Multi-Channel Processing

Today, Apr 2004 by Haitema, Marcie, Koenigsberg, Alan

An Integrated Approach to an Evolving World of Checks

One of the many hard lessons learned from the tragic events of September 11, 2001, was the importance of developing and implementing improvements to ensure the safety and security of the U.S. payments system. With the country's domestic air transportation system grounded for several days, a serious weakness in the paper-based check processing system was exposed, creating a potentially crippling set of circumstances. Since checks could not move, the system came to an abrupt halt, pointing out the need for a rapid conversion to electronic payments and image-based processing.

Because of these events, Congress moved swiftly to enact the legislation entitled "Check Clearing for the 21st Century Act", commonly referred to as "Check 21". And the promise of a more stable, orderly payments system through payment electronification is now being realized. While consumers still rely on original checks to make payments, the use of such paper items is in steady decline. It is expected that while 38 billion checks will be written in 2004, this number will shrink to 32 billion by 2010, according to Global Concepts and the Federal Reserve. This represents a decrease of between three and five percent per year. At the same time, physical check processing costs are increasing, amounting to nearly twice that of electronic payments. For billers, the opportunity to reduce costs and increase efficiencies in the accounts receivables process is clear.

A MULTI-CHANNEL SOLUTION

With the continued growth of check conversion performed at the remittance center, known as Account Receivable Entry (ARC), and the emergence of check image-based processing in response to the Check 21 legislation, the choices available to company cash managers are rapidly expanding. So, as the payment and processing landscape continues to evolve, billers will increasingly need to renovate their payment processing. And, as a result, competition among financial institutions offering innovative ways to process payments will intensify. A financial institution that provides a multi-channel solution - and can provide answers on when best to employ the channels to automate and optimize the payment process - will emerge as the provider of choice for clients.

Billing companies and their cash managers must consider a host of factors in determining which payment processing channel to choose. Only by analyzing the underlying business processes, their customer base, strategic objectives, risk factors, and operational systems can a company begin to judge which channels, and scenarios will yield the successful results they seek. Accordingly, billers will look to financial institutions with a flexible infrastructure offering a full range of truncation, conversion, and other processing options to ensure they implement the best possible solutions for each area of their business.

Companies choosing to move in this direction need to consider their financial institution alliances carefully. For Cingular Wireless, who began roll out of an ARC payment solution in August 2003, their choice of providers was critical to their success. "In selecting partners for Cingular's ARC program, we looked to a provider with a variety of payment products and NACHA, the Electronic Payments Association, there were 160 million ARC entries originated in 2003, up more than 827 percent during the same period in 2002.

And, with NACHA's new rules governing ARC transactions, which were amended in March 2003, there exists an even greater opportunity for high-volume billers to capitalize on the benefits of check conversion. Now, more than 50 percent of all consumer check payments may be converted, including remittances and point-of-sale payments. Check conversion continues to be widely adopted by billing companies, as evidenced by soaring double digit growth statistics. Even with the introduction of image-based check processing, ACH volumes are expanding at nearly 12 percent annually. Having originated more than 1 billion ACH items, JPMorgan Treasury Services, the e-check leader, believes check conversion is here to stay. According to Global Concepts, it is expected that ARC entries options, which ultimately made the process of moving to an automated payment system that much easier for us," explained Renee Caldwell, Director of Cash Management at Cingular Wireless. (See sidebar, page 23.)

ARC IS HERE TO STAY

The old adage, "The only certainty in business is change", is true. And nowhere is this more apparent than in the world of electronic payments processing. Currently, ARC entries, which allow consumer check payments to be sent to a lockbox or dropbox location where they are converted into an Automated Clearing House (ACH) electronic debit, are the fastest growing segment of the ACH network. According to will account for 55 percent of all remittance processing in the United States by 2007 according to Global Concepts.

The three core advantages to billers utilizing ACH processing are reduced operating costs, better risk management and reduced treasury fees. The average lockbox processing cost for a retail check item is between 14 and 20 cents, as compared to two cents for a similar ACH item. Clearly, the cost savings of electronic processing cannot be ignored.