Raiders of the Lockbox ARC

With an eye to both service and efficiency considerations, Bank of America's Global Treasury Services division has begun to offer accounts receivable conversion, or ARC, services to corporate customers.

Somewhere between the corporate clients that still depend on paper payments and the technology-savvy companies on the electronic leading edge, there's the muddle in the middle. The typical enterprise has a combination of electronic and paper processes that banks have to accommodate as best they can.

Bank of America, for its part, stands ready to meet the full range of conceivable payments needs. "We handle any kind of treasury product associated with incoming payments for corporations," said Peter D. Wheeler, senior vice president, receipts product management, for Bank of America. "We try to drive all of our products along a continuum and fill in the gaps."

In that respect, ARC plays an important role. Ever since last year's NACHA rule change permitted lockbox providers to create automated clearinghouse (ACH) payments from consumer checks, banks have had an opportunity to help their corporate customers lower the cost of processing paper.

Handling Exceptions

Bank of America relies upon software from Atlanta-based CheckFree Corp. to power its ACH conversion offering, as well as MICR parsing technology from LML Payments, based in Orlando, Fla. According to Wheeler, CheckFree has developed software that helps the bank handle a wide range of exception items.

To be sure, there are always exceptions. Several kinds of paper documents cannot be converted into an ACH transaction, including corporate checks and money orders. Although there have been industry discussions over whether it might be possible in the future to convert corporate checks to ACH transactions, at the moment the prospects look rather dim.

Conversion Rate Questions

Accordingly, companies that have established paper-in, paper-out processes have to consider whether it's worthwhile to move to a hybrid system that includes both paper and digital images. "When a large biller goes out there to build a business case, to decide whether they want to pursue ARC as an option, the key question is what kind of conversion rate you are going to get," said Wheeler. "Chances are, you're not going to get 100 percent conversion."

Knowing this, companies often seem reticent to take the ARC plunge without a bit of coaxing. By back-testing sample payments data, the bank can provide estimates of actual conversion rates. "That allows the biller to go back and really flesh out a more specific business case," said Wheeler. "If you're a client or a prospect and you're trying to build your business case and estimate what your conversion rate is going to be, we can help to do that without installing the system and running it."

Several factors help determine the success of an ARC program. For one, there's the law of big numbers. "The more consumers you have, the better the conversion rate," said Wheeler. That's because the large-volume billers, such as utilities, typically serve a greater proportion of mass-market consumers whose checks can be converted at the lockbox under existing NACHA rules.

Still, many other lower-volume businesses serve mostly consumers, and may provide fruitful ground for ACH conversion efforts. For example, property management companies that want to convert rent checks would be in an excellent position to take advantage of this type of automated offering. "There's a lot of noise out there in the real estate market about wanting to utilize that capability," according to Wheeler.

After considering the composition of a company's customer base, it mainly comes down to the quality of the conversion methodology. Numerous things can go wrong during an ACH conversion, and unfortunately, not all of those exception items can be detected. Often, it's the receiving bank that raises the alarm. "When you do a conversion to an ARC item, you now introduce a new set of return reasons-in a blanket form called 'administrative returns'," said Wheeler.

Thus, effective processing calls for software that includes an experience curve. "A lot of it really comes down to what your feedback loop is," said Wheeler. "Every transaction that I process, I can learn from. If I don't, I'm bound to make those mistakes over and over again."