ARC FOR CORPORATE CHECKS: will businesses make the leap?
BY CHARLES KEENAN
Accounts Receivable Conversion for business checks can now be used in limited situations, but corporations have their reasons for preferring check float.
Corporate checks are eligible for conversion to ARC, as a result of a November NACHA rule change. But corporations are not convinced of its advantages over other payment methods. Many prefer check float and the ability to stop payments. Some payments providers argue that the rising costs of paper checks will force its acceptance.
Is accounts receivable conversion (ARC) ready for the corporate world? Opinions are mixed and the outlook cloudy. The benefits for payment processors are lower costs, but many businesses are reticent, not convinced of ARC’s advantages over other alternatives.
ARC is a process by which paper checks are converted into Automated Clearing House (ACH) debits at lockboxes that banks operate for their corporate clients. Some of the country’s largest banks, which are major players in the lockbox business, have embraced ARC, boosting volume dramatically in recent years.
Until recently, only consumer checks were eligible for conversion, according to NACHA rules. The Herndon, Va.-based organization that makes the rules governing use of the ACH network prohibited banks from converting business checks until last November when the conversion of all six-inch business checks was approved. The rules are effective September 15, 2006. Opting out of ARC will require businesses to call their payments processor to have the check routed through traditional processes.
The new rule also enables the conversion of traditional, nine-inch business checks, but only if corporations do not include a so-called auxiliary on-us field in the check’s magnetic ink character recognition line. Most large businesses use this field, so the conversion of nine-inch checks is expected to be minimal. Checks for more than $25,000 are ineligible for conversion.
Despite the rule change, the industry is divided on how extensive the use of ARC will be for corporate checks. Some believe that with the rapid growth of ARC and the rising cost of processing paper checks, it’s only a matter of time before all business checks will be converted. A contrary view is that corporate ARC will lag because corporations are loathe to lose the advantages they have with paper checks, such as greater float time and the ability to stop payments.
To prevent ARC from inadvertently happening now, many corporations place so-called “debit blocks” on accounts to protect them against unauthorized debits. This is believed to be a formidable obstacle to business check conversion. Another problem: banks’ ACH systems gen-erally don’t link with disbursement account services such as positive pay, which enables a corporate customer to match check files with checks written.
ARC for business checks is one option for the processing of a check. Another is the nascent electronic check image exchange effort underway across the industry. Corporations can also pay their bills using other types of ACH transfers such as corporate trade exchange, which enables attaching to the transfer information such as invoice numbers, which enables multiple payments.
Bottom line, corporate customers understand what’s to be gained from the “ARC-ing” of consumer checks. (See “ARC: Billers Like It; Bankers Have Their Doubts,” January/February 2006 Banking Strategies, available online at www.bai.org/bankingstrategies/2005-nov-dec/arc/index.asp.) But they do not see a ready value in moving to converting business checks, says Len Heckwolf, a senior vice president and an ACH and retail lockbox business executive at New York City-based JPMorgan Chase & Co. and a former NACHA chairman.
The conversion of consumer checks has soared because corporations receive a benefit by doing so: quicker settlement. But corporate customers are not interested in their own checks settling quicker.
“It is undecided whether or not ARC will go into the business market. It is still unclear if there is a lot of value,” says Heckwolf.
Growing ARC
ARC-processed consumer payments totaled more than 1.25 billion in 2004, more than four times 2003’s volume of 220 million, according to NACHA. While growth has slowed, it continues at a fast clip: 428 million payments were processed in the third quarter last year, up 62% from the same period in 2004.
ARC has taken off at a time when check imaging has been slower to catch on than some in the industry expected, says Mary Ann Francis, a senior vice president of global trade and treasury solutions at Cleveland-based National City Corp. “The movement of the image and arch-iving is a costly proposition,” Francis says. “We have invested in infrastructure that hasn’t grown yet; it’s slowly evolving.” (See “Paperless & Restless: Smaller Institutions Need the Large to Catch Up,” July/August 2005 Banking Strategies, available online at www.bai.org/bankingstrategies/ 2005-jul-aug/paperless/index.asp.)
There’s no arguing that the traditional paper check is following in the footsteps of the dinosaurs. Electronic payment transactions in the United States exceeded check payments for the first time in 2003, according to the Federal Reserve. In that year, the number of checks paid was 36.6 billion and electronic transactions totaled 44.5 billion.
The tepid reaction to ARC may have less to do with an attachment to paper checks and more to do with wariness about check conversion. Experts say corporations worry about ACH debits coming back for presentment and not being reconciled with positive pay and other systems. Most banks haven’t yet linked the two systems, considering the expense of integrating ACH and disbursement accounts and the lack of customer demand for ARC.
Corporate treasurers complain about this lack of a linkage. For Anita Stevenson, associate director of liquidity management at Atlanta-based BellSouth Corp., the main issues are security and reconciliation. “ARC negates a lot of the controls that we have in place,” Stevenson says. “It adds complexity to being able to determine what is still outstanding and what has actually been paid.”
