Ms. Donna Kotelnicki
Acting Director
Cash Management Policy and Planning Division
Financial Management Service
U.S. Department of the Treasury
Room 420
401 14th Street, S.W.
Washington, DC 20227

Re: 31 CFR Part 210
      Federal Government Participation in the Automated Clearing House
      Notice of proposed rulemaking

Dear Ms. Kotelnicki:

The Association for Financial Professionals (AFP) welcomes the opportunity to respond to the Financial Management Service's (FMS) request for comment on its proposal to revise Regulation 31 CFR Part 210 governing the use of the Automated Clearing House (ACH) system by Federal agencies.  Specifically, the proposed rule would govern the conversion of corporate checks to ACH debit entries at Federal agency points-of-purchase and at lockbox locations, as well as the origination by agencies of ACH debit entries authorized over the Internet.

Part 210 incorporates the ACH rules adopted by NACHA, with certain exceptions, and is amended periodically to address changes that NACHA makes to its rules.  As NACHA has also issued a request for comment on proposed rules for electronic check applications that are similar in intent to those proposed by FMS, this letter will address both proposals.

AFP represents approximately 14,000 finance and treasury professionals who, on behalf of over 5,000 corporations and other organizations, are significant participants in the payments system.  Organizations represented by its members are drawn generally from the Fortune 1,000 companies and the largest of the middle market companies.  Many of AFP's members have responsibility for the disbursement and receipt of check and ACH payments and for their organization's cash management operations.  They thus have a sizable stake in the adoption of policies that protect the efficiency and safety of payment systems.  In preparing our response to this request for comment, AFP held discussions with members of its Government Relations Committee and Payments Advisory Group, and conducted a survey of some 5,000 of its corporate members.

FMS and NACHA should withdraw their proposals because conversion of corporate checks to ACH debits would seriously disrupt cash management practices

AFP has long advocated and encouraged the migration from paper to electronic payments, which are safer, cost effective and more efficient.  We were leading advocates of the Electronic Federal Tax Payment System and worked with the Treasury Department to overcome the hurdles of implementing EFT 99.  If, however, the conversion to electronic payments causes serious disruption to cash management practices, substantial increases in time-consuming manual processing, and significant new exposure to fraud, the costs would outweigh the benefits to our members and AFP could not support such a move.

The proposals by FMS and NACHA to convert corporate checks to ACH debits at lockbox and points-of-purchase locations would have severe negative consequences for corporate cash management in the absence of two essential pre-conditions:

• 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
• Provisions requiring explicit authorization by companies whose checks are being converted to ACH debits.

These conditions do not exist today.  Therefore, AFP urges both the FMS and NACHA to withdraw their proposals.  We suggest that the efforts of the Treasury Department and NACHA would be more productively spent on encouraging banks and software providers to develop links between check and ACH systems on a priority basis and on breaking down the barriers to corporate use of ACH credits.

AFP members oppose the conversion of corporate checks to ACH debits

The findings of an AFP survey of our corporate members provide the basis for our position.  AFP conducted the Web-based survey of its corporate members in early July to learn their views on the conversion of corporate checks to ACH debits by billers who receive checks through the mail or at the point of sale. We received a high 16% response rate (782 respondents) and an unprecedented 17 pages of comments on how the proposal would impact payments functions.

An overwhelming 81 percent of respondents oppose the proposal to convert corporate checks to ACH debits.  Widespread corporate use of automated account reconciliation, positive pay and controlled disbursement services explains their opposition to the proposal and underlines the importance of linking check and ACH systems.

To protect against check fraud, 89 percent of respondents use banks' positive pay or reverse positive pay services for their disbursement accounts.  Banks that offer positive pay match a company's check issue file daily against checks received for payment; the company instructs the bank to pay or return non-matches.  In reverse positive pay, the company keeps the check issue file and matches it daily against a file of checks received from the bank; the company instructs the bank on how to handle non-matches.

To protect against unauthorized ACH debits, fifty-four percent of all respondents have either ACH debit blocks or ACH debit filters on their check disbursement accounts.  Thirty-seven percent of them use debit blocks, 29 percent use debit filters.

When asked about the impact of check conversion on their organization's disbursement procedures, the largest percentage of respondents (70 percent) said that the greatest impact would be felt if ACH debit amounts were not included in controlled disbursement totals.  Second in importance to respondents (65 percent) was the fact that outstanding checks would remain on account reconciliation or positive pay files.

However, if control and communication between check and ACH systems were to be established, a small majority favors check conversion to ACH.  Fifty-eight percent said they would support the proposal if their bank could link its check and ACH systems on a same-day basis.  However, a majority (52 percent) is against conversion if their only recourse was the return of an unauthorized ACH debit up to 15 business days after receiving it.

