Feature Articles and Resources

• Converting Paper Checks to Electronic Payments
  
• Pros and Cons of Electronic Check Conversion Options
  
• Electronification of Paper-Based Revenue Processes
  
• Tips for Safeguarding Electronic Transactions
  
• Useful Resources on Electronic Payments
  
• Suggest a Conference Topic
  

• Panel of Economists: Risks Facing the Current Economy
  
• Interest Rate Outlook
  
• Snapshot of Economy and Interest Rates

• Performance Benchmarks
  • 10-Bill Index
  • Money Market Fund Index
  • LGIP Index
  • Key Rates: Cash Markets
  • Relative Value Yield Chart

Converting Paper Checks to Electronic Payments

An important cash management trend occurring right now is the conversion of paper checks to electronic, ACH items. This article will highlight three alternatives for converting paper checks to ACH items:

• Accounts receivable conversion (ARC)
• Point of purchase conversion (POP)
• Back office conversion (BOC)

Accounts Receivable Conversion (ARC). This solution has been in place the longest. ARC speeds collections and eases reconciliation by creating an electronic record of paper check activity that can be posted to your accounting management systems. A notice on the citizen's bill equals the authorization. ARC also lowers the cost associated with paper check processing.

Many hardware and software providers can help your organization set up an ARC solution. However, some experts predict that Check 21, which legislated that an image of a check is the legal equivalent of a check, triggered ARC's eventual obsolescence.

Point of Purchase (POP). POP converts paper checks immediately to electronic payments at the location that you receive them. Authorization is required at the time of transaction. This provides a low cost alternative to accepting credit cards, and allows your organization to automatically access a verification database to identify possible bad check writers.

But, there are inherent drawbacks to consider. For one, the process of scanning and verifying can take time. Second, NACHA declaratory language must appear on both the check and your organization's walk-up location. Finally, some organizations find today's point of purchase hardware too large and too expensive to be practical, especially when they must manage their operation across multiple locations.

Back Office Conversion (BOC). BOC converts paper checks to electronic payments at a single, central back office. BOC eliminates the need to return citizens' checks and saves on hardware expenses.

The primary advantages of BOC versus traditional check processing are accelerated access to funds, lower check fees, and fewer losses from returned items. Tellers and citizens alike have a less cumbersome experience. Interaction time is less for each transaction, enabling your government entity to process more individuals' payments in less time—which can really make life more pleasant in crowded payment lines at peak hours.

BOC can be the easiest and cheapest solution, end to end. Of course, BOC sacrifices check verification services at the point of payment. The only other drawback is for those who would be the earliest adopters—BOC still awaits final NACHA approval, expected later this year.

But according to the research, we have much to look forward to. Meta Software conducted a business case analysis of back office check conversion (BOC) on behalf of a retail department store chain to determine the enterprise-wide benefit. This study found that this retailer could reduce bank fees by 97 percent, improve access to funds by 54 percent and reduce losses from returned items by 20 percent through implementation of BOC via conversion into an ACH payment. This hypothetical implementation would realize an overall savings of 60 percent, or $4.4 million, enterprise-wide. (“A Compelling Business Case for BOC Adoption, Now,” Meta Software, December 2005.)

Pinless Debit. Pinless debit is another trend driving the transformation of payments—particularly in approved, regulated sectors that include government (as well as telecommunications, regulated media, education, insurance, and utilities). This new processing technology enables government entities to process debit card payments in a card-not-present-environment without requiring a PIN—paying a fraction of the cost of association processing fees.

Without a doubt, debit card processing reduces the overall cost of payment processing, as interchange levels are significantly lower than credit card or signature debit rates. Also, since transaction approval is based on the cardholder's available balance, the account is memo-posted—and 100 percent authorized—at the time of the transaction.

Debit payment has historically had two distinct types: Signature (offline) debit, which routes through Visa or MasterCard, and PIN (online) debit, which routes through the Star, NYCE and Pulse Debit networks. Most of the debit cards carried by almost 90 percent of us offer both signature and PIN debit functionality, though citizens who prefer PIN prefer its faster, more secure processing and appreciate that our transaction is paid immediately, all without even having to offer a cashier our card.

What's next? The next trend on the horizon is the adoption of middleware solutions that integrate the multiple databases government entities use to manage citizen information—multiple databases which are unable to communicate and share information today. As you can imagine, this will be another windfall opportunity. Bill presentment, payment information and reconciliation functions will no longer happen independently. Leading merchant acquirers and independent middleware providers are working diligently to bring these solutions to the market so that organizations like yours can integrate these three critical operational functions.

