The Check's in Cyberspace
The transition to automated check clearing at Johnson County Community College reduces paper processing, lowers credit card and other fees, and allows quicker access to deposits.
By Susan W. Rider
Of course, for some time, student financial services had already been steadily shifting from manual to online processes. Miami University, Oxford, Ohio, has recognized the benefits and cost savings of automatic payment plans, online billing and payment, and electronic refunds. (For details, see the article "From In Line to Online.") We've made similar shifts to online services. In addition, we started in 2003 to accept electronic, or automatic clearing house (ACH), checks for student tuition and fee payments made online.
Since that time, we have expanded the use of virtual checks to include other transactions. Our conversion to this system has allowed us to enhance our student services while we save—on a growing number of payments—the 2 to 3.5 percent transaction fees charged by credit card companies. We've also lowered other fees and can access our deposits more quickly.
Reasons to Change
As mentioned, we began the transition to electronic checks in part because of the escalating cost of credit card transactions. We hoped that an online check-payment option was a way to move students and parents away from credit cards. After all, our merchant fees had been increasing mainly because of the steady volume growth in online payments every year since 1999, when we began using this payment method. In fact, we were experiencing bumps in our merchant fees of anywhere from 6 to 16 percent per year. This was a significant financial issue, because not charging our students a fee for using credit cards has been a standard practice on our campus—and one that we were and are not ready to change.
We also recognized that we needed to give students and parents more options when it came to using our online payment system. Not all college students have a credit or debit card, and we did not want to tell them to obtain a card just to be able to use our online system. The college's leadership thought that students and parents should have the convenience of using our online payment system without having to go into debt to do it.
In 2006, after effectively accepting online checks since 2003, we decided to convert the paper checks that we received in our office to electronic checks. That is, we send these items to the bank in the same file as our online payments. They represent point-of-purchase (POP) and accounts-receivable entry (ARC) transactions made through our cashiering system. The change would promote more efficient processing of checks in our office. It would also reduce the number of items we delivered to the bank, thus lowering our armored car expenses. Quicker deposit time at our bank and faster notification of returned items were other anticipated benefits.
Both types of electronic check transitions took significant effort prior to going live.
Accepting online electronic checks. This process lets customers use their checking account information—including their routing and account numbers—to request or allow a business to take funds from their accounts. Conversion to this process took about six months. Our main focus was on the back end—working with our bank; our vendor, TouchNet; and, internally, our information services area. The goal was to ensure that files were in the correct format required by NACHA—The Electronic Payments Association, and to make sure that files were transmitted in a secure environment.
It is important to know that most banking institutions require that any given file be transmitted to the bank as a "balanced" file. This means your debits and credits must be equal, and an off-setting entry must be included in the file to make this happen.
We also had some decisions to make on how we would collect the information we requested from the payer. Would we require the complete billing address or only the ZIP code? Would we request the account number twice, mask the account number as it was entered the first and second times, or mask it only the second time? These may seem like insignificant questions, but they can affect the accuracy of the information you are collecting.
We did decide to require complete billing addresses from our customers; and, after a false start, we quickly learned that we needed to mask the second entry of the account number to force customers to concentrate on what they were entering in this space. Otherwise, many would simply copy the first entry, sometimes including errors. The system would not accept the entries if they did not match.
Initially, we did not do much advertising for our online electronic check option. Before we put money into a marketing plan to promote the service, we wanted to see how the process would work, what the issues would be, and how accepting students and parents would be of this form of payment. We let customers know about the new plan when they called in with questions or when they came to the business office windows. Prior to going 100 percent electronic with our billing, we included a message on the students' paper statements about the option for paying with an electronic check online.
Besides these few communications, we did not push this option in a big way. Now that we see how effective the system has become, we do intend to use some marketing tools to encourage more students and parents to use this form of payment.
Here are some of the things we plan to do:
- Develop "Did you know?" flyers to be sent to our students, letting them know how many options they have for presenting payments.
- Offer incentives to students who use our online electronic check process rather than paying with a credit card. We're considering such advantages as a lower fee on a payment plan that only accepts online electronic checks and a chance at a giveaway for those who use this online option.
The transition to taking POP and ARC checks. This shift took less time to deploy but was more labor intensive. That's because staff needed training to run the check-processing equipment, which takes an image of the customer check, reads the check routing and account numbers at the bottom of the check, and converts the information into an electronic file to submit to the bank.
Staff must also provide notification to customers who might be mailing in checks or coming to our windows expecting to pay by check. In fact, NACHA requires businesses to notify all customers in advance of the possibility that their checks may be converted to electronic transactions. Under NACHA rules, customers also are allowed to opt out of having their paper checks converted to electronic transactions, if they so choose.
