The National Automated Clearing House Association is planning a pilot of check truncation in retail lockbox operations.
The association, known as Nacha, has completed a set of guidelines for holding checks at lockbox sites and converting the data into electronic messages. It aims to begin the pilot in late March.
Truncation of checks at the point of deposit could be a "cheaper, faster, more reliable way of collecting money," said William Nelson, executive vice president of the Herndon, Va., association, the rule-making body for the Automated Clearing House network.
Eight to 12 people touch a check during the normal check collection process, he said. In theory, truncated items at lockbox sites could eliminate half of those "touches," and costs would fall accordingly.
Nacha officials also view truncation as a step toward end-to-end electronic bill payment and presentment.
"This product recognizes the fact that people still send checks in, and probably will continue to send checks in," Mr. Nelson said.
Lockbox processors would warehouse checks and be required to provide consumers with copies upon request within 10 banking days. Processors would have to keep an image or microfilm copy of the check for seven years.
"We will test a couple of consumer notification/authorization options," Mr. Nelson said. "We will take the information and feed it back to the (Nacha Internet) council, and they can make decisions about what the final product will look like."
No banks or processors have signed up yet for the pilot.
Richard Poje, analyst at Treasury Strategies Inc., Chicago, said billers would gladly use the service, because it would lower the costs associated with check collections and clearing. Return items could be handled faster.
Lockbox processors would also be "tickled pink" to see the service succeed, he said, because it would add to their processing responsibilities and potentially deepen their relationships with billers.
Major retail lockbox processors include Regulus Group of Bala Cynwyd, Pa.; Remitco Management Corp. of Washington; First Union Corp.; Mellon Bank Corp.; and National Processing Inc., of which 88% is owned by National City Corp.
Such processors handle consumer-to-business payments, scanning checks and accompanying payment coupons. An estimated 20 billion checks are processed at retail lockbox sites each year, Mr. Nelson said. It is a tight-margin business that does best with scale economies that drive down unit costs.
Many banks prefer to compete in the higher-margin, wholesale lockbox business, which involves the processing of larger-value checks and invoices that are typically not scannable.
Corporate cash management bankers could enjoy lower processing costs by selling lockbox-truncation services to billers, Mr. Poje said.
Banks, however, might still balk at supporting the service, because its impact on check-clearing revenue is not clear. Truncation would remove float from the system "at the expense of banks," Mr. Poje said. "It's a big win for the corporate receivers of the payment. It may be a win for the banks."