With systems like these government treasury operations will enjoy one seamless process, from bill generation and presentment, to payment, then finally, to reconciliation. We will all be one step closer to the transparency that could enable treasury officers a chance for true liquidity optimization.

Mark Schermann is a business development director with Chase Paymentech Solutions.

Pros and Cons of Electronic Check Conversion Options

Electronification of Paper-Based Revenue Processes

By Kenyatta A. Chandler

Electronification of paper is undeniably the next chapter in the evolution of government revenue collection. The adoption of electronic payments is gaining momentum in the public sector. Last year, more than 30 million consumers and business made payments to state and local governments that were collected and processed electronically. This is an increase of 25 percent over the previous five year period. In fact, over the last few years, electronic payment transactions in the United States have exceeded check transactions. The number of electronic payment transactions totaled over 50 billion in 2006, while the number of checks processed totaled about 35 billion.

Checks Versus Electronic Payment Transactions

Source: Analysis from State of Ohio Treasury Data.

Electronification is occurring in three areas: the collection of payment data, the processing of revenue, and the distribution of information. Technologies in each of these areas are described below.

• Web-based applications – Integrate into an existing web site where a government can collect payments via the Internet.
• Interactive voice response – Customers call a telephone number and enter payment data through a series of voice prompts.
• Credit card processing – Widely used for mandatory and non mandatory government payments.
• Registered ACH – Customers complete an enrollment process in which they are identified and their payment information is verified. This payment process is typically used for high dollar transactions and recurring tax payments.
• Electronic check (eCheck) processing – Account information is collected through the Web without prior registration. Electronic checks are used for high dollar transactions.
• Check conversion – Converts a paper-based payment into an electronic debit.
• Check truncation – Transforms a check into an electronic image.
• Electronic distribution of information – Enables a government to optimize and monitor all aspects of electronic revenue by providing access to detailed revenue information that previously had only been available via paper reports. Provides central reconciliation and online reporting capabilities.

Advantages of Electronic Payments. Government electronification initiatives tend to be motivated by potential cost savings to the government and convenience to customers. Below is a list of some of the advantages of electronic payments.

• Reduced billing costs through elimination of printing and mailing cost.
• Cash collection – Reduced collection risk and delay otherwise associated with paper based payments.
• Lower transaction processing costs – The costs associated with transaction processing for electronic payments are rapidly decreasing, as compared to checks. For example, research shows that the cost to process a check is five cents per item, while the cost to process an ACH payment is less than 2 cents per item. A typical government entity saved close to $1.5 per transaction. Electronic payment use in 2006 alone saved state and local governments thousands dollars in revenue. (See chart below.)
• Operational efficiency – Improved efficiency and lower cost by streamlining operations. Enhanced operational efficiencies with standard reporting facilities such as the online reporting, to report and analyze their revenue information, as well as repeatable procedures based on policies contributing to smoother back-office operations.
• Reduced transportation costs – Reduced cost, time, and risk associated with transporting paper checks.
• More accurate cash forecasting.
• Accelerated funds availability. Revenue deposits that are processed electronically are deposited in the government’s bank accounts more quickly than with checks, and within 24 to 48 hours in most cases. Therefore, revenues are invested earlier and generate more interest earnings.

Tips on how to make a paper-based revenue process electronic:

1. Learn about electronifying revenue processes – Include policies regarding the electronic payment process and the enactment of innovative services to encourage expanded use of such payments.


2. Identify critical success factors – Provide a convenient, flexible, secure, and efficient process by reducing cost, accelerating fund availability, and reducing delinquent payments.


3. Identify potential obstacles – Refrain from charging additional fees for the process and address inadequate funding or allocation of resources.


4. Identify how to integrate with electronic payment workflow – Increase opportunities for automation of accounting, banking, and reconciliation processes.


5. Identify citizen impact – Reach your citizens by educating and gaining their trust. This will provide the necessary structure for the new process.


6. Build a business case – Document and quantify the benefits of electronification of the revenue process. The business case can be the impetus for a business re-engineering opportunity.

According to John Silvia of Wachovia Securities, the greatest risk in the current economy is that an expansion in the regulation of mortgage lending will lead to a credit crunch in housing. Silvia predicts a 0.22 percent probability of a recession in 2008. He expects GDP growth of 3.3 percent and CPI inflation of 2.3 percent in 2008. He also expects that the Federal Reserve will keep the Fed Funds rate unchanged for the rest of 2007.