When asked whether their company would want to convert the corporate checks it receives to ACH debits, fifty-five percent of respondents answered "yes."  This apparent contradiction pinpoints another aspect of check conversion to ACH—its inequity.  The benefits of check conversion are much greater for the recipient of the check (the converter to ACH) than to the payer.  A number of respondents remarked that converting checks would be a benefit to them as receivers but would have a greater negative impact on their disbursement responsibilities; therefore they oppose it.

FMS and NACHA proposals would extend consumer check conversion to the corporate environment

NACHA rules currently permit only consumer checks to be converted to ACH debits at point-of-purchase locations. Consumer checks are also being converted at lockbox locations under a pilot program.  But both FMS and NACHA have stated that separating corporate checks from consumer checks is time-consuming and costly, and it reduces the efficiency of the check conversion process.  So both organizations propose to allow the conversion of corporate checks to ACH debits at point-of-purchase and lockbox locations.

Additionally, the NACHA proposal would permit the conversion to ACH of corporate checks that are dishonored for insufficient funds.  The FMS proposal would permit Federal agencies to originate ACH debits to corporate accounts when those entries are authorized over the Internet.

The FMS and NACHA proposals share some common elements and differ in others.  Following are key features of both proposals:

Authorization
Conversion at lockbox locations: Neither proposal would require billers to obtain specific authorization from payers to convert checks received to ACH debits.  If notice is given to the payer that a check sent to a lockbox will be converted, the check that is received will be converted.  There is no specific opt-in or opt-out required.  The recent Federal Reserve Official Staff Commentary to Regulation E sanctioned this "notice equals authorization" process for consumers.

Conversion at point-of-purchase locations: The FMS proposal would eliminate the NACHA requirement to obtain written authorization from customers before conversion at point-of-purchase locations; only signage and other types of notices would be needed.  The NACHA proposal retains the written authorization requirement.

Recognizing that ACH debits might be returned by an ACH debit block or filter placed on a corporate account, FMS proposes to generate and present a paper draft using the stored check image when ACH debits are returned.  NACHA does not propose this alternative.

Recredit
FMS proposes to use corporate ACH rules for point-of-purchase conversions and consumer recredit rules for lockbox conversions.  NACHA would apply consumer recredit rules to corporates in all applications.  NACHA's rules for consumers require financial institutions to recredit an account if the customer notifies its bank of an unauthorized debit within fifteen days after receiving the statement.  NACHA would require an ACH debit that does not match a check positive pay file to be returned by the opening of business on the second banking day after the settlement date.

Conversion restrictions
For all applications, NACHA would place a $50,000 limit on the amount of converted checks, to help manage risk and limit the conversion of large-value wholesale payments.  NACHA would also prohibit the conversion of specific types of checks, including third-party checks and checks drawn on federal, state or local governments. FMS does not impose these restrictions.

Corporate disbursement environment differs significantly from the consumer world

Differences between corporate and consumer disbursement environments are so substantial that comparisons are unrealistic.  In a corporate setting, check volumes can range from a few dozen to tens of thousands per month.  Reconciliation is automated, the containment of fraud is a major preoccupation, timely information is vital and control is essential.  The FMS and NACHA proposals acknowledge these differences but minimize their importance.

Recognizing that companies use positive pay services, NACHA advises banks that it would be desirable to build links between their ACH and positive pay systems.  Check serial numbers will be included in ACH records to assist banks in matching ACH debits with positive pay systems.  FMS also recognizes that its proposal will have an impact on positive pay.  But most banks do not link their check and ACH systems now.  The problems that would result are the most important but by no means the only factors that would cause widespread disruption in corporate treasury practices.

The impact of corporate check conversion on our members' cash management responsibilities are described below.  Remarks in quotes were written by survey respondents; other comments paraphrase member group discussions.

Positive pay, reconciliation, stop payment and controlled disbursement services will be significantly weakened

As the AFP survey showed, a majority of AFP members would support check conversion to ACH if banks, on a same-day basis, could link their ACH systems with check systems such as positive pay, account reconciliation, stop payment and controlled disbursement.  "If ACH debits could be handled by our banks as cleared checks, matched with positive pay, registered as cleared checks, and coordinated with controlled disbursement," commented a survey respondent, "I would support this."  Without that link…

Reconciliation becomes a "nightmare"

• "This change would seriously affect my organization's internal procedures…this would create manual procedures for a now automated process."
• "Reconciliation of bank accounts would become difficult and burdensome with paid items not dropping off the outstanding list."
• "We now pay the bank to auto reconcile our accounts based on the issue file.  Unless ACH can be specifically matched to the issue files, there is a huge reconcilement burden on our company."
• "Controlled disbursement, positive pay and automated account reconcilement services are critical for account security and productivity…The disbursement products currently offered by our banks do not support check conversion."

