Check Processing

by Mary Jean Forry

   Navigating the murky waters of corporate check conversion is something banks must get right.
   Developing and maintaining successful banking relationships requires a combined effort from the corporate customer and the bank. This is particularly true with relatively new corporate check conversion regulations, as both parties set out to determine how they’ll manage different sets of issues and expectations. Understanding both viewpoints will help everyone navigate the requirements and form even stronger working relationships.

The Conversion Paradigm

   While corporate check usage remains steady, we’re witnessing a shift from processing and handling checks to processing electronic transactions. In an effort to reduce check clearing and processing costs, consumer checks may now be converted to electronic items. To further add efficiency to the payments industry, the Electronic Check Council has also urged NACHA to include business and corporate checks as eligible conversion items. Similar to the consumer environment, billers, as well as other payment processors, would convert these corporate check payments to an electronic transaction known as ARC (Accounts Receivable Conversion).
   This is a positive change for banks, bringing about decreased processing costs and faster processing times. But the transition won’t be simple, as issues such as how to educate check issuers arise.
   Consequently, this new way of doing back-office business will require a rapid and strategic operations review. Banks should start by examining their strategic software and hardware technology investments to ensure a smooth transition to this new payment paradigm.

Implementing a Business Process and Technology Strategy

   In today’s payments environment, the business of checks and electronic transactions is typically two distinct operations. From the remittance point-of-view, impending regulatory changes will require check conversion software for originators. For receiving banks, transactions (which begin as a check) will be converted to a different type of payment.
   While such operational paths don’t cross today, the banks of the future must adapt and successfully maneuver through check conversion obstacles. The bottom line is this: banks need a strategy to handle this eventuality. They can maintain current procedures and increase headcount or implement business processes and introduce technological advances to meet the challenges and take advantage of the benefits of electronic check conversion, the choice seems obvious.

Market Impact

   While electronic check conversion will bring about many benefits, the effect it will have on other cash management products needs to be thoroughly examined. One traditional commercial service, Account Reconcilement Product (ARP), will be significantly impacted. ARP is a profitable reconciliation service that banks offer commercial customers primarily to balance their check activity. Commercial customers forward the bank issue data as they disburse checks. The bank updates the ARP system with this issue data and matches it to any paid (check) items that have been posted to the account. For check items that have been electronically converted, exception conditions will be created in the ARP service. Keeping in mind that the accountholder disbursed the payment as a check, the issue data will remain open and outstanding on the account. Many banks will likely identify the converted item as a miscellaneous debit or perhaps an ACH debit. If this data comes across to the ARP application, it will not match the issue item, as issues are matched to checks only, not miscellaneous or electronic transactions.
   This scenario results in reconcilements appearing out of balance. The issue will remain open, yet the converted item, e.g., a miscellaneous debit, will be charged to the account and further complicate the status and condition of the account. Corporate clients are paying the bank for the service of balancing their accounts. For the banks to not properly identify and match these transactions, contradicts the basis for the service.
   Converted items also increase fraud exposure. Items could be duplicated prior to conversion and presented for payment at the bank. Many banks, and commercial customers, have invested in extensive positive pay applications. These applications have been designed to detect check fraud. In the case of electronic check conversion, these items will bypass positive pay edits, in which case risk exposure will soar for both the commercial customer and the bank on deposited items and checks cashed at the teller line.
   Aside from bypassing traditional positive pay edits, the banks are now offering a more sophisticated fraud service involving the matching and verification of payee name. This new, leading-edge service may be compromised, as the payee name may not be captured at the point-of-conversion.
   In an effort to reduce risk exposure, an ever-increasing need to identify and mange exceptions will emerge. Without the actual check, and with only the truncated information, banks may resort to manual and inefficient methods of exception management.

Bridging the Gap

   In the past, the ACH and ARP applications operated independently within the bank. But with the near-term blending of transactions, integration is a necessary facilitator for passing electronic, converted check data from the ACH application to the ARP system. Converted items will pass to the ARP application once they have been authenticated by DDA data.
   It’s important that these converted items post to the ARP application immediately, as many banks have direct inquiry into their ARP application from the teller platform, which offers additional fraud protection on commercial accounts. Only with this level of integration can banks trust that items are matched correctly and processed through the established positive pay channels.
   This approach also reduces the potential for manual exception management. If the positive pay criteria identifies a suspect item, ARP generates an exception file and transmits it with the items to the cash management reporting system for distribution to the corporate customer. Once the corporate customer makes their payment decision and the ARP system is updated with this information, additional integration would require any return decisions to be forwarded to the ACH system. Since the return policy for these transactions is governed under electronic items rules, it is important to use the proper channel for any payments that have been denied by the corporate customer.
   As the converted items are identified by the ARP application, it is important to retain the identification of the transaction. Equally important is the task to match and reconcile the paid transaction to any issue data on file. By following this path, the bank will have fulfilled its duty of offering an account reconcilement service.

Electronification is Inevitable

   Although opt-out alternatives are being considered, corporate checks remain vulnerable to inadvertent conversion. As such, corporate customers can employ different methods to settle transactions: 1) Deny all electronic payments, debits and/or credits from posting to the demand deposit account from which corporate checks are drawn or, 2) Create specific authorizations that honor selective electronic transactions.
   To minimize risks associated with the pending regulations, banks must strategically review their operations to ensure continued service excellence to their commercial customers. This requires some investment in adapting specific processes and business practices. Whether that investment is made in software and hardware vendor code, or in-house modifications, now is the time for banks to formulate their strategies.