Financial Update (Fourth Quarter 2006)
Point of Purchase
The volume of electronic check conversion transactions handled by the Federal Reserve’s Automated Clearinghouse (ACH) network continued to grow rapidly during the first nine months of 2006. A merchant creates an electronic check, or e-check, by capturing information from a paper check and sending the information through the ACH network as an electronic debit.
Most of the e-check category’s growth in the past year is in point-of-purchase (POP) conversions. This particular e-check application is most commonly employed at merchants for in-person purchase of goods or services by consumers or businesses. A POP is a single-entry debit to a consumer or business account. In a POP conversion, the physical check is returned to the consumer at the point of sale, and the information from the check is presented electronically.
From January through September 2006, the overall volume of e-checks processed through the Fed’s ACH network increased 25 percent over the same period in 2005. For POP conversions, there was a much larger increase, 50 percent, in the first nine months of 2006 compared with the same period of 2005, said Stan Stavro, Central FedACH’s financial services director.
Emergence of back office conversion in 2007
A new e-check application, back office conversion (BOC), is scheduled for implementation in March 2007. A change in the ACH rules will allow merchants to convert paper checks into electronic debits elsewhere than at the point of purchase, meaning customers won’t get their paper checks returned to them.
Consumers’ e-checks are subject to Regulation E, which implements the Electronic Fund Transfers Act. That act provides a basic framework for establishing the rights, liabilities, and responsibilities of participants in electronic fund transfer systems. The Federal Reserve recently amended Regulation E to provide for new consumer disclosures regarding e-check conversions.
In conformance with the new requirements of Regulation E, the National Automated Clearinghouse Association (NACHA), which develops rules governing the ACH network, mandates that customers be properly notified that their checks may be converted, that customer service contact information will be provided, and that customers can opt out of e-check conversion.
Will BOC become BMOC?
Could the emergence of BOC impede the current growth of POP? Some large retailers see BOC as a more efficient and cost-effective application than POP. For example, while POP requires special equipment at each cash register, BOC will only require one scanner at a remote location. Furthermore, the average transaction time for a BOC conversion will be less than for POP, which requires the customer’s written authorization at the point of sale.
Stavro said some foresee POP remaining relatively robust going forward as many retailers have already invested in the necessary equipment to support this application. However, the emergence of BOC gives rise to speculation that this new application will experience the most significant growth in the future due to the reduction of costs and inherent operational efficiencies it affords merchants.