Mr. William Colbert, AAP
Network Services Manager
NACHA
13665 Dulles Technology Drive
Suite 300
Herndon, VA 20171

Re: Request for Comment on Corporate Check Conversion/Truncation

Dear Mr. Colbert:

The Association for Financial Professionals (AFP) is pleased to respond to NACHA's Request for Comment on a proposed amendment to the NACHA Operating Rules related to the conversion of business checks to ACH debits.  The amendment would permit the conversion of business checks to ACH debits when they are received at lockbox locations and at points of purchase, and when they are returned for insufficient funds.  There would be two exceptions.  Business checks that contain an auxiliary on-us field in the MICR line and checks that are greater than $25,000 would not be eligible for conversion.

For those checks that are converted to ACH debits, the NACHA proposal provides for:

• "The same right of recredit for the Receiver and 60-day return time frame currently associated with unauthorized/improper consumer…entries."
• Retention by the Originator of the ACH debit of a copy of the front of the converted check for two years from settlement date.
• Printing by the Receiver's bank of the converted check's serial number on the Receiver's bank statement.

Proposed implementation date of the new amendment would be September 12, 2003.

AFP supports the migration from checks to electronic payments.  With regard to corporate check conversion to ACH debits, however, AFP has stated in the past that we favor an opt in mechanism that would enable payers to retain control over payments by explicitly authorizing the conversion of their checks.  The NACHA proposal provides for an opt out mechanism.  In addition, this approach raises implementation issues that are described in this comment letter and that AFP urges NACHA to recognize and address.

NACHA's 2001 Corporate Check Conversion Proposal

NACHA originally issued a proposal to convert corporate checks to ACH debits in June 2001.  In its response to NACHA's request for comment on that rules change, AFP urged NACHA to withdraw its proposal because conversion of corporate checks would seriously disrupt corporate cash management practices.  AFP pointed out that two critical steps must precede adoption of any rule allowing corporate check conversion:

• The widespread ability of banks to link their check and ACH systems on a same-day basis so that information can be communicated between them, and
• A provision requiring explicit authorization by companies permitting their checks to be converted to ACH debits.

AFP's opposition to corporate check conversion was based on a July 2001 survey of its corporate members, which revealed that 81 percent of respondents opposed the proposal.  Members stated that check conversion to ACH debits would:

• Circumvent positive pay controls and increase their companies' exposure to fraud,
• Create a "reconciliation nightmare" by requiring manual procedures in place of automated account reconciliation,
• Cause payments to be returned by ACH debit blocks and filters, which the majority of respondents employ, and
• Weaken controlled disbursement.   

Members commented that "payment method should be the decision of the payer not the payee," and that companies must be able to retain control over their payments by specifically opting in to check conversion.

NACHA did not approve corporate check conversion in 2001, but decided to continue researching the issue prior to making changes to its Operating Rules.

Corporate Check Conversion Proposal, November 2002

The revised corporate check conversion rules proposed by NACHA in November 2002 would allow the electronic conversion of corporate checks that do not contain an auxiliary on-us field in the MICR line.  According to NACHA, "any business may choose to ‘opt out' of truncation/conversion activity by printing an auxiliary on-us field in the MICR line of its checks.  MICR readers will be able to edit for items that contain information in the auxiliary on-us field and reject those items from conversion/truncation ...Checks bearing an auxiliary on-us field in the MICR line must be longer than six inches in length (the length of standard consumer checks)." 

AFP Survey on Corporate Check Conversion to ACH

To prepare its response to NACHA's revised request for comment on corporate check conversion, the proposed opt out method, and the rules governing checks that are converted, AFP conducted a second survey of its corporate members in December 2002-January 2003.  The survey asked about members' views from the perspectives of both corporate disbursement and corporate collection. For easy identification by respondents, the survey instrument included a sample check identifying the auxiliary on-us field in the MICR line, which frequently contains the check serial number.  AFP received a 13% response rate (462 responses), accompanied by nine pages of comments on the impact that conversion of checks to ACH debits would have on corporate control of payments.

Impact on Corporate Disbursement: Key Findings

• The overwhelming majority of respondents would not permit their corporate checks to be converted to ACH debits.  The inability of positive pay fraud controls to guard against ACH fraud continues to be a major problem. The difficulty of reconciling checks issued with ACH debits received is a costly, manual burden.  Moreover, payees who convert checks to ACH debits take control of the payment process away from payers. As one respondent commented: "If my company wants to pay its suppliers electronically, then that should be my company's call, not the suppliers."
• An extensive educational campaign would be necessary to raise awareness of the auxiliary on-us field in the check MICR line and to clarify its use as an opt out mechanism.  A significant percentage of respondents who do not want their checks converted said that their checks did not have an auxiliary on-us field or did not know if their checks have this field.
• Respondent comments revealed widespread uncertainty about how the auxiliary on-us field would work as an opt out mechanism. In view of the NACHA rule that "notice (to the paying company) equals authorization (for the payee to convert checks to ACH debits)," customer education in advance of implementation is critical.
• The companies that agree to the conversion of their corporate checks would, in most cases, be prevented from doing so by the existence of the auxiliary on-us field on their checks.

