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STATUS OF ELECTRONIC CHECKING: We're Getting There!
Check Conversion at Lockbox
Banks received good news in March when the National Automated Clearing House Association approved rules that allow financial institutions to convert paper checks to electronic payments at the lockbox stage for many of the nation's billing companies.
Typically what happens is that billers receive regular payments from customers through a drop box or lockbox. In the past, the bankers would open the envelopes, encode the paper drafts with payment information and send the checks to paying financial institutions. The new NACHA rules allow information from the checks to be entered at the lockbox or drop box site so that payments are converted to an electronic check that will be moved over the ACH system.
The new rules also save financial institutions money since an ACH debit can be processed for as little as 25 to 35 cents compared to $1 to $1.50 per paper check received at lockboxes. It also speeds up the system considerably as paper checks can take two to three business days to move through the system.
Conversion to e-checks at lockbox and drop box locations is called Accounts Receivable Conversion. NACHA has a new booklet called Guide to Implementing an Accounts Receivable Entry Program to assist billers and financial institutions in implementing the new system.
Checks sent to lockbox or drop box locations currently account for a quarter of the 50 billion checks written annually by U.S. consumers. The new system not only allows faster, more efficient processing for billers by financial institutions, it also allows financial institutions that are part of the system to provide more information to consumers on their bank statements, such as what party received the payment.
On The Other Hand…
Meanwhile, however, a representative of the MIT Sloan School of Management in Cambridge, Mass., who has studied the issue of the paperless society for decades, says despite today's alternative payments, check writing is actually on the rise.
Amar Gupta, co-director of the Productivity From Information Technology (PROFIT) Initiative for MIT, said the potential for fully electronic check transfer systems may be greater in other countries, where single, powerful banks are in a position to better control the overall check process. Here in the United States, the process is weighed down by the number of interests involved from large to small financial institutions, major corporate vendors to small businesses - all of them operating under different regulatory scenes.
Gupta also pointed out how expensive processing checks can be: he said transactions range from $1 to $5 per single check for the parties doing the processing (The Federal Reserve says the average cost is $1.25). "If you or I had to pay $1 to $5 per check, we'd have stopped using checks a long time ago," he said. Yet consumers who believe they are helping a paperless society along by using electronic bill paying are fooling themselves: Though some federal government agencies and major companies can conduct a seamless electronic transfer of payment, many electronic check operators in fact actually write out paper checks and mail them to those being paid, he pointed out.
Gupta and his team at MIT have developed technology that can automatically read handwritten information on checks, including amount of payment. The next stage will be to extend technology so that checks are cleared by fully electronic means, he says - from source to destination.
Copyright © 2002 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 12, No. 4, 5/02
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