What is Accounts Receivable Conversion (ARC)?
Accounts Receivable Conversion (ARC) is a process that electronically digitizes paper checks and converts them into an electronic payment through the Automated Clearing House (ACH).
These are explicitly checks that businesses receive as payment for a account receivable. Converting accounts receivable saves both the time and expense of physically processing a check. Both seller and the bank on which the payment was drawn receive an electronic image of the check.
Key points to remember
- Accounts Receivable Conversion (ARC) is a process in which paper checks are electronically scanned and converted into an electronic payment.
- CRA reduces the time and expense associated with traditional check payments for accounts receivable.
- Businesses that use ARC receive their payments much faster than they would with traditional checks. This allows them to provide their liabilities faster.
- The ARC is processed by the Automated Clearing House (ACH).
Understanding Accounts Receivable Conversion (ARC)
As the financial industry becomes increasingly computerized, ARC has become the norm rather than the exception for large payment processors. Growth has been significant since 2001. Prior to CRA and electronic payments, the most common payment method was bank safein which payments are made to a post office box served by a bank. ARC expedites payment to the seller, who would otherwise have to wait for a check to be transported and processed.
Depending on the institution, checks must meet certain requirements before they are eligible for an ARC. There are minimum amounts and checks must be consumer based checks. Most often, mandates and large business transactions are not eligible for ARC.
Benefits of Accounts Receivable Conversion (ARC)
ARC offers many benefits in addition to improving transaction speed and costs. Businesses like using ARC because it doesn’t require high levels of authorization from the customer to begin processing. Usually, a notification is sent to the customer by the company informing them that once the item has been received, their account will be debited.
The most important aspect of ARC is reducing the time it takes to receive funds. Once an item is received by the customer, the business typically receives their funds within days using ARC. The customer has the choice to unsubscribe, but statistically this number is low.
Receiving funds from a company’s accounts receivable is crucial because it reduces collectibles in circulation, which means more cash on hand, which means they can service their debts faster and reduce accounts payable earlier. For example, the sooner money comes from accounts receivable, the sooner a company can pay its suppliers.
Accounts Receivable Conversion (ARC) and Automated Clearing House (ACH)
The ARC goes through the Automated Clearing House (ACH), which is operated by nacha, formerly known as the National Automated Clearing House Association. ACH is a payment system that processes many financial transactions for businesses and government organizations, including payroll, direct deposit, tax refundconsumption bills, tax payments and other payment services.
In 2019, the ACH network processed 24.7 billion transactions worth approximately $55.8 trillion. These numbers include both debits and credits. This is a 7.7% and 9% increase in transactions and total value, respectively, compared to 2018.
The ACH network aggregates financial transactions and processes them at specific intervals throughout the day to speed up processes. For example, the average ACH debit transaction settles within one business day. In addition, recent changes to Nacha’s operating rules now allow for same-day settlement of the majority of ACH transactions.
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