What Is Accounts Receivable Conversion (ARC)?
Accounts receivable conversion (ARC) is a process that allows paper checks to be electronically scanned and converted into an electronic payment through the Automated Clearing House (ACH).
This refers explicitly to checks that companies receive in payment for an account receivable. Accounts receivable conversion saves both the time and expense of physically processing a check. Both the vendor and the bank on which the payment was drawn receive an electronic image of the check.
- Accounts receivable conversion (ARC) is a process where paper checks are electronically scanned and converted into an electronic payment.
- ARC reduces the time and expense that is associated with traditional check payments for accounts receivables.
- Businesses that use ARC receive their payments much quicker than they would through traditional checks. This allows them to furnish their liabilities faster.
- ARC is processed through 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 substantial since 2001. Before ARC and electronic payments, the most common method of payment was lockbox banking, in which payments are made to a post office box serviced by a bank. ARC expedites the payment to the vendor, who otherwise would have to wait for a check to be transported and processed.
Depending on the institution, checks have to meet certain requirements before being eligible for an ARC. There are minimum size amounts and checks have to be consumer-based checks. Most often money orders and large corporate transactions are not eligible for ARC.
Advantages of Accounts Receivable Conversion (ARC)
ARC provides many advantages in addition to improving the timeliness and costs of transactions. Businesses enjoy using ARC because it does not require high levels of authorization from the customer to begin processing. Usually, a notification is sent to the customer from the business that informs them that once the item is received their account will be debited.
The most important aspect of ARC is the time reduced in receiving funds. Once an item is received by the customer, typically the business will receive their funds within a few days by using ARC. The customer has the choice of opting out, but statistically, this number is low.
Receiving funds on accounts receivable for a business is crucial because it reduces outstanding collectibles, meaning more cash on hand, meaning that they can furnish their debt obligations faster as well as reduce accounts payable sooner. For example, the sooner that money comes in from accounts receivables, the sooner a business can pay its suppliers.
Accounts Receivable Conversion (ARC) and the Automated Clearing House (ACH)
ARC moves through the Automated Clearing House (ACH), which is managed by Nacha, previously known as the National Automated Clearing House Association. The ACH is a payment system that deals with numerous financial transactions for companies and government organizations, including payroll, direct deposit, tax refunds, consumer bills, tax payments, and further payment services.
In 2019, the ACH network processed 24.7 billion transactions with an approximate value of $55.8 trillion. These figures include both debits and credits. This was a 7.4% and 9% increase in transactions and total value, respectively, compared with 2018.
The ACH network batches financial transactions together and processes them at specific intervals throughout the day to expedite 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 for the majority of ACH transactions.
View more information: https://www.investopedia.com/terms/a/accounts-receivable-conversion.asp