DOCUMENT Magazine - June 2008 - (Page 32) T& TRANSACT & REMIT R Choosing the Least Cost/Best-Fit Route t hough not a new idea, LCBR promises to hand back the control back to billers for intelligent routing. By maintaining relationships with multiple depository institutions, billers are realizing cost savings and quicker availability. a Clearing the promise of payment optimization for billers’ remittance processing operations | By Tracy Dalton and Josh Wendroff The Electronic Payment Conversion The results of the 2007 Federal Reserve Payments Study demonstrate the growth of electronic payments in a dramatic fashion. In 2006, ACH check conversions represented 2.3% of the total number of non-cash payments (all ACH transactions, including conversions, totaled 16%). This figure equals 2.6 billion converted checks and is eight times the number in 2003. According to the latest Ernst & Young Cash Management Survey, ACH transactions are expected to have grown another 20% in 2007 when all results are tallied. However, these figures are dwarfed by the increase in interbank checks (those checks drawn from a different institution than the one at which they are deposited) cleared electronically. About 40% of interbank checks were cleared electronically in 2006. So while consumers are indeed rapidly adopting electronic payment methods, the rate of adoption is nowhere near that of financial institutions. Because of their tremendous volume, banks have a great incentive to adopt any clearing mechanism that reduces the cost of clearing. Additionally, banks can invest in the equipment necessary for successful electronic clearing, such as new imaging hardware / software that is sophisticated enough to greatly reduce the instances of poor image quality that might otherwise prompt an expensive return. The exponential growth rate speaks loudly of the advantages that banks see in electronic clearing. The technologies that enable interbank electronic payments are increasingly available to non-bank companies looking to convert paper checks, with an additional incentive. Most major billers have at least explored electronic check conversion, and many have adopted ARC as a standard means of electronic conversion for eligible checks. Those payments that cannot be converted to ARC are cleared via paper. As payment options expand, so do opportunities for companies to reduce their costs of accepting payments from customers. Companies have recognized the potential and are actively pursuing changes in consumer behavior. Many organizations heavily promote electronic payments and even offer incentives for customers who move from sending paper checks to recurring ACH transactions in an effort to reduce the ongoing costs of processing. But the payment from customer to biller is only half of the payment equation, and control over the other half is beginning to be explored by forward-looking billers. The “other half” of the equation is the link between a biller’s remittance processing operation and the depository institutions. Electronic payment vehicles combined with new intelligent software are enabling billers to control costs through their deposit choices. Many billers are taking advantage of ARC and Check 21 to convert paper checks to electronic transactions for deposit, but that is just the tip of the iceberg. For billers who have the proper scale and ability to manage multiple depository relationships, least cost / best routing (LCBR) holds the promise of optimizing every transaction for reduced costs and quicker availability. LCBR is a method by which billers maintain relationships with multiple depository institutions and decide, in real-time using sophisticated analysis software, which deposit method and institution provides the biggest benefit. This benefit takes the form of either a lower transaction cost or quicker cash availability, or both. With the adoption of Check 21 along with the dramatic increase in ARC and the rise of the exchange networks, today LCBR is a reality. 32 document june.08 www.DOCUMENTmedia.com http://www.DOCUMENTmedia.com
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