Finance firms fret over check clearing

Fear back-end systems won't be ready in time to comply with Treasury changes

A Treasury Department edict that will force banks to change their check-clearing processes a year ahead of schedule is causing a furor in the banking industry.

The Treasury's plan to convert all paper checks it receives into automated clearinghouse (ACH) electronic debit entries by early next year has some banks worried that their back-end systems won't be ready in time and that deviating from current rules will create opportunities for fraud on a massive scale.

Gary Grippo, chief architect of e-commerce at the financial management service of the Treasury, said the move from paper to electronic transactions will cut the government's vastly inconsistent check-processing times, which now range from three to 90 days, to one day.

The processing discrepancy is the result of the different ways in which the government receives checks, according to the Treasury. For example, park rangers collecting entry fees from tourists at national parks might wait weeks before depositing checks in a bank. Checks handed over the counter to Internal Revenue Service agents normally are processed in three days.

"We will definitely save on manpower with this process. Government agencies processing collections won't need to manually handle the checks and physically handle deposits," Grippo said. "And we'll have much richer information about the revenue stream into the government, which helps in cash forecasting."

The government's conversion to ACH, which will cost about $10 million, involves 3,000 to 5,000 new computer terminals and accompanying software.

The Treasury normally operates by the same ACH rules as the banking industry, which isn't planning to make the change until 2003.

Banks are worried that an earlier shift jeopardizes their ability to link ACH systems with paper check systems for tasks like stopping payments and reconciling accounts.

"How much time before they get integrated, I don't know. We're talking about major core processing changes," said Steven Schutze, director of e-strategies at the American Bankers Association (ABA) in Washington.

While the government conversion will affect all checks, consumer and corporate, the ABA said there is more risk with corporate checks because they are generally written for larger amounts and they are drawn on accounts that have higher balances.

However, Jim Van Dyke, a financial services analyst at Jupiter Media Metrix Inc. in New York, said he has heard corporate America's complaints about new government regulations before.

"I think what's very interesting is, whenever you're looking at government mandates on a massive scale forcing change, the industry resists because they don't like outsiders forcing them to do something," Van Dyke said. "They think that they're the best ones to decide the technology and the nature of change, even if the government can reduce cost and increase efficiency."

All banks have some electronic payment capabilities online now, Van Dyke said. "It's just a matter of moving closer to 100% of transactions done electronically," he added.

Patrick Frawley, senior vice president of regulatory relations at Charlotte, N.C.-based Bank of America, said in a comment letter to the Treasury that "at this time, corporate check conversion at the point of purchase is not feasible" because ACH debit filters and check-fraud protection "at the account holder's financial institution do not accommodate spontaneous conversion from check to ACH."

Schutze agreed. "Corporations tell banks things like, 'Here's all the checks I've issued, their serial numbers, the payee and the amount. If they don't match, then you know it could be fraudulent,' " he said. "Catches like that are not currently integrated into the processing of an ACH transaction," he added.

Donald Hollingsworth, assistant treasurer at St. Louis-based energy company Ameren Corp. and chairman of the Payment Advisory Group of the Bethesda, Md.-based Association of Financial Professionals Inc., said that at the very least, the Treasury needs to put in place security measures to combat fraud.

"If, for some reason, we don't want to convert to ACH—let's say we need proof of payment and definitely want that piece of paper—there's no way to opt out of this right now," Hollingsworth said.

Grippo said the government would be mindful of banks' concerns about cash flow and would ensure that protections against fraud are in place.

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Check-Processing Flap

What is ACH, and who uses it?

ACH is a secure payment-transfer system that connects all U.S. financial institutions. The ACH network acts as the central clearing facility for all electronic fund transfer transactions that occur nationwide. The four ACH operators are the American Clearing House Association, the Electronic Payments Network, the Federal Reserve System and VisaNet.

The ACH network serves 20,000 financial institutions, 2.5 million businesses and 100 million individuals. It is commonly used for direct deposit of paychecks and government benefits such as Social Security, direct payment of consumer bills, business-to-business payments, federal tax payments and, increasingly, e-commerce payments.

Pros and cons of moving to electronic debit entries through ACH in 2002


It would save on government manpower used to physically handle bank deposits and manually enter check information.

It would provide the government with more real-time information about its cash flow.

It would provide a more accessible picture of what kind of payments are being made to the government and who is making them.


Converting to ACH before banks are ready could leave them open to fraud because they would be unable to cross-check electronic debits against current paper-check accounting methods.

It would require costly back-end integration at banks, which wouldn't see any immediate cost benefits.

Copyright © 2001 IDG Communications, Inc.

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