May 11, 2004

Paper checks are being converted to ACH transactions at rapid rate, both at the point-of-sale and the lockbox. In 2003, JPMorgan Chase (New York, $771 billion in assets) estimates that 160 million of about 39 billion checks, or less than half of 1 percent of the total, were converted to ACH payments. But in 2005, the firm estimates that 3.1 billion checks will be converted, comprising almost 8 percent of current check volume.

That's a pretty impressive statistic, especially when you consider that a significant portion of those 39 billion checks still cannot be converted into ACH payments. "Consumers are the only ones that can have their checks converted," says Alan Koenigsberg, vice president and senior product manager, JPMorgan Global ACH. "There was some movement in the industry last year to work on corporate check conversion, but a lot of that noise has died down because of Check 21 and the ability to improve the viability of the paper [check] networks."

"We don't expect that corporate check conversion will happen anytime soon," he adds. Nevertheless, the consumer migration from check to ACH has real savings attached. From a financial-institution perspective, it costs about $0.08 to $0.10 to process a check, versus $0.02 to $0.04 to process an ACH, according to Koenigsberg. Using a back-of-the-envelope calculation of $0.06 savings per item, the industry can eliminate about $176 million in processing costs by promoting check-to-ACH conversion. For JPMorgan Chase, which in 2003 processed 1 billion of 7.5 billion total ACH payments, the benefits should prove to be even greater from economies of scale.

Furthermore, even though corporate checks can't be converted, there's still growth to be had in the corporate payables market, especially with fully electronic business-to-consumer and business-to-business payments. "Especially for recurring types of payments, we'd like to treat them the same way they would treat a direct deposit," Koenigsberg says. "It's really the same process with some additional risk and fraud controls built in."

For example, corporations typically issue checks using 'positive pay' controls, by which they notify their banks of the amount and the payee of a check before disbursing it. "It's building in those 'positive pay' controls into the ACH world that's really going to pay off for those corporates," says Koenigsberg.

JPMorgan Chase developed its ACH technology in-house, so as to benefit from rapid development and deployment of ACH-related innovations, Koenigsberg notes.