ACH Check Clearing: Round 2

by Erin McCune on October 11, 2007

in Payments News

Yesterday American Banker assessed NACHA's Deposited Check Truncation (DCT) pilot scheduled to start 1st Quarter 2008. This is a second attempt to clear checks electronically over the ACH network as an alterative to image exchange. The previous attempt to clear checks via the ACH network sponsored by the Check ACH Coalition died early this year. The second version is scaled back, targeting only small dollar checks, and is governed by unique NACHA rules that have been developed to allow check law (Reg CC) to apply rather than Reg E which typically governs ACH transactions.

The movement to clear checks electronically via the ACH network is driven by large banks that have made significant investments in image technology but are limited to exchanging check images with other banks that have also made the investment. Many small banks have not invested in image, a vestige of the fact that the Check 21 legislation did not mandate image exchange, only made it possible. The ACH network reaches virtually all banks, thus clearing imaged checks via the ACH network would in effect open all bank endpoints for image check clearing. Pilot participants can opt to send and receive or just receive transactions.

According to NACHA the pilot objectives are to:

  • Determine whether the ACH Network infrastructure supports truncation of low-value consumer checks.
  • Measure the impact, costs and benefits of check truncation on Collecting Banks/ODFIs and Paying Banks/RDFIs related to: Check and ACH processing; Customer service operations; Float; Fraud and risk management; and Financial institution profitability.
  • Measure depositor and check-writer reaction to, and expectations of, electronic collection of truncated checks.
  • Identify issues and challenges to developing a full application, including determining whether financial institution participation should be opt-in, opt-out, or universal.

So far, Zions Bancorp (one of four major sponsors of the Check ACH Coalition) is the only participant, but NACHA anticpates a "rolling pilot" with more banks signing on over time.

The key challenges facing DCT are:

  1. How the receiving bank would obtain a copy of the original cehck image in order to resolve discrepancies
  2. How the courts will actually apply the law when disputes occur;
  3. How the payment will be referenced in customers monthly deposits (Zions claims that they will make every effort to include the Payee name on the transaction);
  4. Over time, the urgency and momentum behind ACH check clearing fades as more and more banks adopt image, thus increasing the number of image end points, and banks become more adept at handling IRDs.

Learn more about DCT:

NACHA Digital Check Truncation Pilot website

ACH Check Clearing Gets a New Life in Nacha Plan
American Banker
Wednesday, October 10, 2007
By Steve Bill

Learn more about the demise of the Check ACH Coalition:

Why Coalition Quit Check-ACH Project
American Banker
Thursday, February 1, 2007
By Steve Bills

ACH and Check Image Convergence—A Bridge Too Far
Digital Transactions News
February 2, 2007
by Steve Mott

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