The Benefits of Back Office Conversion
In response to industry demand for additional check conversion options, the voting members of the NACHA–the Electronic Payments Association have approved a new process that will allow retailers and billers that accept checks at the point-of-sale or at manned bill payment locations to convert eligible checks to automated clearing house (ACH) debits in the back-office. The amendments to the NACHA Operating Rules that enable this application, known as back office conversion (BOC), will take effect on 16 March 2007. BOC is viewed as a means to provide merchants and billers with additional payment processing options designed to drive down costs associated with check acceptance and create point-of-sale workflow efficiencies.
To best understand BOC, one must examine the history of check conversion. Introduced in the late 1990s, check conversion is simply an umbrella term used to describe several different methods of processing paper payments as electronic transactions. In a check conversion scenario, a consumer can make a payment using a paper check; however, the business that receives that payment can choose to use the ACH network to process it electronically.
The benefits associated with check conversion have made it one of today’s fastest growing types of ACH applications in the US. It has added efficiency to the nation’s payment system, generated savings for businesses, and led to strengthened privacy, fewer errors, and greater protection for consumers.
Currently, the most common application of check conversion is accounts receivable entry (ARC). Via ARC, the checks that consumers mail to their billers are converted to ACH debits at the point where magnetic ink character recognition (MICR) information is first captured. Many billers that receive high volumes of consumer payments, such as those in the credit card, mortgage and telecommunications industries, have adopted ARC as a means for speeding up payment processing and reducing costs.
A second type of check conversion is point-of-purchase (POP), where the check presented by a consumer payer at a retail checkout location is scanned for conversion, marked void, and returned to the payer. Although initially lauded as a significant process improvement, over the past several years, numerous challenges have caused POP to fall short of expectations.
For example, POP requires the originator to obtain a signed authorization from the payer at the point-of-sale. This is particularly troublesome in terms of its impact on efficiency – reportedly adding seven seconds to each point-of-sale transaction, and thus impacting tender time. Extrapolating that figure over an estimated 6 billion checks presented at the point-of-sale or manned bill payment locations can result in lost productivity and opportunity cost.
Another issue associated with POP is the need for cashier training. Because the check must be returned to the check writer at the time of the transaction, the cashier must be proficient in distinguishing between eligible and ineligible checks (i.e. certain checks are eligible for conversion; only first-party consumer checks and business checks under US$25,000 that do not contain any characters in the auxiliary on-us field of the MICR line are eligible) and what to do with each type of payment (i.e. converted items are returned to the check writer, while items ineligible for ACH conversion are placed in the drawer for subsequent deposit).
Add to these issues the costs associated with required scanning equipment and some confusion among payers as to why their original checks were being returned to them and it is apparent why many merchants are seeking an alternative to POP.
Enter BOC. In contrast to POP, and as defined in NACHA rules and Regulation E (which governs consumer electronic transactions), BOC streamlines and simplifies the process, requiring the originator to display authorization language at the checkout where the purchase is being made and to provide a copy of the notice to the consumer in the form of a take-away. The merchant typically retains the check and forwards it to a centralized ‘back-office’ environment where the item is subsequently converted to an ACH debit. BOC, when used in conjunction with remote check capture for the clearing of all ineligible items (via substitute check or image exchange), offers companies a single-threaded 100% electronic deposit workflow that enables comprehensive electronic deposit and clearing. It also helps mitigate the need to train point-of-sale personnel and reduces costs necessary to maintain conversion devices/technology at each checkout location. Recent changes to Regulation E now enable a merchant to determine the best clearing path for checks; paper check, ACH, image or substitute check created under Check 21 provisions.
Merchants and billers alike can use BOC. Billers traditionally have used ARC to process checks received via the US mail in a centralized lockbox processing operation. Billers such as insurance, telecommunications and property management companies that offer walk-in payment locations, can also benefit from BOC. From a merchant perspective, BOC can be implemented by a wide spectrum of retailers from very large retail or grocery stores with multi-lane environments to family-owned establishments with a single checkout.
