Retail Merchandiser

BOC: A Brand New Option in Check Conversion

July 1, 2008

By By Charla L. Hausler and James E. Michel, Barnes & Thornburg LLP

In this digital age, it is a common practice for retailers to process customers' checks electronically. Image exchange, image replacement documents, Check 21 or electronic check conversion via the Automated Clearing House (ACH) network are viable options for processing checks. On March 16, 2007, retailers will have a new alternative for electronic check conversion: back office conversion (BOC).

For a retailer, processing paper checks can be expensive and inefficient. The most common complaints in processing checks involve handling, delivery, collection and fraud. Converting checks to electronic payments is a proven method for retailers to minimize costs and make check processing more efficient. Converting checks to electronic payments allows retailers to reduce labor and processing costs, minimize fraud, and get money faster.

The National Automated Clearing House Association (NACHA) has established the ACH Rules, which govern the conversion of checks toelectronic payments via the ACH network. Under the ACH Rules, paper checks received at the point of purchase can only be converted into electronic payments at the point of sale using a Point of Purchase transaction (POP).

BOC: The Rival to POP

Retailers have not embraced POP because of training and implementation costs. For example, POP requires that checks be converted to ACH transactions at the point of sale. The retailer must return the voided check to the customer. The retailer must then complete checking out the customer’s purchase and then obtain the customer’s written authorization.

Utilizing this practice, retailers would have to train each cashier on the requirements for processing POP transactions. Moreover, the retailer must provide Magnetic Ink Character Readers, (MICR) at each check out counter.

BOC in a Nutshell

BOC can provide a cost effective alternative to businesses that have not found POP beneficial to their business model. BOC will allow retailers to convert checks received at the point of purchase to electronic payments in a back office setting.

Consumer and business checks in the amount of $25,000 or less which do not contain the Auxiliary On-Us Field are eligible for conversion under BOC regulations. BOC requires authorization from the customer before a check can be converted into an ACH transfer.

A retailer can obtain customer authorization by providing a notice that complies with ACH rules. This notice must inform the customer that the retailer is authorized to use information from the check to make either a one-time electronic funds transfer from the customer’s account or to process the payment as a check transaction. In addition, the notice must provide a telephone number for customer inquiries. The retailer must also ensure that the number is answered during normal business hours.

Until January 1, 2010, the notice must state that funds can be withdrawn from the customer’s account that same day. The customer will not receive the check back from their bank. The notice must track, or be similar to the model language provided in the ACH rules. The retailer must post the notice in a prominent and conspicuous location and provide a copy of the notice to the customer at the time of sale. The retailer must also provide customers with an opt-out option which will allow the customer to use a different form of payment such as a credit card, if desired.

Using the BOC method, the retailer retains the original check. This is in contrast to the POP practice. In the back office or any other centralized location, the retailer captures data from the check in order to present it to the customer’s bank for collection. The retailer must also make an electronic image of the check and retain the image for at least two years. The original check must be securely stored until it is destroyed by the retailer.

Is BOC right for your Business?

Retailers will want to consider the operational pros and cons of BOC before deciding if this form of check conversion is right for their business.

Some important questions to consider:

Can the merchant safely retain the check until destruction?
What percentage of the staff will need this training?
Would the cost of staff training be economically viable?
Is the current staff appropriate to conduct back office conversion?
How much would the equipment cost?
Is there enough space available for the required equipment?
What is the volume of paper checks that the business handles?
Is there an existing centralized location to convert checks?

As with any payment process, businesses need to evaluate the legal implications and requirements for electronic check conversion. In addition to the ACH Rules, electronic funds transfers are governed by federal and state law. Failure to comply with these laws subjects a business to potential legal liability. Moreover, if a business fails to comply with these laws, it may find itself an easy target for fraud. Without proper security measures in place to store or destroy retained checks after conversion, fraudsters could easily access the paperwork for their own benefit.

Check conversion remains a cost effective and beneficial tool for processing checks. Once a retailer carefully examines BOC in connection with its own business model and takes into consideration the legal implications of the process, it may find that BOC is the perfect tool to process checks more efficiently.

The articles and content posted on this blog are intended for general informational purposes only and are not to be construed as legal advice or legal opinion on any specific facts or circumstances.