Exposure to fraud increases

• "Giving up the safety of positive pay leaves a big potential exposure to fraud."
• "Positive pay was designed to help with check fraud; converting these fraudulent checks to ACH has been a big problem."
• "We initiated debit blocks on our disbursement accounts after checks that we rejected as fraudulent on positive pay were then being presented as ACH debits and getting paid."
• "We have had fraud issues with unauthorized ACH debits on our disbursement accounts.  Allowing any ACH debits, even with a greater window for review, would cause an undue burden and increased FTEs to monitor disbursement accounts daily."
• Check copies or images are needed to research disputed claims for payment or to make pay/no pay decisions for positive pay or reverse positive pay services.
• "I put an ACH debit block on my controlled disbursement accounts because someone was forging checks on one of my accounts.  Positive pay stopped the checks from clearing, but a couple of retail firms converted the checks to ACHs and took the funds from my account.  We didn't even know about it until reconciling the accounts a few weeks later!"
• Because check stop payment systems are not linked to ACH systems, unauthorized debits may increase if businesses do not have ACH debit blocks or filters and/or their banks are unable to offer those services.

Investment and borrowing decisions are delayed

• Controlled disbursement totals and ACH debit totals may be reported separately.  Investment and borrowing decisions will be based on data that is more manual, less timely and less accurate.
• Controlled disbursement and ACH clearing totals may be reported in different formats with differing payment-related information.
• Controlled disbursement banks may use routing numbers not able to accept ACH entries, causing payments to reject.

Re-credit and rescission provisions will impair payment certainty and safety

• NACHA‘s proposed rule requires the return of most check conversion debits—including those that do not match a positive pay file—by the opening of business on the second banking day after settlement date, and the remainder within 15 days from the time the customer receives the statement.  This provision will significantly increase check issuers' exposure to fraud.  Without a link between ACH and check systems, two days—even 15 days—are insufficient for banks or corporates to match the ACH debit with issue files in positive pay, reverse positive pay, or corporate account reconciliation situations.
• "Returns need to be longer than 15 days because unauthorized debits may not be found until reconciliation of the account is completed."
• "The problem with only 15 days is that until we reconcile the account…we don't know if this is a check or not, because some checks clear without numbers or with different numbers.  The reason we have an ACH debit block is because ACH debits were being sent through our disbursement account just like any other check.  Until we were able to get a copy of it, we didn't know what it was for.  This took about 30 days to get corrected."
• The right of rescission is a risk to the payee.  It plays havoc with certainty of payment and increases exposure to fraud.

Debit blocks and filters and other ACH security measures will increase returns

• The number of returns will skyrocket because checks converted to ACH will hit debit blocks and filters, introducing new inefficiencies, delays and costs into the payments process and reducing the benefits of electronic payments.
• Bank fees will go up because of increased handling of ACH returns.
• To protect against ACH debits, companies may increase their use of ACH debit blocks and filters, use a disbursement bank that is not an ACH member or a bank with a transit/routing number that cannot accept ACH entries, further increasing ACH returns.
• "Assuming that our banks did have the ability to filter ACH debits based on company ID (which many don't), setting up and maintaining all of our vendors on an ACH debit filter would be inconceivable."
• Check payments delayed by ACH debit blocks may result in late payment penalties, an inability to take discounts, or the rejection of a contractually required payment that could potentially lead to litigation.

Conversions are not authorized when notice is given

The Regulation E Staff Commentary cited by the Treasury Department and NACHA to support their "notice equals authorization" procedure applies to consumers only, not to corporates, and does not appear to provide the regulatory basis for converting corporate checks without explicit authorization.

Treasury professionals responsible for payments policy are, in any case, not likely to see notices of intent to convert checks to ACH debits that are printed on invoices and would not be aware that notice was provided.

• Invoices are often sent not to treasury but to accounts payable departments, where clerical staff inputs data into computer systems for payments that are automatically generated.  The offices may even be in different geographic areas.
• If the notice is not seen by payments decision-makers, a company may face litigation or late payment penalties when payments are returned by ACH debit blocks or filters.
• "I think written permission ought to be required from payers to authorize debiting their accounts."

Payers lose control over payment method

A major reason for opposition to check conversion is the payer's loss of control over the payment mechanism, especially because conversion benefits the payee to the detriment of the paying company.  The payee gains the advantages of float and increased ability to predict cash flows, the payer loses both.

