What would happen to your liquidity and working capital if many of the checks you wrote were presented for payment two days sooner? How about if your bank gave you a day’s better availability on many deposited checks? What would happen to your defenses against check fraud if your checks cleared as digital images instead of paper documents or if they were converted to ACH debits by the bank where they were deposited?
Despite the fact that most treasury departments have not yet been forced to contend with such challenges, these questions are far from hypothetical. Initiatives that would turn paper checks into electronic payments are coming–slower perhaps than hoped for by those who think it will revolutionize business, but faster than those sitting in corporate treasuries or even banks feel prepared for.
The numbers tell part of the story. Between 1995 and 2001, the volume of checks fell to 41.6 billion from 49.5 billion, according to NACHA–The Electronic Payments Association. Given the strength of the economy during most of those years, the drop is noteworthy. “Banks are definitely seeing the decline and can’t really explain it,” says Cathy Gregg, a partner at consulting firm Treasury Strategies. She notes that the government has been aggressive in reducing its check volume and to a lesser extent so have companies dealing with consumer transactions. “On the corporate side, however, there is a drop and that can only be from a combination of factors–accounting departments getting more efficient at combining invoices, use of p-cards, to name two,” Gregg says.
So Corporate America is moving toward being checkless, but through its own devices, rather than via the technologies that have treasuries sweating, such as “check truncation”–changing paper checks into digital images–and “check conversion”–changing disbursements into ACH debits. However, reducing check volumes in these cases, she points out, is merely a byproduct of efforts to become more efficient
Still, change is coming. The Federal Reserve, in its role as the dominant check processor, as well as the Treasury’s collecting arm are pushing to turn checks into electronic clearings. In February, the Fed announced that it will close 13 of its 39 check-processing facilities next year, upsetting the cash management strategies of some banks that had built operations centers next to these facilities. “If the Fed wants to be aggressive, it could increase check-clearing charges,” notes James S. Sagner, managing principal of Sagner/Marks in White Plains, N.Y. “However, both banks and companies are heavily invested in check disbursement infrastructure, so change will be resisted and will come slowly.”
For B-to-B, moving to checkless commerce is like global warming: It may be moving as slowly as a melting glacier, but it portends “an upheaval in the system” when it hits, according to bankers like Dan McCarty, senior vice president for treasury management services at Detroit-based Comerica Bank. It has implications for liquidity and working capital management and will most certainly demand revisions in fine-tuned corporate collecting and disbursing strategies. On the payment side, money will be siphoned off sooner; on the collection side, availability should be dramatically accelerated.
So what should treasuries be doing to prepare for the slow moving tidal wave? Companies that receive a lot of consumer checks should look into converting them to ACH debits at the retail lockbox, treasury consultants suggest. If the checks are local, there may be little gain. If they come from all over the country, the gain could be substantial. Corporate checks cannot be converted to ACHs at this time, but strategies to gain float that are based on check disbursements will have to be reconsidered in light of image truncation. Some companies will find that it’s better for them to originate ACH disbursements, these consultants note. And talk with your banks about getting better availability on collected items, they add.
Coming first will be the truncation of checks at the point of deposit by converting them to digital images and then clearing the images instead of the paper documents. Large cash management banks like Bank of America and J.P. Morgan Chase already are testing bilateral agreements to do just that.
But many banks are waiting for Congress to move on proposed legislation called the “Check Clearing in the 21st Century
Act,” or more commonly “Check 21.” This legislation, the original version of which was written by the Federal Reserve, is strongly supported by banking groups. It would give digital images the same legal status as paper checks. No votes have been taken yet, and consumer groups objected to a few provisions at hearings, but legislation watchers at the Association for Financial Professionals (AFP) rate passage by this Congress as “likely”–although that just means sometime before the end of 2004.
When check images are cleared, instead of the checks themselves, transportation delays vanish. If a check deposited on the West Coast is digitized and the image is transmitted electronically to the East Coast bank on which it is drawn within minutes, most clearing float can be eliminated, notes Tom Meiman, a vice president and collections and disbursement product line manager for Mellon Bank’s Global Cash Management division. “No planes have to fly,” he observes.
