Check Again and Again

T he recent Check Conversion GSQ issue and follow-up stories in the Green Sheet penned by Brandes Elitch and Patti Murphy on various NACHA meetings would seemingly have been exhaustive on the subject, so I must apologize in advance. But I feel compelled to comment on the recently released White Paper from NACHA entitled Administrative Returns: Issues and Proposed Solutions1.

While I am not going to try to cover the entire report - it is available to those who have an interest by simply contacting NACHA at (703) 561-1100 - I have had more than one copy of the report forwarded to me from various sources with notes and comments such as "You were right!" and "NACHA plans to shoot foot!" So I will take this opportunity to highlight some of the reported comments.

In the May 2001 GSQ, I noted, "It seems highly unlikely, at this point, that the scrubbing2 systems, along with MICR errors and consumer challenges to transactions at the payee bank, can be made to have essentially zero defects, or be made comparable to the paper system."

In fact, I have written many stories on this subject and have given numerous speeches, trying to make one simple point: "Check conversion at the point-of-sale using the MICR line will, under the best of circumstances, double or triple the retailer's check-loss problem."

My point is that, if we have a 1.3 percent net loss problem in unpaid checks in this country, universal electronic settlement of retail checks via the ACH system will double the problem, based solely on Administrative rejects.

Of course, throughout the last five years I have been shouted down by bankers, conversion experts, NACHA and, in particular, TeleCheck, all of whom have said that I overstated the complexity of the problem and that administrative returns are manageable.

The truth is that TeleCheck seems to be "managing" the problem by charging the retailer for the problems, which is, of course, simply confirming my point. When I opened my mail to the first copy of the White Paper, an industry member circled an opening statement from NACHA that said in part, "Administrative returns are occurring more frequently ." The handwritten comment above said, "An important point!" Another comment was "Duh!"

Regardless of the rationale, it is a frank and open statement of what was known by many and spoken about by very few. In fact, talking about the difficulty of using the MICR number for check settlement and the expected snowball effect of administrative returns on the ACH system with anyone inside the ACH world was like dancing about architecture. A complete disconnect!

The new NACHA White Paper opens with a introduction that says in part, "The traditional methods for correcting routing and account information in a recurring payment environment - such as prenotifications, notifications of change and even ACH Operator edits - are not suitable for non-recurring payments. As a result, new methods must be found to ensure that the routing and account information can be captured accurately from the MICR line of the check and used to convert or truncate the payment to an ACH item."

NACHA goes on to acknowledge, "Administrative returns occur when the RDFI routing number and/or account number printed in the check MICR line are not the actual routing number and/or account number in the records of the financial institution. While RDFI check-clearing systems - in-house or processor - are typically programmed to "translate" MICR data to the numbers on file, ACH systems often are not.

"The impact of administrative returns is twofold: Handling administrative returns can significantly increase collection costs to Originators and processing costs to ODFls and RDFIs; and returning an otherwise payable item can antagonize a customer whose paper check payment would have been honored but whose electronic payment was not."

This is clearly true and, as I noted in the May GSQ, "It remains to be seen, but perhaps it is possible, that the system can be improved to eliminate more of the 'Unable to Locate,' 'Invalid Account Number' and 'RDFI not Qualified' issues. However, the most significant problem numbers are the 'Not Authorized' and 'Authorization Revoked' categories."

According to NACHA's White Paper, administrative returns have varied from 1.7 percent to 6.5 percent of all items during the pilot-program periods. However, much more significant numbers are apparent when one considers all returns other than NSF and Stop Payment, which are the principal return reasons merchants get before the administrative return additions of conversion.

To punctuate this point, the new NACHA White Paper notes, "High Administrative return ratios can significantly increase the collection costs to Originators. Some Originators have reported that much of the economic benefit of check conversion or truncation to ACH is negated by the costs of handling Administrative returns."

While I will leave the interested reader to look into the ideas that NACHA's White Paper is suggesting to try to fix the problems with ACH mismatch scenarios, it should be enough to say that the paper quotes Thomson Financial Publishing, which estimates that there are approximately 15,000 account algorithms tied to 6,000 different routing numbers. That indicates that the account number in the MICR line must be reformatted.

Good Selling!^SM

Paul Green

1 Administrative Returns: Issues and Proposed Solutions, NACHA, Electronic Check Council, April 2001

2 A system to differentiate MICR numbers on consumer checks, which do represent the transit and routing number and the account number of the consumer's account, from those MICR lines which contain only correspondent clearing bank information. A system to create and maintain whatever alternate numbering system is necessary to get from the MICR line to the correct number that will find its way to the proper consumer's checking account. A system to identify all possible personal and business MICR formats, in order to permit a) the decline of all business formats, when appropriate, and b) the approval of only the MICR numbers that fit the personal formats, which are legitimate.