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Accounts Receivable Entries (ARC)

What is ARC?

The Standard Entry Class code for Accounts Receivable Entries is ARC.  ARC is a single-entry ACH debit that takes place when a business receives and converts a check payment that is sent via mail or deposited into a drop box.  When the paper check is converted, it is then referred to as a “source document”.

What types of businesses benefit from offering ARC?

Any company that receives check remittances through the mail or in a drop box should evaluate the benefits of ARC.  A wide variety of industries take advantage of ARC, such as credit card companies, utility companies and mortgage companies and other billers.  Property management companies, lenders, health care providers, government agencies, educational institutions and not-for-profit organizations also enjoy the following benefits of using ARC:
  • Cost-savings created by processing paper checks as ACH transactions
  • Reduced time-frame for processing payments
  • Receive earlier notification of returned items
  • Reduction in errors resulting from manual processing

Compliance Considerations

As established by the NACHA Operating Rules, there are a number of compliance requirements for companies that accept ARC transactions, including advance notice of the intent to convert the check, electronic capture of payment information from the MICR line and retention of a copy of the source document.  Additionally, there are eligibility requirements that checks must meet for conversion to ARC.


Compliance Checklist for ARC Transactions

Authorization Requirements
  • The company must provide notice to their customer of the company’s intent to convert the check, typically on an invoice or billing statement; for checks deposited in a drop box, notice should be clearly displayed on signage
  • Notice must clearly and conspicuously state that receipt of the check will authorize an ACH debit
  • The company must establish procedures for customers requesting to opt-out of check conversion
Sample ARC Authorization Language

When you provide a check as payment, you authorize us to either use information from your check to make a one-time electronic fund transfer from your account or to process the payment as a check.

Until January 2010, the notice must also include similar language such as:

When we use information from your check to make an electronic fund transfer, funds may be withdrawn from your account as soon as the same day you make your payment, and you will not receive your check back from your financial institution.

Eligibility Requirements

A company may accept a check as a source document for ARC if it meets the following criteria:
  • Sent through the mail or delivered to a drop box
  • Contains a pre-printed serial number
  • Completed and signed by the checkwriter
  • Payable in U.S. currency only
  • Does not contain an Auxiliary On-Us Field in the MICR line (large format business checks)
  • An amount of $25,000 or less

Ineligible items include:
  • Checks or sharedrafts that have not been encoded in magnetic ink;
  • Checks or sharedrafts that contain an Auxiliary On-Us Field in the MICR line;
  • Checks or sharedrafts in an amount greater than $25,000;
  • Third-party checks or sharedrafts;
  • Demand drafts and third-party drafts that do not contain the signature of the customer;
  • Checks provided by a credit card issuer for purposes of accessing a credit
    • account or checks drawn on home equity lines of credit;
  • Checks drawn on an investment company as defined in the Investment Company Act of 1940;
  • Obligations of a financial institution (e.g., traveler’s checks, cashier’s checks, official checks, money orders, etc.);
  • Checks drawn on the Treasury of the United States, a Federal Reserve Bank, or a Federal Home Loan Bank;
  • Checks drawn on a state or local government that are not payable through or at a Participating DFI; and
  • Checks or sharedrafts payable in a medium other than United States currency.

Capturing Payment Information from the MICR line

NACHA sets forth specific guidelines for capturing payment information from the source document:
  • The company must use an electronic check reading device to capture MICR information, such as the account number, routing number and serial number
  • Companies are prohibited from key entering MICR information from the check, except for correcting errors from the reader device
  • Companies may key enter the transaction amount

Retention of Source Document or Copy

The NACHA Rules do not specify a destruction requirement timeframe.  All banking information must be securely stored in a commercially reasonable manner.  A copy of the front of the source document must be stored and available upon request for two years from the Settlement Date of the transaction.  If requested, the company’s bank has 10 banking days to provide a copy of the source document.

Collection of Fees
ARC entries must accurately reflect the source document.  The dollar amount, routing and account numbers and serial number must be the same as the information that appears on the original paper check. Fees for returned checks may not be added to an ARC transaction.  If a company wants to collect a returned check fee via the ACH Network, a separate PPD entry must be originated, and the NACHA authorization requirements for PPD must be met.
 
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