After BOC’s First Year, Ex-Banker Laments Slow Start for E-Check

One year after its launch, an option that lets merchants deposit checks electronically in centralized locations by converting the paper items into automated clearing house debits is growing more slowly than expected, according to a payments executive who led the effort to write the rules for the new option. Back-office conversion, introduced by NACHA on March 16, 2007, is running into stiffer resistance among retailer executives than planners originally thought it would, says the executive, Sam Robb, who is now vice president of global payments solutions for CheckFree Corp. but until eight months ago was with Mellon Financial Corp. “What I'm seeing is many merchants are having a difficult time making the business case,” Robb says. However, current growth rates for back-office conversion, known as BOC, appear to be in line with NACHA's expectations. BOC volumes more than tripled in the fourth quarter compared to the third, albeit on a small base. The problem in Robb's view is that while supermarkets and similar merchants may accept a heavy volume of checks, the number accepted at each location isn't considered high enough to justify investments in centralized processing. “On a per-store basis the check volume is low,” he notes. Back-office conversion, which allows merchants to send checks from each store to a single location?literally, a “back office”?for ACH conversion, demands investments not only in scanner equipment but also in process changes and personnel training. “Retailers are seeing a 13% to 15% decline in checks presented at the point of sale, so there has been a reluctance to invest in a declining tender type,” notes Robb. At the same time, the new payment option is up against highly favorable bank pricing for paper-check deposits, he says. While banks are pricing BOC at a nickel to 14 cents per transaction, says Robb, large merchants are getting paper-deposit pricing of 2 cents to 3 cents per item. This experience stands in stark contrast to expectations when Herndon,Va.-based NACHA introduced back-office conversion after years of preparation, says Robb, who headed up the organization's Back Office Conversion Product Group, the panel that wrote the rules and education plans for the application. “There was tremendous retailer interest prior to and during the rule-making process,” he recalls. “That's what led us down this path.” Indeed, NACHA and bankers like Robb devised back-office conversion to address sluggish merchant uptake of another ACH payment type, point-of-purchase (POP) conversion, which allows cashiers to convert checks at the cash register. POP's requirement that clerks get written consumer sign-off on each transaction was seen as slowing down checkout lines. “We saw stagnating growth in POP,” Robb says. But lately POP has been become a hot e-check application, with transactions reaching 134.2 million in the fourth quarter, up 55% over the year-earlier quarter. Much of that growth has been fueled by Wal-Mart Stores Inc.'s decision last year to roll out POP chainwide (Digital Transactions News, April 17, 2007). BOC transactions totaled 3.1 million in the quarter, up from just under 841,000 in the third quarter. Another rival for merchants' paper-check volumes is remote-deposit capture, a method that lets merchants create and send to their banks images of checks for clearing through image-exchange networks. Unlike BOC, for which only consumer items are eligible, remote capture can handle all checks, including those written on commercial accounts. And merchants can perform remote capture without the opt-out and notification requirements of BOC. With BOC, merchants must post a sign at the checkout stand informing customers their checks could be converted to ACH transactions. This notice must also be printed on receipts. “There's a feeling that remote deposit capture is a path of least resistance,” Robb says. Robb says that banks' pricing for remote capture has been falling as more items clear as images rather than as substitute checks, which are paper printouts of images. Substitute checks add significantly to processing costs for banks of first deposit. For its part, NACHA has said it didn't expect BOC volumes to soar in the first year, since merchants, banks, and vendors needed time to adjust products and procedures to the new e-check code. Indeed, a NACHA executive told Digital Transactions News late last year that significant growth might not arrive until at least the middle of 2008 (Digital Transactions News, Dec. 6, 2007). Even Robb is optimistic that if scanner prices fall as expected and if NACHA streamlines some of its rules, BOC's popularity could rise, particularly with respect to POP. “BOC was going to be the utopian solution for retailers, but that is not proving to be the case,” he says. “But both [POP and BOC] will co-exist for a long period of time. A lot of retailers don't want to impact their point-of-sale interaction with customers.”