heck truncation is coming of age. This is no small feat, given 30 years of false starts and the fact that it has required an Act of Congress to make truncation an acceptable business proposition. One question I have, though: What becomes of ACH check conversion once check truncation becomes the law of the land?

The answer, I believe, is that check conversion stalls.

If Check 21 is signed into law - and indications are that this pro-truncation law will be enacted before the year is out - there doesn't seem to be much of a business case for retailers to embrace check conversion.

ACH can be a risky business, and retailers are risk averse. Check law and practices, as amended by Check 21, offer several advantages over the ACH that I believe compel many to shun ACH-based check conversion schemes in favor of check truncation.

And I'm not alone. I've run this thought by several longtime payments mavens. A comment from Brandes Elitch at CrossCheck pretty much sums up the consensus: "If I were Safeway, I wouldn't do it."

ACH check conversion was pioneered several years ago by organizations like TeleCheck, a First Data Corp. company, and has been gaining renewed interest with the introduction of a new format that supports the conversion of remittance checks.

Nancy Grant, Senior Director for Electronic Check Services at NACHA, estimates that about one in 10 transactions flowing through the ACH in the second quarter of this year were retail check conversions.

These included point-of-purchase (POP) transactions - those most commonly associated with consumer check conversions - as well as transactions initiated via the Web or telephone, plus remittances and re-presented checks. (One of the earliest conversion formats, the re-presented check application gives banks and businesses a leg up on NSF collections.)

Added together, these transactions accounted for a little more than 214 million check conversions during the second quarter of this year. To put this into perspective, consider that, according to the Federal Reserve's data, consumers write about 1 billion checks a month to businesses and other parties.

Like ACH check conversion, check truncation comes in several flavors. One of the most popular is electronic check clearing, also known as ECP (for electronic check presentment). In the typical ECP arrangement, information from checks is digitized and sent electronically to paying banks in advance of the presentment of paper checks.

The time lag between electronic and paper presentment (more than a day) gives paying banks a jump start on processing, and if necessary, a chance to reject checks drawn against accounts with insufficient funds or other problems.

SVPCo, an ECP network owned by the nation's largest banks, clears about 5.2 million checks a day using this electronic clearing process, says Sue Goold of SVPCo's Electronic Clearing Services unit. SVPCo also supports check image exchange and archival.

Eight of its biggest bank owners (including Bank of America) have committed to begin converting to full truncation (i.e., image-based check exchange) in Q1 2004, according to Goold.

The Fed offers several iterations of ECP and truncation. Its full truncation service stops the paper flow on about 3 million items a day, says Dan Littman of the Federal Reserve Bank of Cleveland. The Fed's ECP-like services are used to clear about 11.2 million checks a day.

Several other organizations are similarly poised to leverage check imaging and archival capabilities in support of full-scale check truncation.

Among them: CheckClear LLC, an Oklahoma City firm that operates Endpoint Exchange (a national ECP and archival network that claims an enrollment in excess of 2,000 financial institutions), Viewpointe Archive Services (a private company with ownership stakes held by IBM, JP Morgan Chase & Co., B of A and a few other big banks) and Zions Bancorporation, which markets an ARC-truncation hybrid service called NetDeposit.

So what do these folks understand that, perhaps, NACHA and others pushing ACH check conversion may not? Risk, and the relative costs of risk.

ACH Costs Less, But Risks Are Greater

On its face, it costs less to clear a transaction through the ACH than using check-clearing arrangements. The base price for an ACH item is about 25 cents. Check-clearing costs can run as low as a few pennies to as much as $1, or more, depending on methods used. (ECP hovers around the lower end of that price range.)

But the price differences can be deceiving. They don't take into account, for example, the fact that the ACH is a delayed settlement system. At best, there's a one-day lag between when a check is converted to an ACH transaction and when the merchant's bank receives good funds for the transaction.

With check truncation, the vast majority of a merchant's checks (those written on local banks) qualify for same-day availability. For a merchant concerned about bad checks, that one-day lag has huge implications.

Then there are the legal differences. ACH transactions are governed by the Fed's Regulation E and NACHA operating rules, each of which imposes consumer protection requirements. One such requirement: a 60-day return window for disputed transactions. Check law isn't nearly so generous; at most you get two days to return a check that can't be posted to the check writer's account.

There are other challenges, too. For example, NACHA rules say you can't convert certain types of checks - such as those drawn on corporate accounts and the so-called "courtesy checks" credit card issuers like to offer. Discerning those checks, however, can be difficult at the point-of-sale, at bill collection sites or on the Web or telephone. Rejects can be costly and will delay postings.

Also, checks contain a wealth of information that merchants, check writers and banks find useful, and much of that information gets lost in the ACH conversion. Truncation coupled with check imaging and Internet access means online access to images of cleared checks, 24/7/365. (Check 21 encourages but does not mandate check truncation. And it creates a new, legal equivalent of a check, called an Image Replacement Document, or IRD, for banks and consumers that still need to see paper.)

From the merchants' perspective, the risk factors are paramount. Merchants write off billions of dollars a year in bad check losses. Once Check 21 becomes law, truncated checks will be accorded all of the legal advantages paper checks enjoy today plus the added advantages of faster posting and online access to check images.

"Banks ignore retailers' problems with write-offs," observes David Walker of ECCHO, an industry group that develops ECP rules and has been pushing for Check 21. "There's a real need there. With ECP we have a way to have a real impact on the problem."

So What about the ACH?

Now don't get me wrong, I'm not bashing the ACH. The ACH serves a legitimate purpose in the transition from paper to electronic payments. And there will, undoubtedly, be companies that prefer ACH conversion, for all or some check collections. But the ACH has limitations, and delayed settlement and return rules are just some of the problems.

When it comes to retail checks, my gut tells me that truncation will trump ACH conversion, provided Check 21 is signed into law.

It won't be the first time an ACH application was sidelined by marketplace dynamics. In the mid- to late 1980s, there was a move to support corporate electronic data interchange (EDI) transactions with ACH payment formats. Today, wire transfers and checks continue to dominate this payment space. During Q2 2003 the primary ACH format for EDI transactions tallied just 6 million transactions, according to NACHA's data.

The ACH is an excellent system for some payment types - notably direct deposit of payroll, for which it was originally conceived, and direct debit for insurance and dues payments and items of that nature. Merchant-issued debit cards are another good application, though rarely used.

Merchant collections, though, are better served by checks, and things will only get better for merchants with the enactment of Check 21.

Patti Murphy is Contributing Editor of The Green Sheet and President of Takoma Group. She can be reached at patti@greensheet.com