SAN DIEGO — Nacha has approved a format for businesses to convert checks into electronic payments in their back offices, introducing a new competitor to remote capture, one of the banking industry’s most popular check-imaging applications.
The back-office conversion format will take effect next March and will fill a gap in the automated clearing house system’s conversion capabilities, which already permits companies to turn checks into electronic payments at both the point of sale and the corporate lockbox.
“We believe that billions of checks will be converted” using the back-office process “in the not-too-distant future,” said Elliott C. McEntee, the president and chief executive of Nacha, the electronic payments association.
Mr. McEntee announced here Monday during Payments 2006, Nacha’s annual gathering, that the Herndon, Va., trade group’s members had voted last week to approve the new ACH format, to be known as BOC.
The BOC format will join the point-of-purchase and the accounts receivable conversion formats that companies already use to turn customer checks into ACH payments, which are faster and cheaper to settle than checks. ARC, which took effect in 2002, has proven one of the most popular payment mechanisms in Nacha’s history, growing 71% in 2005, to 1.6 billion transactions.
BOC will present a new alternative to image-based check clearing because it could be used by the same real estate managers, dentists, and other small businesses that have been among the primary customers for remote image capture.
These companies could not use ARC, because Nacha’s rules restrict that format to lockbox operations.
Richard Oliver, an executive vice president with the Federal Reserve Bank of Atlanta and the manager of the Fed’s Retail Payments Office, said that the BOC system could be more cost-effective for banks than remote capture, and less risky.
Banks that offer remote-capture systems must warrant that the images that corporate clients create can be used if they are forwarded to other financial companies. “The liability rests with the bank,” he said.
This risk would be eliminated with BOC, which removes the check from the payment stream and replaces it with a new payment mechanism, an ACH file.
And though remote image capture is less costly than handling paper checks, ACH payments are generally considered one of the banking industry’s cheapest payment types. As a result, Mr. Oliver said, some banking companies have reported that BOC “is a better model because of the cost and liability issues.”
Under the new rules, companies that intend to BOC consumers’ checks must post a sign at the point of sale, and also note it on receipts. The companies will also have to create a digital image of the entire check and archive it for at least 60 days — the window for consumers to dispute a payment.
This is different from the POP format, which only requires merchants to scan the information in a check’s magnetic ink character-recognition line. With POP, the merchant hands the check back to the consumer as a record of the transaction, but this is impossible with BOC because the conversion may happen long after the customer has left the store.
George Thomas, an executive vice president at The Clearing House Payments Co. LLC of New York, said that BOC will be “more cost-effective to the merchant” than converting checks at the register, because they can be scanned in batches. In addition, many consumers ask questions about the POP process when clerks hand them back their checks — extending a process that was designed to make transactions faster.
Mr. Thomas said that Nacha’s members rejected another proposal last week that would have allowed merchants to begin converting checks in their back office in September, but using the POP code for the payment files. He said that this would have made it impossible to track which ACH payments originated at the register and which ones were created in the back office.
Rossana Salaris, the senior vice president of The Clearing House who runs its ACH unit, Electronic Payments Network, said that BOC is similar to ARC, which also occurs behind the scenes, but could be more confusing to consumers.
Many people are now familiar with the ARC process that billers use to convert their monthly check payments into ACH payments. However, ARC takes place only within established biller-customer relationships, and with recurring payments. If a dispute arises, the consumer can easily check the amount of the bill.
But BOC payments can be used for purchases of any amount at a merchant, and if there is a dispute it will be harder to verify the size of the purchase unless the customer has the original receipt. “Who keeps all their receipts?” Ms. Salaris asked.
Ms. Salaris said that though some merchants may prefer remote capture over BOC because there is less potential for customer service issues, BOC will win over other corporate customers because it will be less expensive.
Richard Crone, the founder of Crone Consulting of San Carlos, Calif., predicted that BOC will be “very popular,” because it allows merchants to “store their checks and send them to the back office to process in a batch, the same way that banks do.”
