NACHA Close to Recruitment for Test of New Check-ACH Plan

A new plan at NACHA to merge elements of the automated clearing house network with elements of check imaging could allow banks to clear checks more cost-efficiently but may also turn out to be a solution to a problem that's solving itself, experts say. Some 20 financial institutions, ranging from large banks to community banks, have expressed interest so far in participating in a pilot to test out the new plan, says Daniel L. Miner, senior director of network development at NACHA, the rules-setting body for the ACH. NACHA is organizing the pilot, which it expects to start in the first quarter next year and run for 18 months. Miner says Herndon, Va.-based NACHA is in the final stages of drafting pilot agreements and rules, as well as a pilot guide, for the new effort, known as Deposited Check Truncation (DCT). Formal recruitment efforts will start “fairly shortly,” Miner says. Banks may participate as both collecting and paying institutions or only as paying banks. The test will start with consumer checks with values of $25 or less, but that number could climb later on, NACHA says. Although NACHA is running the pilot, it says DCT transactions will be covered not by Regulation E, which usually governs ACH payments, but rather the Uniform Commercial Code, articles 3 and 4, and Regulation CC, the rules governing checks. NACHA operating rules, however, will give consumers a right of recredit and paying banks a right of return on unauthorized items. The plan represents the first effort to link the ACH with check imaging since a banking group known as the Check-ACH Coalition pushed a highly ambitious program to allow collecting banks to send check data as ACH files while storing images of each check in so-called trusted archives. Though this effort collapsed earlier this year under the weight of various technical and cost issues (Digital Transactions News, Jan. 30), some observers say the new plan could succeed in converting more paper checks to electronic formats. Deposited Check Truncation calls for depository banks to capture payee data along with account and routing numbers from check. The bank would transmit this information to paying banks as an ACH file. The bank would also create an image, but instead of sending the image to a common archive, it would store it in its own system. By picking up the payee information, some observers say, the new scheme makes huge and costly common archives unnecessary, since images would only be required to handle disputed items. “I think [DCT] has a better chance” than the Check-ACH Coalition plan, says George F. Thomas, an industry consultant based in Oakdale, N.Y., and a former executive with The Clearing House Payments Co. LLC, New York. “If they had started this a year and a half ago, they'd be farther along by now.” DCT may also allow banks to cut their check processing costs by converting more paper checks to electronic files. ACH processing costs vary by a number of factors, but clearly at least some banks expect creating ACH files to be less expensive than handling paper checks or the printouts of images known as substitute checks. Paying banks receive substitute checks if they haven't yet installed equipment necessary to clear images. Paper checks cost collecting banks 6.6 cents per item to process, while substitute checks cost 5.9 cents, according to Global Concepts, an Atlanta-based research firm. “We've certainly heard from a lot of financial institutions that they are going to experience a lot of savings from this,” says Miner. Cost efficiency could be especially important for the low-value checks DCT is targeting. Ian Macoy, managing director of network development at NACHA, says one reason NACHA set the maximum check value at $25 is that much image-exchange activity has been focused on high-dollar-value items. “Where it may be lagging is with endpoints where you have low-dollar volumes,” he says, leaving a substantial volume of checks as paper items. But the new scheme faces substantial challenges, as well. Gearing up to automate the capture of payee information, says Thomas, could be expensive. “You can do it off the deposit ticket, but you have to link the deposit ticket to the ACH system, and that's not a trivial task,” he says. “There's work to be done here.” At the same time, some observers argue that more and more paying banks are going live with image exchange every month, rendering efforts like DCT ultimately unnecessary. Like the Check-ACH program before it, DCT relies on the near ubiquity of the ACH network to allow depository banks to electronify checks even in cases where paying banks aren't equipped to clear images. But the number of routing and transit numbers capable of receiving images reached 10,111 in July, up from 4,216 in July 2006, according to the Electronic Check Clearing House Organization, Dallas. That figure represents almost 6,900 financial institutions, ECCHO says. Aite Group LLC, a Boston-based researcher, projects that by 2012 almost all routing and transit numbers will be receiving images. “That's coming up pretty darn quickly,” says Nancy Atkinson, a senior analyst at Aite. But Miner says NACHA sees a need to act now. “There is a concern,” he says. “Nobody knows for sure how big the paper problem is going to be in two or three years. Rather than waiting a few years, let's test a potential solution now.”