
Craig T. Vaream, a vice president at JPMorgan Chase & Co. and the ACH product executive in its treasury services group, said merchant demand for BOC products appears to be strong.
"I've seen interest across the board," said Mr. Vaream, whose company is the nation's largest ACH originator. "It doesn't matter the geography. It doesn't matter big or small."
He also said the new format, which will let merchants convert customer checks into ACH payments, offers several advantages: It could speed up checkout lines and let retailers consolidate the scanning of checks; having a single back-room scanner would be less expensive for the retailer than putting scanners at each checkout line; and the format likely would be less confusing for consumers than POP, a type of check conversion that takes place in front of the customer.
In developing the business case for BOC, Nacha, the electronic payments association, projected that merchants would be converting 3 billion checks annually within five years after the rules take effect. That estimate was based on a Federal Reserve Banks study of check use, which showed 6 billion checks written at the point of sale.
Michael Herd, a spokesman for the Herndon, Va., trade group, said the new format could be adopted as rapidly as ARC, if not faster. In 2004 there were 1.3 billion ARC payments, and in the second quarter of this year there were 494.6 million.
The need for lockbox operators to install new processing procedures slowed the initial use of ARC, Mr. Herd said, but many retailers already have the scanners they would need to use BOC.
"You might see a quite similar type of adoption curve, maybe even a bit more front-loaded with BOC," because it would require less change in merchants' procedures than ARC required at the lockbox, he said.
The research firm Financial Insights Inc. of Framingham, Mass., was more conservative, forecasting 1.2 billion BOC conversions in 2010.
Aaron McPherson, the research manager of payments at Financial Insights, a unit of the technology publisher International Data Group Inc. of Boston, wrote in a September report, "Over the last two years, ARC has grown from 200 million transactions to 2.15 billion. We expect that BOC will follow a similar, if less steep, trajectory, because it is much less expensive for merchants to implement" than POP.
Wausau Financial Systems Inc. of Mosinee, Wis., announced an alliance this month with Solutran Inc., a Minneapolis maker of treasury management systems, to offer BOC technology to retailers. Nancy Langer, the president of Wausau's payment solutions unit, said the new format could simplify retailers' operations while improving financial reporting.
"Retailers want to avoid disrupting things at the counter," she said, but the back-office approach could provide better reports to the home office. "I look at BOC as an extension of ARC."
Bob Meara, a senior analyst at the Boston research and consulting firm Celent LLC, said that BOC "is definitely going to move the needle" for check conversion, but that banks probably will not be the primary beneficiaries. "The real volume is going to come from the top 100 or so retailers, and that volume is not going to go to the banks but to third parties."
Companies such as TeleCheck and Fidelity National Information Services Inc. (through its merger with the payment processor Certegy Inc.), already have relationships with merchants, many of which already have scanners at the point of sale for submitting check authorization requests, he said.
The scanners capture bank account data and transaction amounts; the new format would require them to capture check images, which Mr. Meara said would not be a huge hurdle.
"Capture is just that, capture," he said. "That's going to be a relatively big winner and relatively easy to implement, and these players have the feet on the street to do the installs. BOC is an area where banks are going to find themselves disintermediated once again."
Bruce Dragt, a senior vice president at First Data, said the changes in the payments landscape - including imaging and BOC - are causing a resurgence of interest in the POP conversion format.
"We've been involved with POP for a very long time," Mr. Dragt said. "It's had very flat growth," but the most recent Nacha statistics showed "a very significant uptick in the POP statistics" as merchants started to comparing formats and processes. "It reignited people's interest."
The number of POP conversions in the second quarter rose 43.4% from the same quarter last year and 41.5% from the first quarter, to 60.1 million, according to Nacha.
Other bankers say the economics of imaging are compelling enough for merchants to send all their checks to the bank as images and let the bank figure out the least costly way of clearing them.
Daniel J. McCarty, the senior vice president of treasury management services at Comerica Bank, predicted that imaging technology would become faster, more accurate, and more commonplace in business.
As a result, "the concept of back-room decisioning was at the center of our planning," Mr. McCarty said. Because of the growing number of options for clearing checks - which can involve the physical distance to the paying bank, as well as the ineligibility of many business checks for conversion - "the decision whether to convert those to ACH becomes a very lively topic."
