Accounts Receivable Conversion: Is It Right for Your Company?
Companies with high volumes of consumer check payments such as retailers,
insurers, utilities, and credit card issuers, may benefit significantly from the
implementation of Accounts Receivable Conversion (ARC). These benefits
include reduction in bank service charges, accelerated availability of funds, and
improved cash position management. However, there are several factors such
as customer reaction and smooth implementation that a company needs to consider before implementing this process.
Effective March 15, 2002, the National Automated Clearinghouse Association (NACHA) authorized an ACH entry called Accounts Receivable Conversion. ARC is the standard entry class code for converting first-party retail checks mailed to remittance processing locations (internal or third party) into ACH debit transactions. ARC enables a company to convert virtually all customer checks received via mail into ACH debits to customers’ bank accounts. During this process, retail checks are imaged, data is captured, and the checks are converted into an ACH file for clearing and return handling.
In order for a customer’s check to be eligible for ARC, it must have been received through the U.S. mail, contain a preprinted serial number, be completed and signed by the customer, not have been physically presented in paper form through the check clearing system, and not be presented more than three times. Under ARC, the rules that preside over these checks fall under Regulation E, not the Uniform Commercial Code. Examples of retail check payments that can be converted to ARC include utility payments, state and local taxes, credit card payments, and insurance premiums.
At this time, corporate checks, money orders, official checks, third-party checks, U.S. and state government checks, and foreign currency items are not eligible for the ARC process. However, there may be challenges to these limitations in the future.
Given that the charges assessed by banks for clearing checks are generally well in excess of the charges for processing ACH items, companies that deposit a large number of paper payments can significantly reduce bank service charges by utilizing ACH debits to collect these payments. A company utilizing ARC also has the option of transmitting the file to the lowest cost provider, regardless of location. Similarly, some items can be transmitted to a high volume drawee point, thus further reducing float and service charges. Return item fees can be significantly reduced as well. Finally, the potential for adjustments and rejects is reduced.
Currently, most companies receive collected funds within one to two business days after the deposit of consumer checks. By utilizing ARC, a company uniformly receives collected funds in one business day and, as a result, accelerates the availability for those checks currently being collected in two business days.
There are several factors that a company must consider before implementing ARC for processing retail payments. If a company already uses a retail lockbox provider (bank or non-bank), the first step would be to discuss alternatives with the provider, and possibly also evaluate other providers as well. If a company has an in-house remittance processing operation, then discussions should be held with current providers of hardware and software.
ARC requirements state that the check images (front and back) must be kept at the point of capture for two years. In addition, 14 days after the settlement date, the original checks must be destroyed. Destroying the checks helps prevent mistakenly presenting the check as a paper item in the future. As noted above, various types of checks cannot be converted. It is very important to have procedures in place to avoid the conversion of ineligible checks. It is also important to understand that the implementation of ARC will not be an instantaneous process. Once the ARC provider is selected, a company will need to begin to convert a portion of the checks received in order to test procedures and controls, and also evaluate any customer reaction. However, once an acceptable process is in place, additional volumes of transactions can then be added to ARC over a period of perhaps only a few months.
Customers need to be considered as well. Customers whose checks are to be converted to ACH must be notified prior to each payment that the receipt of the check will, in effect, be an authorization for the check to be converted to an electronic transaction.
This disclosure can be placed anywhere within the remittance document (or on the remittance envelope, or another location). Currently customers cannot opt out of ARC as long as the guidelines set forth in the ARC rules are followed. It is possible, however, that some customers may complain and refuse to continue to do business with a company. But as ARC becomes more and more common (the volume of these items increased significantly from the second to the third quarter of 2003), customer acceptance should become widespread.
Although ARC represents a major transformation for processing retail check payments, the benefits can be substantial and several major companies have
adopted its use. Other companies, concerned about customer relations, are holding off implementing ARC until it is more mainstream and accepted by the
public as a common business practice, but are looking to it as a future option.