5.2 Check Conversion SEC Codes: ARC, BOC & POP Rules and Notices

5.2 Check Conversion SEC Codes: ARC, BOC & POP Rules and Notices

Core Principle: Electronic Check Conversion is the process of capturing the routing number, account number, check serial number, and dollar amount from an eligible paper check to create a single-entry ACH debit. The moment an eligible paper check is converted, the transaction ceases to be governed by check law (Uniform Commercial Code Articles 3 and 4 and Regulation CC) and becomes an Electronic Fund Transfer governed by the Electronic Fund Transfer Act (Regulation E) and the Nacha Operating Rules.

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1. Check Conversion Taxonomy: ARC, BOC & POP

Nacha establishes three distinct Standard Entry Class (SEC) codes for converting paper checks into single-entry ACH debits, distinguished primarily by the point of receipt and the operational workflow of conversion.

+---------------------------------------------------------------------------------------------------------+
|                                 CHECK CONVERSION APPLICATIONS                                           |
+---------------------------------------------------------------------------------------------------------+
| SEC Code | Full Name                     | Point of Receipt         | Physical Check Handling           |
+----------+-------------------------------+--------------------------+-----------------------------------+
| ARC      | Accounts Receivable Entry     | Mail-in / Lockbox / Box  | Copy of front kept 2 yrs; item    |
|          |                               |                          | stored securely until destroyed   |
| BOC      | Back-Office Conversion        | Attended POS / Location  | Copy of front kept 2 yrs; item    |
|          |                               |                          | stored securely until destroyed   |
| POP      | Point-of-Purchase Entry       | Attended Cashier Desk    | Voided & returned to customer POS |
+---------------------------------------------------------------------------------------------------------+

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2. Accounts Receivable Conversion (ARC)

Workflow and Environment

Accounts Receivable Conversion (ARC) is used by billers, utility companies, credit card issuers, and lockbox service providers to convert consumer checks received via the U.S. mail or placed in an unattended drop box for payment of an account.

ARC WORKFLOW TIMELINE
1. Biller sends periodic invoice with mandatory Conversion Notice & Opt-Out terms.
2. Consumer mails paper check to biller's lockbox.
3. Lockbox high-speed transport scans MICR line (Routing, Account, Serial Number) and amount.
4. ARC ACH debit file generated and transmitted to ODFI.
5. Physical check stored securely until destruction; a legible copy of the front is kept for 2 years.

Notice and Opt-Out Requirements for ARC

• Mandatory Advance Notice: Prior to receiving the check, the Originator must provide the consumer with clear and conspicuous notice (typically printed on the monthly billing statement or invoice) stating:

  "When you provide a check as payment, you authorize us either to use information from your check to make a one-time electronic fund transfer from your account or to process the payment as a check transaction. 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 we receive your payment, and you will not receive your check back from your financial institution."

• Opt-Out Mechanism: The Originator must establish and disclose a clear, readily accessible mechanism allowing the consumer to opt out of electronic check conversion (e.g., a marked check-box on the payment coupon or a toll-free telephone number).
• Source Document Retention and Destruction: The Originator must retain a reproducible, legible image, microfilm or copy of the front of the eligible source document for two (2) years from the Settlement Date of the ARC Entry, and must provide a copy to a requesting financial institution, through its ODFI, within 10 banking days of the request. The physical item itself must be stored securely until destruction, and destroyed by a method that prevents reconstruction (cross-cut shredding or incineration). Nacha sets no fixed number of days before destruction — do not memorize one.

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3. Back-Office Conversion (BOC)

Workflow and Environment

Back-Office Conversion (BOC) allows merchants and retailers to collect eligible paper checks presented at an attended point of sale (POS) or physical customer service location, and convert those checks into single-entry ACH debits during centralized back-office processing rather than at the checkout counter.

BOC CHECKOUT & CONVERSION WORKFLOW
1. Customer presents check to cashier at attended point of sale.
2. Cashier verifies customer ID and places intact check into cash drawer (no terminal conversion).
3. Cashier provides customer with receipt containing BOC notice.
4. At end-of-day, merchant back-office scans checks in bulk, creating BOC ACH debit batch.
5. Physical checks stored securely until destruction; a legible copy of the front is kept for 2 years.

Mandatory Dual Notice Requirements for BOC

Because the check is taken from the consumer at a retail counter but converted out of the consumer's sight, Nacha enforces a strict dual-notice mandate:

1. Posted Notice: Prominently and conspicuously posted at the point of sale / checkout lane prior to the transaction.
2. Written Copy of Notice: Provided to the consumer at the time of the transaction (commonly printed directly on the register receipt or delivered as a separate handout).

