Checks

Obeying (some of) The Rules (US Check Printing)

On February 9, 2010, In Checks, By Craig Jeffery

We recently switched payroll services – within the same payroll firm. The move was to the fully online version simply to make life even easier on many fronts (no more downloading updates to tax rate tables and forms – even though it was automatic). No more software updates and challenges if someone else was running payroll. We removed those extra steps that can be avoided with a SaaS (software as a Service) model. In fulfillment of the principles of unintended consequences, we found we needed to get new check stock to print checks for when checks (and not direct deposit) are required.

This was interesting. Since we provided all of the bank information and gave them a starting check number, imagine our surprise to get the special check stock which was blank. Interesting…why did we need their check stock – besides to generate an excessive fee?

In running payroll our accountant was meticulous in following the rules they list to setup the check run. A severe warning to the affect “you must follow these rules or you are breaking the law”. The rules focused solely on alignment issues.

Exactly how far over the bank number must be from the right side of the check.
Exactly how far above the perforation should the MICR line information be printed.

The process was simple and it proved to be quite easy to align the checks according to the instructions. However, there was NOTHING in any of their instructions to indicate that there might be problems caused by printing everything with regular ink. The MICR line (the bottom of the check) is supposed to be used for Magnetic Ink Character Recognition (MICR). Without magnetic ink the check won’t be magnetically readable by the reader/sorter equipment at the bank. This creates rejects, delayed processing (for a repair line to be added) and can result in additional charges being imposed by the banks.

So the payment process gets easier for us while we create exception processes downstream. It seems to us that they should have printed the MICR line in magnetic ink for their customers!

caj

Fed Reserve Check/ACH Crossover Point

On October 26, 2006, In Checks, Electronic, Thoughtful Thursday, By Craig Jeffery

Prediction: Estimating the Crossover point of Paper and Electronic Volume through the FED

The date when the US becomes a check-less society isn’t being forecasted by too many people. The fact that we are a less-and-less-check society is wonderful for all of us electronic-bigots.

The settlement of paper and electronic items occurs through direct on-us presentments, private channels and through the Fed. Getting highly accurate numbers of total market volume is quite difficult since the data sits in many buckets. The surveys that the Fed sponsors are not annual events -so securing current data on this shift is a challenge. The Fed is an enormous processor of many paper and electronic items – and they have very good statistics on what passes through their systems and facilities. And, their statistics indicate that the crossover (or inflection point) for ACH to top Checks at the FED is almost upon us if things continue at their current rate of change.

Bar chart based on the statistical data presented on the Federal Reserve’s web site.

Below: The top line indicates the decreasing check volume. The bottom line that is arcing upwards is the ACH volume handle by the Fed.

Where is that crossover point where ACH bests Checks for the volume title at the Fed? What factors will move that point sooner or further out?

Right now it looks like the Summer of 2007 will show the Fed processing more ACH items than checks. That seems far sooner than most of us thought just a few years back.

Corporate/Local Governments: What is the impact to your organization’s collection and disbursement plans? Banks: This shift has process and costs implications for your organization and for your customers – what can you do to help your clients take advantage of more efficient settlement methods? Even if your strategy is sound – the playing field is changing – are your tactics changing?

ACH and Check Cost Trajectories

On October 12, 2006, In Automation, Checks, Electronic, By Craig Jeffery

Costs for ACH and Checks are on very different paths. Isn’t it obvious (without the data from the Fed) that the costs to process paper will continue to increase while the electronic items (ACH) continue their path of lower costs. This trend has continued for many years.

Note the initial cost advantage of ACH (Automated Clearing House) over checks from 1997 were about 1.5 cents. By 2002 the difference had double to about 3 cents. In 2005 we see a gap of about 4 cents – this is a substantial price advantage with ACH. Checks processing should rapidly increase over the short term with the greater use of image exchange moving volume away faster than the FED closes check processing sites (in 2007 we may see image exchange volume hit or approach 50% of check volume) – this will drive up traditional check clearing processes.

