On March 16, food retailers will be able to start using a new mechanism for processing checks that promises greater efficiencies and cost savings than traditional methods.
Called back-office conversion, the new procedure allows retailers to gather all of their checks from the POS and other sources and feed them into a scanner/imager that electronically transmits consumer check data through the Automated Clearing House (ACH) network while capturing an image of each check.
The rule change that allows retailers to transmit check data electronically to the ACH via back-office conversion was approved last year by NACHA-The Electronic Payments Association, Herndon, Va., a not-for-profit association that represents more than 11,000 financial institutions.
Proponents of back-office conversion point to a number of benefits for retailers, such as simplified and consolidated check deposits, faster clearing, lower return fees and inexpensive ACH transactions (less than 5 cents per transaction).
“It takes the paper out of the equation by converting paper into an ACH transaction,” said Andrew Starinsky, national account executive, Check Again, Sterling, Va., at a presentation at the National Grocers Association's Annual Convention and Concept Show in Las Vegas earlier this year. “In the paper world, it can take several days for a check to [clear]. With ACH, checks clear in 24 to 48 hours. That has a significant impact on the bad guys.”
Back-office processing also allows images of checks not accepted by the ACH network — such as payroll checks and credit union checks — to be transmitted to banks directly under the Check Clearing for the 21st Century Act, or Check 21, signed into law in October 2004.
Most banks convert those check images back to a paper Image Replacement Document (IRD), which has the same legal effect as the original check, though processing of check images is expected to become commonplace over the next several years.
POP VS. BACK-OFFICE
Over the past few years, some retailers — notably Wal-Mart Stores — have used electronic check conversion at the checkout (known as POP conversion) via readers that capture MICR (magnetic ink character recognition) information from a check and transmit it to the ACH network. Paper checks are returned to the customer at the POS, and the customer must sign a receipt.
Back-office conversion proponents consider it to be a better way to access the ACH, and thus reduce check processing costs, than POP conversion. One notable difference is that back-office conversion requires one imager/scanner device at the POS, whereas POP requires a device at each checkout lane. Another is that back-office is managed by a cash-office manager, whereas POP is handled by cashiers, who must be trained in the process.
Binghamton Giant Markets, a 12-store food retailer based in Vestal, N.Y., is “thinking about” testing back-office conversion, said Frank Bucciarelli, director of IT. “The payback is dealing directly with banks instead of waiting three days on a deposit. It's basically a 24-hour return. That's the majority of the savings.”
Overall, Bucciarelli thinks back-office conversion will reduce check processing costs. “It's the way of the future,” he said. Starinsky noted that the Federal Reserve is raising the cost of handling paper checks, “forcing retailers to use some of this new technology.”
Supervalu has been testing back-office check processing under Check 21 at a Cub store in Minneapolis. The store has captured images of checks and sent them to Solutran, Minneapolis, a returned-check processor, which converts them into image replacement documents that are sent to banks.
The test was designed to prepare Supervalu to implement back-office conversion when it became approved. “We see a lot of benefits coming with [ACH] back-office conversion,” Jacki Snyder, Supervalu's director of electronic payments, said last year. “But we believe there will be a combination of ACH and Check 21 processing when all is said and done.” Supervalu declined to comment on its current plans for back-office conversion.
To meet NACHA's requirements for back-office conversion, retailers will have to place a “prominent and conspicuous notice at the POS,” said Starinsky. The notice would inform shoppers that the store does not deposit checks and that checks go through the ACH network. Shoppers have the option to have their checks processed in the traditional way. In addition, shoppers must be given a receipt to take home; no signature is required. Check images must be maintained for two years and paper checks must be held for up to 14 days.