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Title News - July/August 2005

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July/August 2005 - Volume 84 Number 4

Electronic Payments Come of Age: Check 21

by Joe Schoder

As a result of the new Check 21 legislation passed last year and the ongoing evolution of the National Automated Clearinghouse Association's (NACHA) rules for check conversion, accountants and cash managers will start to see an increase in electronic payment processing solutions. While the ability to convert checks into Automated Clearing House (ACH) debits has been around for several years, Check 21 continues the electronic check-clearing evolution by creating a new instrument called a “substitute check.” Properly created substitute checks are the legal equivalent of the original paper check and provide the means by which banks can pursue the promise of Check 21—electronic, image-based clearing of checks.

Banks are starting to introduce a variety of new check imaging and MICR capture services with integrated forward and return presentment solutions. (The MICR is the line at the bottom of the check with the account and bank routing information.) These solutions combine check conversion (converting checks into ACH debits) with check imaging (Check 21) capabilities to enable customers to electronically deposit all items from remote locations. These offerings are designed to deliver faster, safer, and more efficient methods of accepting and depositing check payments by truncating or converting the check at the earliest point of the payment process as possible.

Truncation vs. Conversion

For treasurers and cash managers evaluating these services, it is important to understand the distinction between truncation and conversion. Truncation involves replacing the customer's physical paper check with an electronic image. Conversion implies using a consumer's check as a source document to gather bank/account information, and creating a onetime electronic debit to that consumer's checking account. When a check is converted, it becomes an electronic funds transfer (EFT) debit and is governed by a different set of laws (Reg E) and regulations (NACHA) than those of a traditional check. There are a number of rules and regulations that govern the types of checks eligible for ACH conversion. In general, only consumer checks are eligible for conversion. Business checks, foreign checks, and money orders are among the types of checks that cannot be converted into ACH debits.

Electronically Depositing Checks

The ability to electronically deposit all check payments can have a significant impact on the payment processing workflow of a title company that maintains local, regional, or national branches. With new electronic deposit technology, all checks used at a closing can be imaged and deposited electronically into a single bank account, from anywhere. A branch office's proximity to a local bank is no longer necessary, which can significantly reduce both the amount of time it takes to prepare and transport deposits and the number of banking relationships needed throughout the company's network to make timely deposits. And, since this new electronic deposit technology is image/data driven, timely access to payment information can be easily enhanced. Access to the deposited check and any related transaction data is retrievable via a secure Internet connection to the bank's archive, potentially eliminating any need to photocopy a check. This can provide title companies the opportunity to improve the efficiency and speed of the closing process.

Electronic deposit is making a considerable impact on accounts receivable processing for companies that accept, process, and deposit customer payments made in person, through a drop box, or mailed to a lockbox. In each situation these companies can employ technologies and processes that electronically deposit all checks at the collection point, by either converting the check into ACH debit or truncating if the check is ineligible for an ACH debit, then transmitting the deposit directly to their bank for clearing. Most of these products also provide robust information reporting as well as returned check management capabilities.

What Cash Managers Need To Consider

Cash managers and those responsible for optimizing collections, who may be considering electronic deposit solutions, can measure the cost/benefit through careful analysis of their current methods and costs of collecting and depositing payments. In analyzing the payment process, the following should be considered:

How checks are received. Checks collected by title companies are typically of higher value and are often guaranteed instruments (cashier checks, money orders, etc.) tendered during complex closing processes. The nature of this business and the type of checks used (nonconsumer checks) make the conversion of the checks into ACH debits less likely.

How the payments are posted. Most of the posting for title companies is handled as a matter of course in the closing event. With electronic deposit products, new options for capturing payment data are possible. In some offices it may make sense to move some of the data-entry work, otherwise done in separate steps, to the step where the checks are ultimately scanned and prepared for electronic deposit. In offices where the posting of receipts is already optimized, using an electronic deposit product as a basic deposit automation tool may make more sense.

How checks are deposited. One of the major cost-saving features of electronic deposit products is the ability to consolidate deposits into one single bank and one single account. This is particularly effective for companies that receive payments from multiple office locations and maintain multiple banking relationships in order to make deposits from each office. Electronic deposit products allow these companies to transmit deposits electronically to their bank instantly without geographical constraints.

Types of checks. Since only consumer checks are eligible to be converted into ACH debits, many types of check conversion services do not make sense for companies that receive a large number of ACH ineligible checks (i.e. business checks, corporate checks, 3rd party checks, cashier checks, money orders, etc.). On the other hand, all domestic checks can be truncated and electronically deposited as a substitute check. The check-clearing process for substitute checks remains the same as it is today for traditional paper checks.

Volume and value of checks. While the quantity of checks deposited is important, it may not be the most significant consideration when evaluating the benefit of electronic deposit products. For example, if a company receives ten checks a day worth $15 each and they are not deposited for two days, there is little financial impact from a collected funds perspective. However, if those same ten checks were worth $150,000 each, those two days of lost float would be much more expensive.

Joe Schoder is vice president of treasury management technical sales for U.S. Bank, one of a few banks now offering electronic deposit products that combine check conversion and image-based deposit capabilities for lockbox, in-person payments, drop box and cash letters. Joe can be reached at: 612-303-7356.

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