*Please note that these this chart reflects the costs that the FED reports. This does not represent all of the costs that a bank has (they may have some computer equipment, staff, contingency plans and data communication costs…and may want to make a profit too).

Moving to ACH is a great benefit for most organizations when done properly. The financial benefit can be enormous – and the largest area of realized benefit is in processing efficiency at your organization. English: Reducing your internal costs. Savings on reduced bank charges is a nice added benefit. Again – the biggest savings are related to your internal processes and not bank costs.

Checks…get rid of them! ACH… recommended by four out of five consultants….

Float is dead?

On October 4, 2006, In Checks, Electronic, Float, Working Capital Management, Working Capital Wednesday, By Craig Jeffery

FLOAT IS DEAD?

In recent years, several Treasury folks have been saying, “Float is dead” and they support that conclusion by multiplying the savings of float time by a current/short term interest rate. And in a low interest rate environment, they view that value as inconsequential compared to process efficiencies that can be gained in the Treasury processes. This leads to erroneous conclusions since it begins with a false premise.

What they mean to say and indicate is that Float is not as important as those areas. However, float remains very important for a number of reasons. Those that say that Float is not important begin with a faulty premise that all Float savings should be calculated at the short-term interest rate. This is true when there is a one-time change in Float – for example: moving a single payment or collection activity up a number of days. We agree – the value for that type of savings should be calculated using a short-term interest rate. However, a permanent or on-going change in float (i.e. moving a stream of payments or your entire universe of collection activities ) that should be valued using a longer-term interest rate – one that more accurately reflects the change you are making.

When making a permanent change in float due to some initiative using weighted average cost of capital or an interest or rate that approaches weighted average cost of capital is more appropriate. This can be supported by multiple lines of reasoning – including using an owner’s expectations. If you moved an entire stream of payments up, you would have those funds available to either be reinvested in the business or returned to the owners, they would NOT be expecting a 2, 3 or 4 percent rate of return on their funds (the short term rates of the past few years). They would expect to realize at least a weighted average cost of capital return- or give me my money back.

Using a number that is too conservative to value the Float savings that you can achieve (wherever it is in the working capital and cash conversion cycle) will lead you to make incorrect decisions regarding processes and bank services.

Float is certainly alive and important.

RDC and ACH

On February 2, 2006, In Checks, By Craig Jeffery

Remote Deposit Capture (RDC) is a bank service that takes an image of the check and sends it to your bank for collection. Your bank is likely creating an Image Replacement Document (IRD) that is roughly a printed copy of your check and presenting that for payment. A NACHA Rule that comes to life in September will impact the collection and disbursement processes and financial measurements as much as RDC (which were spawned from Check21 legislation) – and will impact RDC itself. Corporates and Banks must be prepared.

The RDC process today is:

paper (check) to image to paper (IRD) present and then clear.

The hope is that the banks will move towards everyone accepting the image – instead of printing all that paper. Thus it would be:

paper (check) to image to electronic present and then clear.

NACHA (www.nacha.org) rules will allow the conversion of 6" business checks (except in certain situations such as using an auxiliary on-us field or opting out with the vendor or using 9" checks or with amounts $25K and up) to an electronic (ACH) method just like consumer payments can be converted today. The rule becomes effective September 15, 2006. The process would look like:

paper (check) to ACH present and clear.

Here are some questions to start your thinking:

Corporates: What does this mean? What does this mean to Treasury and Accounts Payable Departments? What does this mean to Accounts Receivable Professionals? How should you prepare? How will this impact reconciliation? Will you need to opt out or accept this advance? What are the process, float and financial impacts/benefits on both sides of the house?

Banks: What does this mean to your RDC or Remote Deposit offering? Are you planning to offer a least cost routing alternative with your service? What will happen to float? How will you make sure your offering addresses the process, float adn financial concerns of your clients?

