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Check Truncation Image Exchange
ARC, Image Exchange, ACH & Check 21
The costs of handling checks in paper form are staggering. A number of initiatives have been undertaken in order to reduce the expense of processing check payments.
ARC
ARC refers to converting a first-party check to ACH transaction. ARC is a process by which a paper check is used as an authorization to make an immediate electronic deduction from a consumer account.
Highlights of ARC’s impact:
- Checks converted under ARC are considered source documents and are governed under Regulation E.
- Not all payments are eligible for ARC such as corporate checks and third-party checks.
- Consumers must be notified that their check will be converted under ARC.
- Checks are imaged and payment data is captured electronically.
- Once an ARC payment has been imaged, the original check must be destroyed within 14 days.
- Scanned images of the check must be held at the point of capture for two years.
Check 21
Another impact on check handling is the Check Truncation Act (Check 21). This legislation gives a specifically formatted image copy of a check the same legal status as the original check.
The Check 21 Act facilitates truncation through expanded use of electronic processing technologies to improve the efficiency and reduce the cost of the nation’s check collection system. The law provides for the use of a substitute check to be used in place of the original paper check without an agreement.
Check truncation will reduce the time required for transfer of funds from one bank to another reducing exposure to fraud. Additionally, check truncation can eliminate or minimize the physical sorting of checks, manual encoding of amounts, etc., reducing the number of times that a physical check has to be handled. While banks stand to benefit, check truncation also raises a number of questions. Selecting vendors, implementing new solutions, establishing new processes and workflows for truncation, all invite opportunities for improvements and efficiencies, but also come with risks.
Check 21’s Impact on ARC
Payment processors are asking themselves whether ARC can still be considered in the wake of the Check Truncation Act. It is believed that the two payment handling methodologies will work hand in hand for some time. ARC is better established, with the standards and interoperability issues related to image exchange under Check 21 still being worked out.
Check Imaging
The process of converting checks to images did not originate with the recent Check 21 legislation. This process has been in place for years as banks negotiate agreements to accept check images.
Exchanging check images not only speeds the payment process, but it also reduces the bank’s handling costs, and can help spot fraud more quickly.
With check imaging, an image of the check is created and transmitted. Key check image exchange benefits:
- Reduced fraud losses with earlier notification and faster authentication of fraud
- Fewer employees needed for sorting, balancing, bundling, and delivery of paper checks
- Shortened collection cycle and accelerated cash flow (reduced float cycles)
- Reduced cost of transportation of paper-based payments
A number of organizations, including TAWPI and the Federal Reserve Bank have been working to address issues related to check truncation and image exchange.
To additional articles about Check Truncation and Image Exchange, ARC and Check 21 see TAWPI’s white papers.
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