I was quite pleased today to learn that NACHA is expanding the types of consumer checks eligible for conversion to the ACH. The concept of allowing consumer check deposits to be eligible for conversion has been contemplated since the inception of ARC (and later BOC) as valid ACH transaction types.
Low value consumer check deposits are a logical extension of ARC and BOC and RCK. The Federal Reserve’s 2010 Payment Study revealed that businesses and consumers issued 24.5 billion checks in 2009 to pay bills and each other. That number does represent a 7.1% reduction from 2006, but there is still a huge opportunity to either convert commercial and consumer payments to the ACH or leverage the ACH from the very beginning.
A lot of smart folks have been working diligently to educate businesses and consumers on the benefits of ACH: It is convenient, safe, secure and cost-effective. While progress has been made with particular success in the small business market due to the efforts of companies like Intuit, Bill.com and banks offering electronic bill payment solutions, middle market and especially large corporate companies have significant legacy investments in accounts payable and accounts receivable programs that are well-honed and highly integrated with controlled disbursement systems that make electronic payment adoption difficult. Electronic payment usage is slowed further by existing contracts that state payment terms.
On the consumer side, electronic bill payment offerings are fast replacing the traditional check book but the lack of critical mass participation and end-to end electronic P2P payment offerings has failed to put a significant dent in the billions of paper check consumers still write today.
That is why I am so excited about financial institutions being able to convert consumer checks deposits to ACH payments. If every check written from a consumer payer to a consumer payee, 2.8 billion of the checks , or 9.7% of 24.5 billion paper items, could clear via the ACH and reap the same rewards that drove the creation of ARC and BOC. Those benefits include for the FI, reduced clearing and settlement costs, improved risk management through faster receipt of returned items, as well as not having to bear the costs to physically store or electronically archive all those checks.
And for consumers, your risk management practices will improve too because you will know sooner (than later) who not to trust to reimburse you for their portion of the dinner tab or cover their portion of the rent. You are now going to be able to mitigate your payment risks by demanding Johnnie or Susie to reimburse you with a more secure form of payment like (and I cannot believe that I am going to write these next words) a cashier’s check, money order or cash. Better yet, enroll in a P2P program (like PayPal or Tabbedout). The money does not move into your account if the sender (Payer) doesn’t have it. In banking terms that is called a “good funds model” –which is when a payment receipt only happens when the payer has enough money in an account to send the money.
I am so glad to see the idea of converting consumer checks at the bank of first deposit come to fruition, even if it is an opt-in program today. It is something that has been on the NACHA table for a long time. But comfort and confidence in ARC and BOC had to come first, along with concrete evidence of their benefits. That is why I am so glad to see NACHA (supported by its FI membership) taking this next step to allow consumer checks to move onto the ACH rails for clearing and settlement. It allows FI’s to achieve greater efficiency and reduce operating costs. At the same time, it is another significant step to help consumers become more comfortable with electronic bill payments and hasten the development of convenient, multi-channel electronic P2P (C2C) product offerings and their eventual adoption by consumers.