The Auxiliary On-Us Field as an Opt Out Mechanism

Seventy-nine percent of survey respondents said that their company would not permit its checks to be converted to ACH debits.  In their comments, many reported placing ACH debit blocks and filters on their disbursement accounts after experiencing fraud when checks rejected by positive pay were converted to ACH debits.

However, 21 percent of respondents said they would permit their checks to be converted.  Support for conversion is more likely among relatively smaller companies.

The NACHA proposal would not convert corporate checks with an auxiliary on-us field in the MICR line. This field generally contains the check serial number.  Checks that use this field are greater than six inches in length.  AFP's survey asked about both the size of corporate checks and the existence of the auxiliary on-us field.

Eighty-six percent of respondents reported that their company's checks are greater than six inches. 

However, there is considerable uncertainty about whether corporate checks use the auxiliary on-us field. Only 57 percent reported that their company's checks have an auxiliary on-us field.  The remaining respondents either said that their checks did not have an auxiliary on-us field (22 percent) or did not know if their checks had this field (20 percent).

Moreover, companies in certain industries -- for example, mutual fund and brokerage companies -- whose regular corporate checks are likely to be greater than six inches -- frequently issue to their consumer customers six inch checks that draw funds from an omnibus corporate account.  An opt out through the auxiliary on-us field would not be available for these checks under the proposal.  When such checks are converted and ultimately debit the consumer's asset-based account with the company, the company is subject to the Electronic Funds Transfer Act and Regulation E.  These federal rules require the company to provide initial disclosures and specific information on periodic statements that the company's systems are unlikely to be able to provide.

Companies Wanting to Opt Out

The auxiliary on-us field works as an opt-out mechanism for the majority of companies that report having that field on their checks.  Eighty-two percent of respondents whose checks have an auxiliary on-us field said that they do not want their checks converted to ACH debits.

Among respondents who want to opt out but whose checks do not have an auxiliary on-us field or who do not know if they do, 46 percent said that they would change their checks and print an auxiliary on-us field in order to opt out.  However, 54 percent said their company wants another way to opt out of check conversion.

Companies Agreeing to Conversion

Many companies that agree to conversion of their checks to ACH debits will not be able to have their checks converted because of the proposed opt out mechanism.  Eighty-one percent of these respondents said they have checks greater than six inches, and 52 percent have checks with an auxiliary on-us field.  In order for these companies to have their checks converted, they would need an alternative opt in mechanism

$25,000 Dollar Limit on Check Conversion

NACHA's proposed rule states that corporate checks greater than $25,000 would not be eligible for conversion to ACH debits.  This exemption would not stop the conversion of the majority of corporate checks.  Seventy percent of respondents report that at most 25 percent of checks issued by their companies are greater than $25,000.

Rules Governing Corporate Checks Converted to ACH Debits

If corporate checks that do not have an auxiliary on-us field are converted to ACH debits, NACHA's proposal provides for "the same right of recredit for the Receiver and 60-day return time frame currently associated with unauthorized/improper consumer…entries."

When asked whether 60 days is enough time to identify and return unauthorized or erroneous ACH debits and ACH debits for stopped checks, almost two-thirds of respondents said yes, but a significant minority (37 percent) said that 60 days is insufficient for reconciliation and research.

NACHA's current rules relating to recredit and return of unauthorized/erroneous ACH debits are confusing and unclear, leading to uncertainty about the rights and responsibilities of corporate receivers of ACH debits. The rules do not, in fact, provide for recrediting the account of a receiver of unauthorized/erroneous ACH debits within 60 days of settlement date of the original entry. A company that receives unauthorized ACH debits is entitled to immediate credit for such entries only if it makes that request to its bank in writing within fifteen days after receiving information about those entries. If the company receives a daily balance and transaction report from its bank, the company would only have fifteen days to report the error and receive immediate credit. The bank has up to 60 days to return the item to the bank that originated the debit. After the 15^th day and before the 60^th day, the company can ask its bank to return the debit and recredit its account, but the bank is under no obligation to recredit the account.

