Consumer Have More Protection with Check
Conversion, NACHA Reports to Congress
Herndon, Virginia, April 20, 2005
Accounts receivable check conversion is an example of a "win-win" innovation in which consumers have more protections and receive more information than when their checks are processed in a traditional manner, and businesses and financial institution can collect checks more cost-effectively, according to testimony submitted by NACHA – The Electronic Payments Association to the House Subcommittee on Financial Institutions and Consumer Credit.
With check conversion, "Consumers gain the protection of Regulation E and the NACHA Rules, which provide more protection than when checks are processed in the traditional way," said Elliott C. McEntee, President and Chief Executive Officer of NACHA, in his prepared testimony. "Check conversion preserves the choice for consumers who want to continue to pay their bills by check. Check conversion does not require consumers to do anything differently."
Accounts receivable check conversion (ARC) allows companies that receive consumers' checks at remittance and lockbox locations to convert them into electronic Automated Clearing House (ACH) payments, the same, safe electronic payments system used for Direct Deposit. ARC is used for consumer bill payments such as credit cards, mortgages, insurance premiums, and telecommunications and utility bills. NACHA recently reported that in 2004 there were 1.27 billion consumer checks converted into ARC payments, and that at its current growth rate may reach 2 billion payments in 2005.
McEntee noted that ARC payments are covered by both the Federal Reserve's Regulation E and the NACHA Rules. The NACHA Rules give consumers the right to have their accounts re-credited in the event of an error or an unauthorized transaction. In recent comment letters to the Federal Reserve, four leading consumer groups have endorsed the Regulation E and NACHA protections as clearer than those that exist for checks. (See Consumers Union et al letter to the Federal Reserve Board, July 7, 2004, at http://www.consumersunion.org/pub/core_financial_services/001264.html; and Consumers Union letter to the Federal Reserve Board, November 1, 2004, page 3, at http://www.federalreserve.gov/SECRS/2004/November/20041109/R-1210/R-1210_21_1.pdf.)
McEntee also noted that when checks are converted, consumers receive more detailed information on their monthly account statements, including the name of the company being paid. With more and more electronic payments replacing checks, such as Direct Deposit, debit cards, and various forms of electronic and online bill payment, consumers' monthly account statements are coming more and more to resemble credit card statements, where transactions are easier to identify.
McEntee reported the following data about the performance of ARC in the marketplace:
- The consumer opt-out rate is typically 0.1 – 0.25 percent. Opt-out is not provided for under Check 21 because several different parties have the ability to create a substitute check. This creates the possibility that a consumer may opt out of check conversion through the ACH Network, but nonetheless have their check converted under Check 21.
- In October and November 2004, a survey conducted for NACHA found that 69 percent of consumers surveyed responded that they are familiar with the check conversion process. The survey also found that 55 percent of consumers, when given an open-ended opportunity to say anything, had no concerns about check conversion. In the survey, no consumers volunteered that they were concerned about checks clearing more quickly.
- NACHA's data shows that the insufficient funds rate for check conversion payments is 0.3 percent – lower than that for checks – suggesting the check conversion is not causing more checks to bounce.
- The rate at which consumers claim that check conversion payments are unauthorized is 0.0045 percent, which is 45 out of every 1 million, showing that there is no significant problem with proper authorizations or with fraud.
- A recent survey of financial institutions conducted for NACHA found that only 1 out of 31 institutions surveyed responded that customer service issues as a result of check conversion were significant.
"Taken as a whole, this data is evidence that the implementation of check conversion in the marketplace has been smooth, that the application is high-quality, and that consumers generally accept it," said McEntee.
About NACHA - The Electronic Payments Association
NACHA is the leading organization in developing electronic solutions to improve the payments system. NACHA represents more than 11,000 financial institutions through direct memberships and a network of regional payments associations, and 650 organizations through its industry councils. NACHA develops operating rules and business practices for the Automated Clearing House (ACH) Network and for electronic payments in the areas of Internet commerce, electronic bill and invoice presentment and payment (EBPP, EIPP), e-checks, financial electronic data interchange (EDI), international payments, and electronic benefits transfer (EBT). Visit NACHA on the Internet at www.nacha.org.