Notification is not always an easy thing for higher education institutions to accomplish, as we don't necessarily know who might be sending us a check. For our part, we posted signs at our counters describing the change; and we sent
e-mail notifications to all students who had been enrolled in prior semesters, letting them know that paper checks may be converted to electronic transactions upon receipt in the business office. Although we have had a few customers question the process, most people understand and accept the conversion process.
Keeping Accounts in Balance
During our move to electronic check clearing, we've had to absorb some bumps along the way and resolve some unexpected issues. The biggest problem has been an increase in returned checks. We have identified three reasons for the upsurge.
1. Some students and parents request a stop payment on checks mailed to our office. That's because people do not always recognize that the electronic posting on their statement replaces the check number of the paper check they'd normally see as having cleared the account.
2. Students often enter the wrong information into the online system. They may transpose numbers or add incorrect numbers to the account number information. The software does validate the routing number used to confirm that the item is going to an actual banking institution, but it does not confirm the account number.
3. Many young people carry debit cards rather than checkbooks. For this reason, students enter debit card numbers in place of checking account numbers. Consequently, the electronic checks come back marked "unable to locate account." When questioned about the numbers, students tell us that they know the number is correct because they copied it right from their debit card. When we ask students to get out their checkbooks to verify the account numbers, their response is that they do not have them. Alternatively, the routing number is almost always correct, so we assume that students call the bank to obtain the number or that they are savvy enough to search the Internet for their institution's routing number.
Despite the returned checks, added cost, and necessary follow-up, the amount of time and cost spent handling paper checks has decreased dramatically. For example, in previous years we brought in temporary staff to help process all the paper checks mailed to our office, while our regular staff took payments at our busy service windows. We have now gone two full years without needing temporary staff and have seen a dramatic reduction in the lines at our cashiers' windows. This has allowed our staff to do other projects that we couldn't get to in years past.
Our goal is to continue to increase the percentage of our total payments made by electronic check. Overall, that has been the case each year from 2004 to 2007 (see Figure 1, "Volume of Electronic Check Clearing"). Through September 2008, we've almost reached last year's total and are on track to surpass it by a significant amount.
We would also like to see the dollar volume of our online electronic checks surpass that of credit card payment dollars. We are not yet close to doing that, but it remains our goal. Fortunately, the numbers of parents and students moving to both options of online payments continues to increase. And, we can report a smaller percent of increase in our merchant fees for last year—7 percent compared to the double-digit increases of previous years. Obviously, further savings in merchant fees would be quite beneficial to our budget.
In terms of volume of all types of electronic checks, we will probably pass the $4 million mark by the end of this year. We are converting to electronic checks approximately 15 percent of all payments that come through the business office. We would like to see that percentage increase as well. In addition to allowing for more streamlined staff, virtual checks improve the efficiency of posting check information to the students' accounts, since the automated system accurately authenticates information and promptly posts it. That in turn reduces the amount of staffing time needed to look for errors in posting.
Implementing the automated check clearing process has enabled us to take things one step further and process refunds by direct deposit. Since our payment gateway is already in place, our ACH file is established, and students are storing their electronic payment methods, we were able to offer students the option of using that established payment method to receive refunds for tuition and financial aid. As a result, we've seen a dramatic acceptance rate of direct deposit as a way to receive financial aid refunds. Within the last four semesters of disbursement (see Figure 2, "Comparison of Refund Methods"), we watched our direct deposit transactions surpass the paper checks that we issue to students.
As with electronic payment processing, refunding also has its issues. Students often close the bank accounts that they used as their stored payment method and forget to update their account information with us, resulting in returned direct deposits. Compounding the issue is the time lapse—often up to one week—between our sending the direct deposit and finally receiving notification of the returned item, which allows us to make the direct deposit to the correct account. Consequently, students sometimes must wait an extended amount of time before actually having access to their funds.
For this reason, it is important to consider pre-noting direct deposit and ACH accounts prior to sending settlement batches. Pre-noting allows you to validate the routing number and account information by sending the bank a $0 transaction with the customer-provided bank account information. That process does mean a delay in sending the actual transaction to the bank, because of the amount of time it takes to receive the requested validation.
For our institution, the transition to automated check clearing has been a positive experience. We have been able to reduce our paper processing, lower our cost of credit card fees by 5 to 6 percent annually, and realize a leveling out of armored car fees. We also have quicker access to our deposits—up to two days earlier than before. Most important, though, is the fact that we've been able to provide our students with more options for payment processing, 24/7 access to their student accounts and stored payment information, and quicker direct deposits of refunds.
SUSAN W. RIDER is manager, business office services and bursar, Johnson County Community College, Overland Park, Kansas.
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