Physical Check Retention

Like ARC, the physical paper check is never returned to the customer. The Originator must retain a legible copy of the front of the eligible source document for two (2) years from the Settlement Date and provide it to the ODFI on request, and must store the source document securely until it is destroyed by a method that prevents reconstruction. The Rules prescribe a secure-storage-until-destruction standard, not a fixed destruction date.

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4. Point-of-Purchase (POP) Entries

Workflow and Environment

Point-of-Purchase (POP) occurs at an attended point of sale where the merchant captures the check's MICR line data in real time at the checkout register, prompts the customer for authorization, and immediately renders the check unpayable.

POP REAL-TIME CHECK CONVERSION
1. Consumer presents completed or blank check to cashier.
2. Cashier passes check through MICR reader/scanner at terminal.
3. Terminal prints receipt with mandatory POP legal authorization disclosures.
4. Consumer signs receipt or provides electronic authorization.
5. Cashier stamps check "VOID", cancels MICR line, and IMMEDIATELY RETURNS check to consumer.

Physical Check Handling: The Void & Return Rule

Unlike ARC and BOC, in a POP transaction:

• The merchant MUST NOT retain the physical paper check.
• The cashier must stamp "VOID" across the face of the check and immediately return the voided check to the consumer at the checkout counter along with the signed transaction receipt.

Mandatory Receipt Data Elements for POP

The register receipt provided to the customer must contain specific legal disclosures:

• Merchant Name and Merchant Telephone Number.
• Date of Transaction.
• Transaction Dollar Amount.
• Check Serial Number.
• Terminal / POS Identification Code.
• Merchant's City and State.

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5. Source Document Eligibility & Ineligibility Framework

Nacha establishes strict, non-negotiable eligibility criteria for source documents across all check conversion applications. Originators make absolute warranties that every converted item meets these standards.

                         CHECK CONVERSION SOURCE DOCUMENT SCREENING
                               ┌───────────────────────────┐
                               │ Paper Source Check Tested │
                               └─────────────┬─────────────┘
                                             │
                  ┌──────────────────────────┴──────────────────────────┐
                  ▼                                                     ▼
    ┌───────────────────────────┐                         ┌───────────────────────────┐
    │   ELIGIBLE SOURCE CHECK   │                         │  STRICTLY INELIGIBLE ITEM │
    │ • First-party Consumer Chk│                         │ • Dollar Amount > $25,000 │
    │ • Under $25,000 Limit     │                         │ • Auxiliary On-Us Field   │
    │ • Pre-printed Routing/Acct│                         │ • Third-Party Endorsement │
    │ • No Auxiliary On-Us Field│                         │ • Cashier's / Money Order │
    │ • Drawn on US DFI         │                         │ • Demand Draft / RCC      │
    └───────────────────────────┘                         └───────────────────────────┘

Source Document Eligibility Rules

To be converted under ARC, BOC, or POP, the source document must be:

1. A first-party consumer check drawn on a U.S. financial institution.
2. A corporate check for an amount under $25,000 that does not contain an Auxiliary On-Us field on the MICR line.
3. Pre-printed with the routing number, account number, and check serial number.
4. Completed and signed by the consumer (or blank check provided by consumer at POP).

The Auxiliary On-Us Field Rule

The Auxiliary On-Us field is an extra data segment printed on the far-left portion of the MICR line (to the left of the routing transit number) on standard business-sized commercial checks. It typically contains a 4-to-6 digit commercial check serial number.

• Significance: The presence of an Auxiliary On-Us field signifies a large commercial check. Any check bearing an Auxiliary On-Us field is strictly prohibited from conversion under ARC, BOC, and POP.

Strictly Ineligible Items (Prohibited from Check Conversion)

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6. Exception Handling & Return Reason Codes

When an Originator converts an ineligible document or breaches notice requirements, the RDFI and consumer possess specific return mechanisms:

• R51 (Item Related to RCK / Check Conversion Ineligible / Notice Not Provided):
  • Used when an ARC, BOC, POP, or RCK entry was created from an ineligible source document (e.g., third-party check, cashier's check, check exceeding $25,000, or check with an auxiliary on-us field) OR when required advance notice was not provided.
• R52 (Stop Payment on Item):
  • Used for RCK entries where the consumer placed a stop payment order on the underlying physical check.
• R53 (Item and ACH Entry Have Both Been Presented):
  • Used when both the electronic ACH debit (ARC, BOC, POP) and the physical paper check were cleared and posted against the customer's account (double debit).
• R10 / R11 (Customer Advises Unauthorized / Revoked / Substantially Modified):
  • Standard consumer dispute codes utilized within 60 calendar days when the consumer states no authorization was provided.

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7. Comparative Architectural Matrix: ARC vs. BOC vs. POP