BOC allows the merchant/biller to experience the many benefits of ACH check conversion while minimizing the impact on tender times, loss prevention and overall consumer checkout experience. Typically, merchants will continue to use current fraud prevention tools and processes, such as validating the payor’s identity by requesting a driver’s licence or using check verification/guarantee services to minimize loss and associated costs.
BOC also allows a consumer to express the desire to have their payment excluded or opted-out from the check conversion process by communicating this directly to the merchant at the time of the transaction. Because of the typically decentralized merchant footprint, this opt-out applies to a single transaction and does not carry forward to future payments. If the merchant chooses to accept the check anyway, that single check must be excluded from the ACH conversion process, but can be deposited as an image, which can then be cleared as an image or substitute check, or simply as the paper check. The merchant reserves the right to refuse a check as a form of payment and request another form of tender such as a credit or debit card.
While the point-of-sale experience remains largely intact, there are back-office workflow and process changes that are necessary in order to comply with NACHA rules and minimize overall transaction risk. With that said, numerous implementation models have surfaced to offer merchants flexibility regarding process change. In many cases, a merchant will need to purchase/lease check-scanning technology in order to create the electronic deposit. Those wishing to defer upfront costs may choose to outsource the scanning and balancing function to an outside provider such as their financial institution or armored courier. Regardless of that decision, certain precautions must be taken to protect consumers and mitigate risk. Merchants (or entities acting on behalf of the merchants) are required to securely store all banking-related information and checks until they are destroyed.
With the proliferation of imaging technology and image exchange, why would a merchant implement a BOC solution? In addition to process change and adherence to NACHA rules, one of the key considerations is the overall financial business case for BOC. Key components of the business case may include:
The potential impact to consumers has been likened to that in the ARC world, which caused initial unrest but, after a short time, was mitigated through the efforts of both NACHA and financial institutions. Similar to the ARC scenario, consumers will not receive their cancelled checks back from their bank, but will see a description of the transaction on their bank statements or through their banks’ online banking portals. Because of ACH settlement rules, the funds may or may not be drawn more quickly from the consumers’ accounts. ACH is typically a next-day settlement model, while checks can clear anywhere from same-day to three to four days, depending on the location of the paying bank.
NACHA has taken a very aggressive approach to consumer education and awareness, both through the rule making process and a comprehensive education plan. The BOC rules require that a customer service phone number of the merchant (or agent of the merchant) be displayed on the posted notice and on the take away notice to aid in consumer inquiries by connecting those that are a party to the transaction.
Traditionally, the consumer calls their financial institution, which results in further phone correspondences to the merchant’s financial institution and a subsequent call to the merchant, which results in the reverse to communicate a resolution. The rules seek to connect the parties that are in the best position to both convey the question and provide a response. To address marketplace education for BOC and check conversion generally, NACHA has launched an electronic payments website which contains a variety of materials targeted toward financial institutions’ customer service and front-line personnel, companies and consumers. The NACHA Back Office Conversion Task Force has developed a training curriculum for both financial institutions and merchants, sample educational leaflets for consumers, and a media plan to ensure that the proper messaging is presented to both consumers and the consumer media.
The anticipated emergence of BOC has raised doubts about the future of POP check conversion, which has sparked heated debate in various industry forums. POP users feel that the benefits of completing the deposit at the time of the transaction and returning the check to the consumer outweigh the concerns over tender timeliness and training. Some merchants use cashiering system screen prompts to ensure cashiers are taking the required steps and are able to apply the correct processing procedures to checks that are eligible and ineligible for check conversion. Those same merchants feel that their back-office is not capable of adhering to BOC requirements, specifically the secure storage of checks and banking-related information, because of the various other store processes that occur in that space. To that end, both BOC and POP are likely to co-exist for some time to come.