Stevenson, chair of the payments advisory group of the Association of Financial Professionals, a trade group based in Bethesda, Md., says the process of reconciling the ACH and business check accounting systems needs to be addressed.
“If you put a stop into the check system, it does not relay that through the ACH system, so the item will still try to come through,” Stevenson says. “Until those two systems at all the institutions can talk to each other and actually can relate and show that this ACH item replaces this check, then it is going to be very cumbersome for corporates.”
Preparing for “the inevitable”
Nonetheless, some banks are pressing on. National City is one of the first banks to link ACH and disbursement accounts so that ACH transactions are recognized as converted checks by its accounting system.
National City, in September 2004, had to make adjustments to 26 different systems, making sure ACH debits went through the same channels, such as DDA, returns, positive pay and control disbursement. While Francis declines to be specific, she says the cost was in the “low seven figures...We didn’t find it extraordinarily expensive.”
Why would a financial institution make the investment for a customer group not enthusiastic about ARC for business checks? National City says it sees the writing on the wall: the cost of processing paper checks will continue to rise in the coming years. Francis says that corporations, by holding onto paper checks as a payment method, are only going to share in an increasing burden of processing costs charged by the Fed.
“The cost of maintaining that paper structure is going to be extra-ordinary,” Francis says. “There will be a tipping point. We are encouraging corporates to think ahead.”
The thinking goes like this: the longer businesses wait to do away with paper checks, the more of a cost burden they and banks will bear as consumer checks fade into history. The Fed charges banks based on volume to cover its fixed and operational costs; the less volume, the higher cost of processing per check. The Fed’s own handling of paper checks declined to 14.3 million pieces in 2004, down from 16.3 million in 2003, according to the agency.
Customers that insist on traditional paper check processing are “delaying the inevitable,” Francis believes. “The more you cause the transition from checks to be delayed, the longer the business check stays out there. And ultimately, higher unit costs are incurred for those companies that prefer paper over electronic payment.”
Inadvertent ARC
In fact, business check conversion is already happening — inadvertently. Business checks make up a large percentage of the overall check pool, and many businesses now use smaller, six-inch-long checks that resemble consumer checks. Consequently, many banks have reported that these non-convertible items are often slipping through the cracks — thousands a day at National City, according to Francis. That is in part why NACHA recently changed the rules to allow for their conversion.
With the rules effective date just months away, there are some solutions on the market to help banks deal with the conversion of business checks and there are more to come. Wachovia Corp. and First Horizon National Corp. use e-Check Bridge, a product from CheckFree Corp. Atlanta-based CheckFree produces online bill-payment technology and services. The product helps reconcile converted checks with disbursement accounts of corporate customers.
According to Stuart Williams, CheckFree’s director of strategic planning, the technology “allows for a bridge to be created between standard check and ACH processing.” The product is included in the treasury services provided by a bank and represents no added cost to the corporate customer.
Alleviating Corporate Concerns
Despite the reservations and some resistance by corporate customers, some treasurers see a benefit of allowing ARC to happen. BellSouth, for example, processes 8 million items a month, many of them from small businesses using six-inch checks. “It’s cumbersome for me to decide if an item is a consumer or a business check,” Stevenson says. “That makes it costly to do that exception processing. I would love to be able to convert everything.”
If corporate customers object to losing control on business check conversions, they can still determine when to pay in the first place, says Beth Robertson, an analyst for TowerGroup Inc., Needham, Mass., a research unit of MasterCard International. “Any organization can negotiate with payment partners. The initial payment date can be later because the settlement time is less,” she says. In other words, corporations can make up for lost float by arranging to pay their vendors later.
Michael Herd, a spokesman for NACHA, says the rule change is designed to alleviate corporate concerns over control. “The overall goal is to give businesses a sure-fire method to opt out of check conversion and to give companies converting the checks a sure-fire ability to distinguish between what can and can’t be converted,” Herd says.
“That keeps the large corporate-disbursement customer happy,” says John Lucas, first vice president for Mellon Global Cash Management’s electronic services. “In fact, their items will continue to be processed as paper. In our world, we deal generally with the larger corporates. Most of our customers use the auxiliary on-us field. Most want to be processed as paper. We don’t see a clash there.”
Yet, many think business check conversion won’t get far. “It is not going to happen,” contends Aaron McPherson, a research manager for payments with Framingham, Mass.-based Financial Insights, a unit of IDC. “There are other means of facilitating corporate payments.”
Ultimately, the debate over corporate ARC may be irrelevant as fewer checks are written. “Check conversion is a good interim step,” says Herd of NACHA. “But it’s an interim step. You want to get to the point of the payment being originated electronically to begin with.”
Questions or comments about this article? Post them at the Banking Strategies blog.
Mr. Keenan is a freelance writer based in Brooklyn, N.Y.