lectronic payment business lines are burgeoning. But even the most exciting new payment options can't hold a candle to the popularity of checks among consumers and merchants, who have grown frustrated with the rising costs of card acceptance.

Payments 2005, the annual conference and expo put on by NACHA - The Electronic Payments Association, vividly illustrated this notion. An estimated 2,500 payments mavens converged in San Antonio for the four-day meeting in mid-April. The most talked about topic at the conference was "check electronification."

Check electronification is a catch-all phrase that refers to electronic clearing options for paper checks. It describes checks converted to electronic payments and cleared through the automated clearing house (ACH) system.

It's also used to describe check truncation, a process in which paper checks are replaced with data (image) files that clear through electronic versions of traditional (land-based) check collection networks.

Last year, 12 billion payments were cleared and settled through the ACH system, according to NACHA. Of those payments, more than 2.2 billion actually began as checks and were converted to electronic ACH payments by either banks or corporate clients of those banks.

Only one check conversion format, a remittance application known as accounts receivable conversion (ARC), drew 1.2 billion checks through the ACH, NACHA said. NACHA has dubbed ARC the "fastest growing" application in the 33-year history of the ACH.

Pressures for Business Check Conversion

While NACHA rules limit ARC conversions to consumer remittances, pressure is mounting to amend the rules; at Payments 2005, plenty of discussion took place about this.

But changing won't be easy. Some pretty influential organizations oppose the change, including Electronic Payments Network (EPN), the private-sector ACH processor owned by many of the largest banks in the country.

EPN's President, George Thomas, said during an interview at Payments that if EPN has its way, the ban on converting business checks to ACH items will continue. Thomas said he and colleagues believe ACH check conversion would wreak havoc on corporate cash management practices. Check truncation with image exchange is better suited to business checks.

By NACHA's reckoning, 80% of business payments today are made by check.

Giving Consumers a Say

Another hot topic was the NACHA rule that requires billers using ACH check conversion to provide the opportunity for people to "opt out" if they'd rather not have their checks converted to ACH payments. Billers say the process adds too much confusion and cost.

NACHA President and Chief Executive Officer Elliott McEntee said there's a lot of sympathy for billers and bankers on this matter. But, he added, when the first few billers began using ARC without giving consumers a choice, NACHA was deluged with complaints from Congress and the public. "We'd love to get rid of the opt-out requirement, but in this political environment it's not going to happen very soon," McEntee insisted.

The House Committee on Financial Services scheduled a hearing in late April to address issues related to check electronification; NACHA plans to testify at the hearing, McEntee said.

ACH Growth Tied to Pricing Sensitivity

The ACH has come a long way during the last quarter century, and so, too, has NACHA: It's transformed itself from a small department run by the American Bankers Association, to the name behind one of the largest payments expositions of the year.

Initially conceived as a check replacement system, the ACH has been logging significant growth in recent years. "ACH volume has been doubling about every five years," McEntee said.

While early growth focused on converting regularly scheduled payments, such as payroll, to electronic payments, check electronification makes a significantly improved business case for moving payments to the ACH.

"We're trying to move the payment system forward in a practical, forward way that benefits our customers," said Danne Buchanan, Executive Vice President at Zions Bancorporation, an early provider of check electronification services.

For more and more retail businesses, and other businesses that accept checks from consumers, that means finding better ways to clear those checks.

"The consumer's love affair with checks is going to be going on for quite awhile," Jackie R. Snyder, Senior Business Consultant at SuperValu told a packed session on merchant perceptions of check conversion. SuperValu runs 700 grocery stores under several brand names, including Shoppers Food Warehouse.

Specifically, Snyder and other retailers on the panel said soaring transaction acquiring fees are driving them away from card payments.

"We're very concerned, because normally, in our business, when volumes rise, our costs go down," Snyder said. "Our volume of credit and debit card payments grew 10% last year, and our costs [for processing] went up even more."

"For us, checks are considerably less expensive than electronic tenders," she said.

Snyder even suggested the Federal Reserve exert regulatory control over payments pricing. She also suggested a public relations campaign to sway consumers away from electronic card payments. "Our costs [in the U.S.] are the highest in the world for electronic payments," she said.

Double Digit Price Increases

At CVS Pharmacy, a chain of 5,000 pharmacies, tender costs for electronic card products have increased in excess of 20% a year, according to Peter Nash, Director of Credit and Collections at CVS.

"Checks are still a preferred method of payment for us," Nash said. "And we see checks being around for quite a while." Today, CVS accepts 62 million checks a day from customers, representing about 8.5% of total sales, Nash said.

As for ACH check conversion, the retailers said they have yet to make a case for check conversion at the POS, although Nash and Synder said they were considering back office check conversion.

In back-office conversion, checks taken in at the POS are bundled, then imaged and electronified, either for ACH processing or for electronic check clearing.

However, current ACH requirements regarding customer authorization make back office check conversion a difficult proposition for retailers. Those rules came up during several sessions at Payments 2005. When check conversion occurs at the POS, the merchant is required to get an authorization from the check writer (a signed receipt).

A company that decides to convert remittance payments using the ARC format, on the other hand, need only provide consumers with an opportunity to opt out of the process.

"We need to have the same rules apply across the board," said Joe Keller, President of Solutran, a Minneapolis-based developer of remote deposit software.

Truncation with image exchange is a different matter; it's governed by check law. The process can take place at the POS or the back office, with the help of a check image capture device. There's no need for special authorization.

That's why, over the long term, most experts bet that truncation will trump ACH check conversion. But that's long term. For now, ACH check conversion has the spotlight.

Patti Murphy is Contributing Editor of The Green Sheet and President of The Takoma Group. E-mail her at patti@greensheet.com .