J.P. Morgan Reaps a Windfall from Lockbox Check Conversion

The recent surge in transactions in the category of electronic checks called accounts-receivable conversion (ARC) comes as no surprise to the banks that are playing a major role in moving utilities, insurers, retailers, credit card companies, and other major consumer billers from paper checks to electronic transactions on the automated clearing house. J.P. Morgan Chase & Co., one of the largest originators of ARC transactions in the country, says without revealing numbers that its volume is increasing at a rate that is even faster than that of the industry as a whole. Alan Koenigsberg, vice president and senior product manager for global ACH at J.P. Morgan Treasury Services, attributes the explosive growth in ARC to the fact that, unlike the three other major forms of e-check, ARC doesn't require consumer authorization with each transaction. Rather, it follows what NACHA calls a “notice equals authorization” standard whereby authorization stems from periodic notice to consumers. “This is different,” he says. “The check is received at the lockbox and looked at as a payment advice. That's why you're seeing such huge growth.” RCK, or electronic representment of returned checks, also follows the “notice” standard but its share of all e-check volume has leveled off at only about 1%. Companies using ARC get next-day funds availability and reduce the time on returned checks to two business days from as many as eight, Koenigsberg says. At the same time, ACH processing costs about 2 cents per item, compared to the 14 to 20 cents it costs to process a retail check in a lockbox. As a result, billers are responding by initiating and expanding ARC programs. One J.P. Morgan client, says Koenigsberg, is now converting 160 million payments annually through ARC. “When you begin to convert [at that volume], it's very powerful,” he says. Helping to fuel the trend, too, he adds, is that software that manages lockbox conversion is rapidly falling in price. “As the technology becomes more mature, the barriers to entry aren't there,” he notes. The software cost is borne by banks and by billers that maintain their own network of lockboxes. The National Automated Clearing House Association last week announced the ARC e-check category had grown nearly tenfold in transaction volume from the second quarter of 2003 to same period this year, reaching 208.8 million transactions in the April through June period. ARC now accounts for 44% of electronic check transactions, more than any other form of e-check (Digital Transactions News, July 12). Between them, ARC and WEB (payments on the Internet) transactions now account for 80% of all e-check volume. Introduced as a standard entry code by NACHA in March 2002, ARC refers to the conversion into an electronic ACH format of paper checks sent by consumers to companies' lockboxes to pay bills. One drawback to ARC is that only checks drawn on consumer demand-deposit accounts are eligible under NACHA rules for conversion, ruling out corporate checks as well as balance-transfer and brokerage checks. Although consumer authorization is not required for ARC, billers must inform consumers each month that they are converting checks, a requirement most companies fulfill on monthly statements. And, under a rule that went into effect last month, billers must allow consumers to opt out of the ARC process if they so request. NACHA says most billers offered an opt out even before the rule went into effect, and Koenigsberg at Chase says the rate of opt out among consumers served by his clients has run about one-half of 1%.