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Who is NACHA and why are They Saying Those Things About Checks?

B y Brandes Elitch

A few weeks ago, I attended the NACHA Payments 2001 Conference in Washington, D.C. Why should this conference be of interest to the ISO community? The answer: The folks in NACHA-land are focused on changing the way that payments are made at the merchant level and, judging from the conference, a lot of money is being placed on their bets.

What is NACHA? It means National Automated Clearing House Association. Remember when direct deposit started, or you bought a life insurance policy and the agent told you that they were going to debit your checking account automatically instead of having you mail a check? Well, that's where NACHA stepped into the payment systems picture.

Checks and wire transfers already were regulated by the Uniform Commercial Code and decades of practice. The government delegated the responsibility for writing rules and procedures for electronic, paperless debits and credits to NACHA. Yes, I know you are thinking that wire transfers are electronic, but the difference is that NACHA was meant to address small- dollar payments where settlement did not occur until the next business day and the files were sent in batch.

This didn't catch on for a long time because NACHA required that files be sent in a standard file format and companies generally didn't have the capability of sending these files to their bank for processing. For example, when I worked at a large California bank, we would not even discuss ACH processing with a client unless they had a credit line and were relatively sophisticated.

In part, this is because when the bank sends a file debiting consumer accounts for one of their customers, if the customer takes the money and later files bankruptcy, the consumers might have the right to have those debits reversed and the originating bank would be out that money. The bank is in effect warranting the merchant.

This is a big risk to a bank, a risk that doesn't exist in the check or wire world. In fact, banks still haven't found a way to deal with it, which is why when you bring a check conversion company an account for POS check conversion, you might have to wait to get underwriting approval and might even be turned down!

Anyway, somewhere along the line, probably in the last couple of years, NACHA has expanded its scope. Not to put too fine a point on it, but they have decided to conquer the payments system. This might seem like an overly broad statement, but I don't think so.

There were 1,700 attendees at the conference, representing banks, processors, cash-management vendors, hardware and software manufacturers, product managers and sales organizations all trying to figure out how to make a buck in NACHA-land. The underlying theory is that clearing electronic items is somehow cheaper and faster than clearing a paper check and that the consumers will like it better.

However, while there are some situations where it is cheaper and some cases where it is faster to settle electronically, this is not the case for the vast majority of merchants. Stop and think about it: If you are a local merchant, almost all of your checks will be one-day items or less. Most ACH conversion vendors credit the merchant account in three business days. Most small merchants are not even on account analysis, and the large ones doing encoded item cashletters are paying around 5 cents per item. Conversion companies charge around 20 cents an item! Hello!

However, NACHA marches on, and it has an agenda. I won't even get into the B2B and P2P space (watch for a future article on these topics). But when you have this many folks thinking about how to "electronify" the check, things are bound to happen.

Here are some of my notes from the meeting. Keep in mind that as an ISO you are calling on merchants to discuss better, cheaper, faster ways to process payments (not just credit card payments!), and these merchants are being called on by vendors who are telling them that they really need to do check conversion. Here is some background information for you, in case your merchant asks you what is going on.

+ NACHA claims that 32 million items were converted last year. Compared to total check volume, this is a tiny fraction.

+ A study by eFunds Corp., released in March, profiled experience with ECC among 112 national retailers. The study showed that only 14 percent are currently using ECC. In that group, only 2 percent were actually pursuing ECC at this time. The study shows that 69 percent of customers viewed it very favorably, 56 percent of employees viewed it very favorably, and that half the employees took from one day to one week to train.

+ Most business-to-business payments are done by check. NACHA rules prohibit conversion of business checks because there are different time frames for returning commercial-to-consumer transactions. There is the question of how you determine that the person signing is authorized - i.e., on the signature card. Also, to whom do you return the check? This is a major issue. Most large corporations have positive pay and ACH blocks, and their banks have different silos for ACH and DDA. To complicate things, there is no way to identify a business check by looking at the MICR line. Even if NACHA changes its rules, these issues would not go away.

+ A NACHA study indicated that the largest single item in the cost equation when comparing paper and electronic items is the return-item fee. The study estimated that it is 33 cents cheaper with ACH. However, this is misleading because the ODFI or third-party originator can charge whatever it wants and even could charge more for an ACH return.

+ And there still is the old 3 percent administrative return issue, caused by MICR misreads, improper parsing and no common reference for MICR to ACH conversion. This is because it is not obvious which routing number to use, or how the account number structure works, or where to find the check number. There also are a number of non-participating financial institutions.

+ There also is the question of how to reach the consumer if you are just capturing the MICR line. Guarantee companies need the full name and address and driver's license number. The only way to get that is with a full image, which makes the start-up process even more expensive. This expense is simply too costly for the majority of merchants at this time. This might prove to be a major stumbling block because some retailers have concluded that the program will not work well without imaging.

There is major impetus coming from First Data and the ISOs. But there is very little impetus coming from the merchants or consumers, and that makes me wonder.

Brandes Elitch is National Accounts Manager for CrossCheck. E-mail him at brandese@cross-check.com