Check Serial Number on the Bank Statement

If corporate checks that do not have an auxiliary on-us field are converted to ACH debits, the NACHA proposal would require the company's bank to print the check serial number and the name of the payee, as well as the dollar amount, on its bank statement. Most of the survey respondents reported that this information would be useful for reconciliation.

However, the major cause of the check-to-ACH reconciliation problem is the differing formats of ACH debit files and check issuance files. As one respondent commented, "providing the data on the bank statement is not all that helpful.  Most corporations receive paid item files from the bank to load into their accounts payable systems. With ACH debits, the data must also be received on the daily paid items file."

Retention of Check Copies

If corporate checks that do not have an auxiliary on-us field are converted to ACH debits, the company converting the checks would have to keep a copy of the front of the checks for two years.  The proposed rules change would no longer require retention of a copy of the back of the check.

AFP members were asked whether information on the front of the check would be sufficient for corporate research.  Over two-thirds of respondents said no, information from the back of the check is also needed. 

For example, respondents reported that they need the back of the check because the bank requires "back and front copies of any check where we suspect fraud," or to resolve disputes, or because the "checks contain legally binding contractual language on the back, which the endorser agrees to."  Image archive and retrieval of checks by the payer would be difficult when the payee retains the check copies.

Implementation Date

NACHA proposes to permit corporate check conversion to ACH debits beginning on September 15, 2003.  Forty-seven percent of those who have to make changes to their company's checks want another six to twelve months to make those changes.

Opinion on Conversion if Banks Link Check and ACH Systems

Only 37 percent of respondents would allow their checks to be converted to ACH debits if banks could link their check and ACH systems on a same-day basis. This is a significant decrease in support from the 58 percent in AFP's 2001 survey who said that they supported conversion if check and ACH systems were linked.  Respondent concern about "ever increasing ACH debit fraud" may account for the increased opposition.

Impact on Corporate Collections: Key Findings

From the check collector's perspective, opinions on corporate check conversion to ACH are considerably more favorable. This apparent contradiction illustrates another aspect of conversion to ACH debits: the benefits are much greater for the company that converts the check than for the paying company. The payer loses control over the payment process, the payee gains control and the resulting benefits of reduced cost and increased efficiency.

A significant majority of respondents would want to convert to ACH debits the corporate checks their company receives at lockbox locations (64 percent) and checks returned for insufficient funds (71 percent). Only 43 percent of respondents would convert checks received at point of purchase, likely a result of the smaller percentage of respondents that have point of purchase locations.

Conversion rules

Most respondents (81 percent) that want to convert corporate checks to ACH debits agree with the provision to exempt checks with an auxiliary on-us field in the MICR line and checks greater than $25,000. By a slightly smaller percentage (76 percent), they agree with the rule allowing 60 days for companies whose checks are converted to return unauthorized ACH debits.

AFP Recommendations

AFP favors an opt in mechanism to corporate check conversion to ACH debits that would enable payers to retain control over payments by explicitly authorizing the conversion of their checks.

AFP recognizes that NACHA believes it is offering companies that do not want their checks converted to ACH a means to opt out of conversion by printing an auxiliary on-us field in the MICR line of their checks. However, AFP's survey revealed widespread lack of knowledge and uncertainty about the existence and function of the auxiliary on-us field and its use as a barrier against check conversion.  On the other hand, the auxiliary on-us field also prevents the companies that support check conversion from having their checks converted.

• If NACHA proceeds with its proposal to convert corporate checks, AFP recommends that implementation of the rule change be postponed until March 2004.  This delay would give companies time to learn how to opt out of conversion and place ACH debit blocks or filters on their disbursement accounts to avoid disruption in their cash management practices and a potential increase in fraud.
• AFP recommends that a wide-ranging corporate education campaign be conducted by NACHA and the companies that intend to convert their customers' checks to ACH debits to advise and inform companies about this opt out mechanism before it is implemented. 
• The delay would also afford NACHA and the companies that want to convert checks an opportunity to research other mechanisms that would enable companies that agree to conversion to permit their checks to be converted.
• AFP recommends that NACHA re-write and clarify the rules relating to recredit and return of unauthorized/erroneous ACH debits.
• AFP recommends that there be no change in the check retention rule, and that companies converting checks to ACH debits be required to retain copies of the front and back of converted checks.
• AFP also recommends that fines be implemented to penalize billers that improperly convert corporate checks.

AFP has long advocated and encouraged the migration from paper to electronic payments. AFP recommends that the efforts of the financial and corporate communities to achieve that objective be focused on breaking down the two major barriers to electronic payments:

• Lack of integration between electronic payments data and corporate accounting systems.
• Inability of banks to link their check and ACH systems.

Thank you for the opportunity to comment on the NACHA proposal.

Sincerely,