Impact of US Back-Office Conversion Initiative

The Back Office Conversion (BOC) Initiative is NACHA’s (the US electronic payment association’s) new standard entry class (SEC) for check-to-automated clearing house (ACH) conversion, launched in March 2007. This rule enables the conversion of checks into ACH debits at the point of sale (POS) and over-the-counter (in-person) remittance.

It is estimated that US consumers write several billion checks at the POS each year. The checks typically take two to seven days to clear through traditional paper-processing networks. Retailers and the banking industry have been working on reducing the float time for these items for many years.

The Introduction of BOC

BOC is positioned as an alternative to NACHA’s point of purchase (POP) SEC. POP, launched in September 2000, has some attributes that made widespread adoption challenging. First, POP requires that merchants invest in technology to scan, capture and convert the MICR line data of a check into an ACH transaction at each checkout lane. Second, in the process of capturing and converting this MICR data, the check is voided and an authorization slip is issued for the consumer to sign. Add to this the fact that the checkout clerks are often unable to properly explain the transaction to the consumer and you get a process that delivers increased time spent in the checkout lanes and a considerable amount of confusion. As a result, POP never realized the potential once hoped for by the industry.

Enter BOC. This SEC offers a ‘consumer experience’ in the checkout lane that is exactly the same as writing a traditional paper check. The consumer still writes out the check. The clerk still puts the check in the cash register. The only difference is that the retailer performs the scanning, MICR capture and check conversion to ACH debit in a back office. This SEC not only minimizes the required investment in the enabling technology but also eliminates the need to train the entire checkout staff thus removing two of POP’s greatest challenges to adoption.

The ideal candidates to initiate BOC transactions are businesses that accept checks at the POS, such as a register or service window at big box stores and grocery stores, as well as governing agencies, manned billing locations and many other financial institutions. However, for any business looking to adopt the new SEC code, it is important to note that the actual process of converting checks to ACH debits is not without its own set of challenges and that all BOC systems are not equal due to the quality of information used in transactions.

Approximately 2-4% of checks have information in the MICR line data that is not appropriate or relevant for ACH debit transactions. Inclusion of this information or not taking appropriate re-mapping steps could result in an ‘ACH administrative return’. Administrative returns occur when the improper ABA routing number is used and/or the account number is formatted incorrectly. Without the correct routing information, payment transactions may be delayed and even subjected to fines thereby negating the benefits derived from reducing float time offered by BOC.

To address the challenges for customers processing ACH payments with BOC, it is important to determine the validity of account structures and whether there are any changes needed to make those structures ACH-capable. It is imperative to have the ability to correctly transmit critical information to make BOC transactions ACH-capable and to provide override ABA routing numbers for ACH when necessary. Solutions exist to facilitate this required re-mapping and thereby enhance the effectiveness of BOC processing. Any business considering adopting BOC should research these available solutions prior to implementation.

What Are the Benefits of BOC?

BOC is intended to reduce overall processing times. According to NACHA, by installing BOC systems, the banking industry has the potential to save almost US$320m over the first five years of BOC adoption. The estimates for market adoption is three billion back-office conversions in year five, which enables businesses participating to further align their check, Check 21 and ACH processing, giving them best routing decisions.

Financial institution benefits:

• Greater speed and efficiency in routing and processing imaged checks.
• Best-routing decision-making on every check that is deposited.
• Reduction of costs at the branch.
• Helps reinforce a business deposit relationship with reduced float times.
• Presents the opportunity to go after new business.

Retailer benefits:

• Increased funds available in 24-48 hours instead of three to seven days by reducing float time.
• Because transactions are transmitted electronically, the retailer will realize reduced expenses related to preparing, transporting and depositing paper checks.
• There are low transaction fees, which would also lead to lower bank deposit fees.
• Little training involved because this specialized processing is done by a function in retailing that encounters fewer turnovers than the clerks operating the checkout lanes.
• Lower cost of equipment. 
• No consumer impact at the POS versus the traditional paper check process.

Conclusion

Even at this early stage, BOC is attracting a good deal of interest from those businesses looking to reduce volumes of paper checks and speed customer service because it offers a new way to process checks with very few drawbacks. New and enhanced security may be required for personal check storage and there is also the embedded cost of obtaining image storage/retrieval programs to consider. Aside from these few launch expenses, BOC may turn out to be the ideal check conversion solution for many companies.