AFP's Survey on Electronic Payments Initiatives and the Internet, conducted in 2000, reported on our members' opposition to allowing ACH debits to corporate accounts by other businesses.  Only one-third of respondents said they currently permit businesses to debit their company's accounts via ACH.  Of those who did not permit ACH debits, over 80 percent said they are not likely to do so in the next two years.

• "Converting checks to ACH debits will significantly alter the cash flow of the company without the company's permission."
• "I generally believe it is a positive thing to convert checks to ACH.  However, I think it should be done by the payer, not forcefully by the payee."\
• "No one has the right to place an ACH debit against my firm's bank account without my firm's explicit approval."
• "I believe that payment method should be the decision of the payer not the payee.  Payment terms are negotiated based on…check float.  Payments received by ACH require agreement to grant additional days to pay.  I oppose the ability of a vendor to gain benefit at my expense without our consent."
• Because companies expect float on checks, ACH debits may reject because there are insufficient funds in the account.

Companies will be required to modify internal accounting systems

To accept ACH data instead of check data into accounts receivable and payable systems, companies will need to modify their accounting systems to accommodate different data formats.

• "I see this as a potential accounting nightmare.  Assume that a check is sent out and posted through the system all the way to the general ledger.  If companies are allowed to convert to ACH, I can see having to hire a full-time person just to monitor the system to void out the checks which have been replaced by ACH."
• "Banks would have to return checks paid by conversion to ACH debit to us in the same format as the electronic paid check files that are loaded into our recordkeeping systems.  Otherwise, the company would be required to incur major expenses to modify several systems…an unnecessary and burdensome expense."
• "We have already experienced check truncation by one of the vendors to whom we issue checks.  It creates a lot of complications with our internal systems.  Until all of these systems are in sync, we are opposed to conversion to ACH."

Implementation costs of the FMS and NACHA proposals will reduce benefits to check converters.

• In the point-of-purchase application, when ACH debits are blocked, FMS proposes to create paper drafts based on stored images.  This may significantly increase processing errors because the drafts would be manually encoded.  FMS will also need to manage two return systems, one for ACH and one for the paper drafts.
• For all applications, the NACHA proposal requires converters to outsort and reject checks over $50,000 as well as seven categories of checks that may not be used as source documents.  These exceptions reduce the efficiency and cost-effectiveness of the conversion process and may create as many problems as sorting corporate from consumer checks.
• For all applications, the NACHA proposal prohibits originators from key-entering MICR line data from the source document because of the potential for error.  In large-volume lockbox operations, key-entry operators frequently repair missing data from these fields because the machines do not read the documents with perfect accuracy.

AFP Recommends Withdrawal of the Corporate Check Conversion Proposal

AFP members strongly support the move from paper checks to electronic payments, even though they overwhelmingly oppose the FMS and NACHA proposals to convert corporate checks to ACH debits.  One comment by a respondent to the AFP survey summarizes the views of many: "My company generally supports all efforts to move from a paper-based system to an electronic process…yet [so that they do not] impact the processes currently in place for control, reconciliation and fraud reasons…The most important advancement in the immediate future is the integration of paper-based systems with the ACH network."  Another AFP member adds, "…It is imperative that [banks] link their paper and electronic systems.  We have reached a point in technology that the excuses of separate systems should no longer be acceptable."

AFP recommends that FMS and NACHA withdraw their proposals to convert corporate checks to ACH debits and direct their efforts instead to two areas that can lead to more promising outcomes for the future of electronic payments:

• Encourage financial institutions to integrate check and ACH systems so that both systems can communicate with positive pay, account reconciliation, stop payment, controlled disbursement and information reporting services;
• Break down the barriers to the use of ACH credits by participating in Federal government and private industry initiatives to promote the end-to-end electronic flow of payments and payment-related information.

AFP would be pleased to work with the U.S. Treasury Department, NACHA and the banking industry to achieve these goals.

AFP thanks the FMS for the opportunity to comment on this important issue.  Please call Arlene S. Chapman of AFP at 301.907.2862 if you have questions about the Association's position.

Sincerely,
 

CC:Richard L. Gregg, Commissioner, FMS
Donald V. Hammond, Under Secretary for Domestic Finance,
U.S. Department of the Treasury
Richard Oliver, First Vice President, Federal Reserve Bank of Atlanta
Louise L. Roseman, Director, Division of Reserve Bank Operations and Payment Systems, Board of Governors of the Federal Reserve System
Walt Henderson, Senior Financial Program Specialist, FMS
William Nelson, Executive Vice President, NACHA
Ian W. Macoy, Senior Director, NACHA|
Deborah Shaw, Senior Director, NACHA