Author: Ware, Viveca
Date published: December 1, 2010
Journal code: BINB
Bob Steen is a pragmatist. As president of the $59 millionasset Bridge Community Bank in Mechanicsville, Iowa, he can't spread his operating costs over numerous bank branches. He has only three. So when NACHA, the Electronic Payments Association, sought participants for its deposit check truncation pilot-whereby financial institutions truncate low-value consumer checks and collect them as ACH debits-he eagerly signed on.
His reasoning: Faster processing plus reduced cost equals improved efficiency.
"My variable per-item transaction costs for a check image clearing over the Fed's network is 2.6 cents on average," he says. "My variable cost for an ACH is a quarter of a percent. So there's a 90 percent savings by converting that item to an ACH. Seventy percent of our items on a daily basis are under $250 [the dollar maximum allowed under the pilot], and 70 percent of those are eligible for conversion.
"We could save 90 percent on half the items. This is a big deal."
While the technology isn't new, the ability to process these payments without the check writer's consent-which is easily obtainable at the POS in the case of retail check conversion-is a more recent development and makes now an opportune time to initiate this pilot, NACHA executives say.
The pilot, launched Aug. 18, is open to all financial institutions (seven currently participate) and uses existing infrastructure-the ACH Network's truncated check (TRC) Standard Entry Class Code.
Originating banks must sort out ineligible checks-business checks that bear auxiliary on-us fields as well as third-party and special checks. They must then convert electronically the eligible deposited check's routing number, account number, serial number, dollar amount and payee information to the required ACH format.
Receiving banks must be able to process the transaction, and because the pilot uses the existing TRC Standard Entry Class Code, there should be few, if any, system changes.
All participants must agree to handle checks up to a minimum of $50 and a maximum of $250 and have certain reporting requirements under the pilot.
The pilot has already proven beneficial in that it detected a glitch, easily remedied: NACHA rules didn't require vendors to pass through serial numbers, so Mount Vernon Bank & Trust in Mount Vernon, Iowa, a receiving bank in the pilot, had to force the payments through the system manually, says Mary Thomsen, a vice president at the bank. Despite the hiccup, Thomsen calls the chance to work with a fellow community bank toward a mutually beneficial solution-reducing costs-"rewarding."
Surprisingly, so far only community banks are actively sending and receiving TRCs, though big banks have expressed interest and remain active in a working group examining costsaving measures. Pilot participation is just another example of community banks' nimbleness in deploying new applications and processes.
Steen believes larger banks have been slow to join because many have multiple routing numbers-some that receive and some that send-and may not want to change current processes. Others suggest competing interest (i.e., those that create products and benefit from the corresponding revenue stream of existing check processes), as companies may be hesitant to abandon the status quo.
There are lots of unanswered questions. Will large banks and credit unions participate in the pilot program? Why or why not? Would their unwillingness to participate undermine the likelihood of the pilot's becoming a permanent check-to-ACH conversion application? Are the savings sufficient to make it an attractive alternative to the current process? And would there be enough volume to make it worthwhile?
The pilot (set to run 12 to 18 months) and NACHA's analysis thereafter should help answer these questions and determine next steps for developing another full ACH Network check truncation application.
Till then, the industry waits to determine whether this pilot will foretell a less costly processing future or serve as a footnote in payment processing history.
Viveca Ware is ICBA's senior vice president and director of payments and technology policy. Reach her at email@example.com.