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Lead Story: Massive Change in Check Collection M
ajor retailers will be dancing in the street with this NACHA rules change.
The Board2 is adopting a final rule revising the Official Staff Commentary to Regulation E, which implements the Electronic Fund Transfer Act to permit the collection of check service fees without a written authorization from the consumer. Under this new view, a sign telling consumers that their check may be collected electronically will be considered sufficient notice.
All businesses, including collection organizations, will benefit, but major retailers like Wal-Mart have been lobbying for this change for a while. Wal- Mart has said over and over that it wants to collect check service fees electronically without slowing down its checkout process to acquire consumer signatures.
Re-presented check entry (RCK) collection has been a major cost-savings opportunity for high-volume check businesses like Wal-Mart, and collection of the service fee with as little work as possible will be another terrific boost to collection effectiveness.
While the collection of a service fee, which varies by state, is always beneficial, it is most significant on low-value checks. These fees, which average about $35 nationally, can double the net collection percentage on checks less than $70, which explains why major retailers will benefit most from this new rule.
The new commentary interprets the requirements of Regulation E, to facilitate compliance by financial institutions that offer electronic fund transfer services to consumers. The final rule provides guidance on Regulation E coverage of electronic check conversion transactions and computer-initiated bill payments, authorization of recurring debits from a consumer's account, telephone-initiated transfers and other issues.
The new rule was effective March 15; however, to allow time for any necessary operational changes, the mandatory compliance date is January 1, 2002.
Excerpt for Regulation "E" changes:
Comment 3(c)(1)-1 provides guidance on NACHA's RCK program, in which merchant payees (or their financial institutions or agents) re-present returned checks electronically. Written authorization from the consumer for the RCK debit is not obtained, although the merchant payee usually has provided notice at POS that any returned item may be collected electronically if returned for insufficient funds.
The comment clarifies that an RCK transaction is not covered by Regulation E because the transaction was originated by check. In some cases, a payee may impose a fee on the consumer because the consumer's check was returned.
NACHA rules provide that the RCK debit must be in the amount of the original check; therefore, the amount may not be increased to include a fee. The payee would have to initiate a separate debit to collect the fee electronically. Because an electronically debited fee meets the definition of an EFT under Regulation E, it is covered by the regulation and must be authorized (in this case, by notice to the consumer).
Most stakeholders in the industry agreed with the proposed rule excluding coverage of the RCK. A number of stakeholders, however, disagreed with the proposal to cover any additional fee debited electronically from the consumer's account. Since the fee is based on the original transaction, these stakeholders believed that the fee was likewise covered by the Uniform Commercial Code (UCC), which permits incidental damage fees.
The Board views, as separate transactions, the RCK and any fee assessed and debited from the consumer's account as a result of insufficient funds, whether or not the fee is permitted by the UCC to cover incidental damages. Authorization is required to electronically debit the fee from the consumer's account, but because the transfer is nonrecurring, notice to the consumer is sufficient for purposes of compliance with the regulation.
Bad News for Collection Companies
This change also might have some other unexpected side effects. Since service fees are so significant in low-value checks, major retailers might plan to do more work for themselves in check collections and outsource less work. Since the high volume of low-value checks might decline in the number assigned to collection agencies, the collections companies will find they must compete in higher-dollar checks, where the collection results are much lower.
Finally, the lack of easier collection items, in what are essentially freebie collections, to offset the higher cost of large-value check collection might make it more difficult for collection companies to compete with check guarantee companies.
It also is likely to be true that enough benefit might be realized in low- value check collections, once service fees also can be collected cheaply and easily, that it might well begin to impact the adoption of check electrification.
1 National Automated Clearing House Association is the trade association that develops operating rules and business practices for the ACH network.
2 FEDERAL RESERVE SYSTEM, 12 CFR Part 205, [Regulation E; Docket No. R- 1074], Electronic Fund Transfers, AGENCY: Board of Governors of the Federal Reserve System, ACTION: Final rule; official staff interpretation.
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