Will BOC be the next ARC?
A new payments format takes effect today, authorizing the back-office conversion of checks to automated clearing house transactions, at retail stores, and other locations where checks are presented over the counter.
Some bankers expect BOC to have the same kind of moonshot adoption pattern as accounts receivable conversion, its payments cousin that is used to convert checks into ACH transactions at the lockbox. ARC took effect in March 2002, and took off almost immediately, surpassing a billion items in 2004. At the peak of its ramp-up, the second quarter of 2004, ARC transaction volume grew 791% from a year earlier, and in the fourth quarter of 2006 the volume was 613.2 million items.
Though some bankers say BOC will compete with payment formats that were not available when ARC made its debut, notably image exchange, many are still bullish about BOC.
"ARC has been the fastest-growing application in the history of the ACH network. I think BOC has the potential to do the same thing," said Keith Theisen, a senior vice president at Wells Fargo & Co.'s treasury management unit.
Mr. Theisen, like other BOC boosters, said check conversion has a number of advantages over traditional check clearing. For example, he said there is a Sunday evening ACH clearing window that would enable merchants to use BOC on all the checks they received during the weekend, and the funds would be available on Monday morning. Merchants depositing paper checks, would have to wait until Monday morning to do so.
Banks hope that offering BOC services will appeal to corporate customers and generate additional fee income, and Mr. Theisen said several customers are
He predicted that over the next three years, as many has half of the checks received at the point of sale could be converted under BOC which could exceed 2 billion checks annually industrywide. "It definitely has the potential."
Jesse Sandoval, a vice president at UnionBancal Corp.'s Union Bank of California, and its senior ACH product manager, said banks that receive BOC items can notify merchants the next day of items returned for insufficient funds; with paper checks, that can take several days. In addition, ACH rules permit the bank to re-present the item for payment an additional time, which can reduce the number of checks that fail to clear.
Such features are especially valuable to retailers, because "the goods have already been given to the customer," Mr. Sandoval said.
Still, using BOC imposes some new obligations on merchants, most notably that they must post notices at the counter and on receipts, providing a telephone number that the customer could call if they have problems.
Like other conversion formats, only consumer checks and business checks that lack an "auxiliary on-us field" generally the business checks that are the same size as standard consumer ones are eligible for BOC. Money orders, credit card "courtesy checks," and checks of more than $25,000 are ineligible.
Unlike other conversion formats, BOC also requires businesses to preserve a copy of the check.
Because of these complexities, many banks' BOC services can make the conversion decisions on behalf of their merchant customers, which could minimize the operational changes that the business would have to make. A merchant could deliver all of its checks to a bank, or use a remote-capture system to deliver the digital images of them, and the bank would convert the eligible items to ACH files and forward the rest through image exchange networks.
Robert W. Johnston, the product executive for check and ACH at Bank of America Corp., said these issues are why some retailers are proceeding cautiously. "A few of them have a large team of folks doing a very detailed analysis," he said, and many merchants are "sitting on the sideline, feeling it out."
He noted that BOC is the first new ACH format since the Check Clearing for the 21st Century Act took effect in October 2004. "Now that Check 21 is around, you get much faster settlement on the image side. It's very competitive with ACH," he said. "There are many more choices today than when ARC was introduced."
Craig T. Vaream, a vice president at JPMorgan Chase & Co. and the ACH product executive in the New York banking company's treasury services group, said ACH offers a cost advantage over image, in large part because many check images must be converted again to image replacement documents, sometimes called substitute checks, which drives up costs.
"Processing ACH transactions is typically cheaper than processing images under Check 21 because of the cost of [printing] the substitute check," Mr. Vaream said.
Image costs are likely to drop quickly as more banks become able to receive image files, he said, but "typically ACH is a cheaper clearing mechanism."
BOC's growth might be hindered by other check conversion formats.
Wal-Mart Stores Inc. began using POP in 1999. It now has 1,600 stores using POP and eventually plans to use it at all of its 3,500 outlets.
Elliott C. McEntee, Nacha's president and chief executive officer, said that the surge in POP volume last quarter was largely attributable to Wal-Mart, but that the format was more suited to retailers with low check volumes.
Howard N. Forman, a senior vice president at Wachovia Corp. and the manager of the Charlotte banking company's electronic payments product team said that many merchants would opt to buy point of sale card scanners or other technologies rather than investing in BOC. "Some customers are coming to the conclusion that they may not want to do anything with checks at their point of sale, because it is a declining tender type," he said.
The choice of payment systems will have to play out in the market, several executives said. "Some banks are going to be more pro-ACH, and some banks are going to be more pro-image exchange, depending on the investments they've made," said Esther Pigg, the vice president of global product management in the software unit of CheckFree Corp., which makes ACH software. "We're going to see transactions flowing in both directions for quite some time."
Some banks believe they can afford to wait. Don S. Jackson, a senior vice president and senior product manager in treasury management services First Horizon National Corp., said the Memphis banking company has not yet acquired the software to process BOC, though First Horizon will be ready to begin offering BOC later this year. Mr. Jackson said adoption may not go the way the industry expects.
"A property management company, for example, could use BOC very easily where they could not use ARC as well," he said. "We're not going to try to limit it. We'll see where it takes us."
