Bankers are introducing a variety of corporate services in preparation for a Nacha rule change that will let them convert some business checks into automated clearing house transactions.
Though banks and billers have eagerly adopted accounts receivable conversion - the procedure for converting checks into ACH payments - corporate customers have been far less enthusiastic about the process, which treasurers say could make their accounting more difficult.
Upgrading banks' corporate payment systems can be a relatively expensive undertaking. However, there is widespread agreement that the new services - such as ACH positive pay, advanced account reconciliation, and payee verification for both paper and electronic payments - will be increasingly important to corporate clients, which are focusing more attention on managing their finances online.
Mary Ann Francis, a senior vice president at National City Corp. and its manager of global trade and treasury solutions, said the Cleveland company began testing an electronic payee verification service for both checks and ACH payments in March. She said so many existing corporate customers have asked the banking company for such a product that Nat City concluded the test and began selling it, even though it has yet to formally announce its availability.
"We've had so much demand we haven't had to put on a full-court press," Ms. Francis said.
Such services are aimed at reducing errors in corporate accounting. When banks convert checks into ACH payments, the check is destroyed and never clears; it is replaced with an electronic ACH debit or credit that the customer did not initiate and may not recognize when it appears on its books.
The original rule, which took effect in 2002, permitted banks to convert only consumer checks, but Nacha, the electronic payments association, approved a rule change in November. Beginning Sept. 15, banks also will be able to convert consumer-size business checks worth less than $25,000 that lack the "auxiliary on-us" field in the magnetic ink character recognition line.
ARC has become wildly popular with banks and billers because ACH payments are faster and cheaper to process than checks. Nacha, of Herndon, Va., said the number of checks converted using ARC in the first quarter rose 45% from a year earlier, to 491.2 million.
Though corporations acquiesced to the rule change, they are not enthusiastic about it.
"Many of our members do not wish to have their checks converted," said Arlene S. Chapman, a senior consultant to the Association for Financial Professionals, a Bethesda, Md., trade group for treasury executives.
Companies rely on services such as account analysis and account reconciliation, fraud prevention, controlled disbursement, and stop payment - all of which could be disrupted if checks disappear and ACH debits appear in their place, she said.
Ms. Francis said that in September 2004, Nat City became the first banking company to link its check and ACH systems to track converted checks and compare those records to the positive pay issue files its corporate customers provided.
At the time Nat City was receiving 2,500 ACH debits a day that had been converted improperly from checks, she said. "The vast majority of them were completely legitimate entries. They were intended to be paid, but they were intended to be paid as a check."
In addition to the payee verification service, next month Nat City plans to introduce a Web-based ACH positive pay system. "We've had ACH positive pay for five years, but it was very manual," and the new system, enabling online review of ACH transactions, is more automated, Ms. Francis said.
John F. Dugan, a vice president and the disbursement team leader at KeyCorp, said the Cleveland company plans to introduce an integrated reporting service today that will include account reconciliation and positive pay for checks and electronic items. The service, an industry first, will produce "a deeper connection between our check reporting and our ACH services."
Comerica Inc. announced an ACH positive pay service in June. Daniel J. McCarty, its senior vice president of treasury management services, described it as "reverse positive pay" for ACH transactions. "You don't have to do anything if you have this service with us. We'll tell you" if a suspicious transaction warrants corporate review.
The Detroit company has added a system of filters that can screen both debits and credits and flag items for review by looking at the routing number or the dollar amount, or by comparing them to a "hot list." A corporate treasurer can review flagged transactions before they post.
Mr. McCarty said it was important for a client to be able to reject payments completely, including those that arrive over the ACH network when they should be paper checks.
The filters also can be applied in areas other than check conversion. For example, a borrower in foreclosure might try to send an ACH payment rather than a check; if the lender accepts the transaction, "that could disrupt your foreclosure process."
The system also can be used internally. Mr. McCarty said Comerica's largest initial customer for the system is using it to monitor the movement of funds among business units.
David C. Robertson, a partner at Treasury Strategies Inc., a Chicago consulting firm that serves banks, corporations, and other large organizations, said he doubts many corporate clients will be affected by the rule change. "It's going to be a very small set of customers, I believe, that are going to be vulnerable to this."
As a result, banks' investment might seem disproportionate at first glance, Mr. Robertson said. For most banks, ACH transactions generate only 5% of their treasury income, but a robust ACH filtering system could easily cost $1 million or more, he said.
But with payment systems in flux and regulatory pressure increasing, "banks are looking at their processing architectures," he said. Bankers may be seizing on opportunities such as the rule change to make their systems more flexible, improve their fraud-fighting abilities for different types of payments, and differentiate themselves to clients, he said.
Mr. Robertson said banks are likely to find reasons to link the filters that currently monitor separate payment systems, and not just to fight fraud. The U.S. Treasury Department's Office of Foreign Assets Control currently requires screening only for international wire transfers.
But with the growth of international ACH services, OFAC screening may be required for those payments, and even for checks, he said.
Particularly for midsize institutions, innovation is vital if they do not want to lose corporate clients to the industry's giants, Mr. Robertson said.
"They're thinking, 'I've got some large clients. If I'm not on top of this, they're going to go to JPMorgan Chase or Bank of America,' " he said. "It's probably a multifaceted business case that is going to justify these things."