Living With Images
If Check 21 passes, banks will move to take advantage of the efficiencies of clearing digital images instead of paper checks, predicts Sandy Saxer, senior vice president for sales development at PNC Bank, Pittsburgh. “They’ve bought into image technology and like to use it,” he notes. But for truncation to pay off, “it would take a lot of scale,” he says.
Because images will still be processed as checks, core cash management services like account reconcilement and positive pay will not be disrupted, good news for treasury managers who rely on these services. But it’s bad news for those who use remote disbursement sites and capitalize on other inefficiencies in the check-clearing system to gain float.
The imminent truncation and clearing of check images already is causing a stir. “There is definitely a buzz about how check truncation could affect settlement timing,” reports Jeff Oleske, vice president in Citigroup’s global transaction services unit. “We’re getting a lot of questions. The changes eventually will accelerate the posting of payments to disbursement accounts by a day or two.”
On the collecting side, speedier settlement of truncated checks will reduce the need for working capital and improve the efficiency of receivables-based financing facilities, predicts veteran payments guru Richard J. Poje, head of R.J. Poje and Co. in Barrington, Ill.
Some companies will see greater gains in collection timing than others. You only win if you convert two-day availability checks to one-day checks or ACH transactions, notes Matthew Bauer, director of treasury consulting at Chicago-based CNA Financial Corp. “Our overall lockbox availability is 1.002 days, so I don’t see much benefit for us.”
But others will see definite improvement. A Citi pilot with one collections customer using image truncation of retail checks picked up float of nearly one day, reports Maria Mandler, head of Citigroup’s North American cash management products.
If banks can clear digitized checks sooner, will they revise their availability schedules to pass on the gains to their collecting customers? That may take arm-twisting. For years, some banks have used MICR-line data to speed up settlement and kept the float, says J. William Murray, president of the Murray Group in Baltimore.
Corporations will see a gain, insists Citi’s Oleske. “Treasury staffs are astute. Once they learn we’re collecting sooner, they’ll push for better availability.” But there could be a time lag before the benefits are passed on, he concedes.
Truncation and image clearing are not necessarily free from operational problems, however. Controlled disbursement depends on knowing all the checks that will be presented on a given day by around 10 a.m. Eastern time so that disbursing accounts can be funded at lower morning rates, Meiman notes. If truncated checks are transmitted throughout the day, controlled disbursement could suffer. One solution might be to impose a morning cutoff; checks presented after that time would be held until the next day, he explains.
Fraud Control Considerations
Next up is the more problematic prospect of converting corporate checks to ACH transactions at the point where they hit the lockbox. Since the check would die at the point of conversion and be processed from that point as an ACH debit, considerable disruption could occur, especially where companies have put debit blocks on their disbursing accounts. Corporate treasury managers and AFP protested vigorously when NACHA floated a proposal for converting corporate checks. For now the corporates have derailed the proposal. “It will take a lot of bridge-building to connect a bank’s check processing with its ACH processing,” observes Marcie Haitema, senior vice president for ACH and wholesale account services at J.P. Morgan Treasury Services. Converting corporate checks is “a very sensitive subject that is being actively discussed at the NACHA level,” she notes. “Any conversion plan needs to be well thought out and accompanied with the right tools so that corporations gain from the change.”
Fraud control is a big issue for ACH conversion. “We’re torn,” admits Donald L. Hollingsworth, assistant treasurer of electric utility Ameren Corp. in St. Louis and head of AFP’s payments advisory group. “We don’t want our checks to be converted for many reasons, especially fraud protection. However, we like it on the receiving side. We’ll do it some day, but not soon.”
Like many companies, Plano, Texas-based retailer JCPenney uses debit blocks on its own disbursing accounts that would reject an ACH. “It’s a good security feature that became available a few years ago. We don’t want to give that up,” says Frank Napoli, assistant treasurer.
On the other hand, converting checks to ACH brings some security benefits to receiving companies, Haitema notes: return items can be discovered and pursued much sooner. “You learn about an ACH return in one or two days; it can take anywhere from seven to 14 days to learn about a returned check,” she says.
No one claims that paper checks are efficient payment vehicles, but check inefficiencies have been effectively minimized by technology and years of processing practice, and check security and reporting services have become so fundamental to treasury operations that letting go scares cash managers. Nevertheless, electronification is coming and savvy treasury managers should push to preserve valuable tools and prepare for an era in which even corporate checks rarely make it past the point of deposit in paper form.