Touting Cost Savings, NACHA Launches Pilot for Deposited Checks

NACHA, the regulator for the automated clearing house network, announced on Tuesday it has launched a long-awaited pilot for a payment method that would let banks convert low-value consumer checks into electronic transactions and then clear them through the ACH. The method, called Deposited Check Truncation (DCT), is intended to cut processing costs for banks compared to the cost to clear check images.

The pilot, which NACHA says will run for 18 months, includes six financial institutions, all of them community banks. NACHA president and chief executive Jan Estep tells Digital Transactions News that NACHA will continue to solicit financial institutions to participate in the pilot for the next 12 months or so. The purpose of the pilot is to measure cost savings and gauge customer impact, according to Herndon, Va.-based NACHA.

The savings could be substantial, according to estimates from NACHA. A cash letter including 400 items, for example, would cost originating institutions 6.1 cents per item if it were processed through image exchange, assuming 20 of the items had to be cleared as substitute checks, or printouts of check images. The same batch of checks would cost three-tenths of a cent each if processed via the ACH. The expected cost advantage for the ACH grows larger if more of the imaged items must be cleared as substitute checks, according the NACHA estimates. With 100 of the items processed as substitute checks, for example, the per-item cost climbs to 8.4 cents, fully 28 times the ACH cost.

“There continues to be an interest at banks that want to use the ACH’s efficient infrastructure to process payments,” Estep says. “These are the institutions that want to take paper out when it is received.”

Bob Steen, chairman of Bridge Community Bank, Mechanicsville, Iowa, tells Digital Transactions News he sees the cost savings as necessary to keep his bank, and ultimately all community banks, in the payments business. “The community bank has to stay in the payments game,” he says. “If we don’t, there’s nothing left of our franchise. We can’t leave pennies per transaction on the table.”

For the DCT pilot, consumer checks up to $250 are eligible for conversion, a threshold likely to capture most paper items. Estep says NACHA would be open to changing this limit depending on feedback from the pilot. “The magic in the pilot is the [originating financial institution] is the one receiving the benefit and also the one taking the risk,” she says. “They’re the ones having the potential returns coming back.”

Bridge Community Bank, which is one of the six participating banks, is acting as an originating institution for the pilot; the other five are receiving. Bridge’s Steen says more than 70% of the checks the bank handles fall under the $250 threshold, with more than 50% eligible for ACH conversion.

The pilot has been a long time in coming. NACHA officials originally floated the idea three years ago and expected a pilot to be under way in the first quarter of 2008 (Digital Transactions News, Oct. 11, 2007). A year later, that start data had been pushed back to no earlier than the middle of 2009 (Digital Transactions News, Oct. 9, 2008).

At the same time, the competitive landscape in payments has shifted substantially. Part of the rationale for DCT had been to offer a way for banks to process checks electronically when a significant number of paying banks were not capable of clearing image files. That incapacity forced banks of first deposit to print substitute checks and raised image-exchange costs. But since then this so-called last-mile problem has largely gone away, with more than 97% of financial institutions now receiving images. “There’s not much of a last mile left, as far as I can tell,” says Robert Meara, a senior analyst at payments research firm Celent LLC, Boston.

The ACH cost efficiencies, however, could prove compelling for banks, compared to image exchange. DCT calls for depository banks to capture payee data along with account and routing numbers from checks. The bank transmits 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.

The pilot is using a long-standing, low-volume ACH standard entry class code, TRC, which refers to check truncation. As such, 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.

Besides Bridge Community Bank, the other five participating institutions are: Community Savings Bank, Edgewood, Iowa; First National Bank of Cold Spring, Cold Spring, Minn.; First State Bank of Kensington, Kensington, Minn.; Mount Vernon Bank & Trust, Mount Vernon, Iowa; and Sandy Spring Bank, Olney, Md.