Payment Creation Outsourcing as a Fraud Tool

On November 4, 2005, In Checks, Fraud, Fraud Friday, By Craig Jeffery

Segregation of duties is a challenge in all but the largest organizations. Additional opportunities with fraud for checks abound:

Stolen check stock
Lifted signed checks from within the building
Access to the signature plate
No control counting on the printing, signing or mailing of checks

Many people are outsourcing the payment creation (print checks, generate the ACH) for financial gain or improved flexibility of staff. Outsourcing the payment creation can help keep a clean segregation of duties and the file control discipline that is needed and will often help catch an quality control issues more quickly. Outsourcing check printing (payment creation) as a control…something to look at carefully.

Remote Deposit Capture Decisions

On October 10, 2005, In Checks, Electronic, By Craig Jeffery

When determing whether to use remote deposit capture (RDC) services, what is being used in the calculation? Many are using a subset of the benefits, and others aren’t looking at all of the costs. Commonly used in cost/benefit analysis

Float
Transaction costs (bank fees)

How are you valuing the following:

Transaction costs (all cost, not just bank fees)
Account reduction (can you still close the accounts, can you combine accounts now)
Reconciliation changes
Time and safety issues (less/no trips to the bank)

What is the value in changing your process now in anticipation of expanded image exchange activity (say 50% of checks will be able to clear via image exchange in 12/2006)? If corporate conversion (to an ACH) becomes a reality, will an earlier conversion plan help your process/costs?

Check Conversion Web Site

On October 5, 2005, In Checks, By Craig Jeffery

The check conversion education website put out by NACHA http://www.checkconversioneducation.org/ is an excellent resource for consumers, corporate treasury practioners, accounts payable professionals, accounts receivable staff and bankers.

There is a wealth of diagrams and statistics that will satisfy all but the thirstiest of check conversion groupies.

Thoughtful AP professionals will get up to speed on the check conversion process for two reasons: 1. Your corporate checks are probably being converted, in error, already. 2. There continues to be interest in converting corporate checks into the more graceful ACH (automated clearing house) items.

Enjoy.

Check21 Issues

On October 4, 2005, In Checks, By Craig Jeffery

Check 21 is an exciting opportunity as many of our banking friends exclaim. While converting checks to image replacement documents (IRDs) is not the end game (image exchange is), there are several interesting developments with the ancillary products supporting these services that are popping up all over.

Banks are offering remote capture, remote deposit capture (RDC) services (company scans a check, it appears on the web site, the paper check is stored, paper check is destroyed (within 14 days) and the bank prints an IRD to collect the funds for their customer. Some banks are also creating IRDs from their lockbox data.

Checks (and IRDs) are not supposed to be presented twice. One great fear was this happening regularly – double presentments. It is happening now. Sometimes you’ll see an image presented against an account twice – sometimes the IRD is first and then comes the live check. Positive pay systems are usually alerting the payee of the duplicate – but few corporate treasury folks understand why this is happenings. The controls within companies, and at a few banks too, are not adequate. Checks that should be destroyed are run through the machine a second time or cleared in the traditional manner.

This activity really seems to have heated up recently beginning in September (some in August). Banks and the Fed will need to keep this to a minimum to prevent an uproar in a few months as DDA accounts start getting overdrawn and penalties assessed.

New processes usually have a few bugs to work out. WATCH for these in your disbursement accounts.

On October 4, 2005, In Checks, By Craig Jeffery

It has been about five years since check volume in the United States began to decline. There are still far too many of these pesky objects. Not only do they cause paper cuts and more open to fraud, they are quite cumbersome for transferring value.

Individuals should do their patriotic duty and sign up for direct payment plans using the automated clearing house (ACH). Companies should push for more outbound and inbound payments to be made electronically.

Check conversion (ARC and POP) and Check 21 programs (remote deposit capture) are steps (two for check conversion and one for RDC) in the right direction – but they are clearly not the end game.

As a profession we should celebrate the day when ACH volume exceeds check volume.

TREASURY UPDATE

A Treasury Blog by Strategic Treasurer