Up, Up and Away ... But How Far?

Rapid growth in the volume of accounts receivable entry (ARC) transactions is expected to continue throughout this year, largely fueled by declining check activity. But whether or not the pace of growth will continue beyond 2005 is less certain. The wild cards are Check 21 and check image exchange, which some analysts contend could emerge as an attractive alternative to ARC.

Framingham, Mass.-based Financial Insights predicts that ARC transactions will continue to grow but will begin to level off in the next couple of years, increasing from 1.3 billion in 2004 to 2.3 billion in 2005 and nearing a peak of 3 billion in 2006. The main factors in this performance, according to Financial Insights, will be declining check volumes and growing adoption of check image exchange. But a different forecast is offered by Needham, Mass.-based TowerGroup, which, citing skepticism about how quickly Check 21 will affect check volumes and ARC, expects ARC volume to grow to more than 4.5 billion transactions by 2007.

Because Check 21 enables banks to exchange image replacement documents (IRDs) rather than paper checks, the legislation promises efficiencies in check processing once banks have the necessary technology (see related article, page 28). This will take a few years, according to Aaron McPherson, research manager for payments at Financial Insights. But once the technology is in place, the use of IRDs will catch on quickly - replacing ARC transactions, he contends.

Debatable Advantages

According to McPherson, there are certain advantages that Check 21-related procedures offer over ARC. For example, Check 21 pertains to business and personal checks alike, whereas ARC is limited to personal checks, he notes. The exclusion of business checks has kept ARC from being adopted by more financial institutions, McPherson asserts. Since the exclusion doesn't apply to check image exchange, he expects it to eventually surpass ARC in terms of popularity among financial institutions and their customers.

Other industry experts, however, are not convinced that image exchange will catch on so quickly. Furthermore, NACHA (Herndon, Va.) is considering ARC procedures rules changes that would include some business checks - small business drafts that are no more detailed than personal checks (see related article, page 35). But up to this point, NACHA has been reluctant to change the ARC rules. A major reason for the reluctance is that corporate treasurers have been opposed to ARC. If corporate checks were subject to ARC, corporate disbursements wouldn't enjoy the same float as non-converted consumer checks, meaning a loss of cash flow for corporations.

In most instances, however, the speed of ARC transactions is viewed as a clear benefit. In addition to receiving deposits more quickly, the faster processing of electronic transactions also means that billers learn of rejections sooner, McPherson points out. While a rejection may be due to a legitimate problem, such as a transmission error when communicating the check information, it may also indicate fraud. "The creditor who's first in line has a better chance of getting paid," McPherson says.

In fact, fraud prevention considerations are among the prime factors fueling the popularity of ARC, suggests Elizabeth Robertson, senior analyst with TowerGroup. Another factor in ARC's rapid growth, she suggests, is the practice of notifying customers of their right to opt out rather than requiring written authorization. This practice takes the decision of whether or not to allow check conversion out of the hands of consumers and puts it into the hands of billers, Robertson notes.

Tier I banks are benefiting the most from the growth in ACH payments, according to Financial Insights' McPherson. These banks have the financial wherewithal to purchase technologies to convert checks to electronic payments, while many smaller banks are left with shrinking and increasingly unprofitable check processing businesses. Therefore, McPherson foresees many smaller banks outsourcing to companies such as Fiserv (Brookfield, Wis.), Jack Henry & Associates (Monett, Mo.) and Metavante (Milwaukee).