Accounts Receivable Conversion (ARC): Notice, Rights, and Failures

Accounts receivable conversion, known in the ACH network as ARC, is the process a business uses to turn a consumer check received by mail, at a lockbox, or at a staffed bill-payment location into an electronic debit that clears through the Automated Clearing House. Only consumer checks of $25,000 or less qualify, the business must notify the check writer in advance, and the paper check is voided rather than deposited. Done properly, the money can settle in the business’s account the same day.

Which Checks Qualify

ARC applies only to checks drawn on a consumer’s personal bank account. Corporate or business-issued checks are not eligible. The check also has to carry a pre-printed MICR line along the bottom edge showing the routing number, account number, and serial number. If any of those elements are hand-written or missing, the check fails eligibility and has to be deposited the traditional way.

The dollar ceiling is $25,000 per transaction. A check above that amount triggers return code R19 if someone tries to push it through the network.

Several instrument types are excluded regardless of amount:

Third-party checks, where the payee is not the party attempting conversion.
Credit card convenience checks, which draw against a credit line rather than a bank account.
Checks drawn on investment or brokerage accounts.
Cashier’s checks, traveler’s checks, and money orders, because these are obligations of the issuing bank rather than of a consumer’s account.¹
Checks not denominated in U.S. dollars.

How the Conversion Happens

A MICR reader pulls four data points off the face of the check: the routing transit number, the account number, the check serial number, and the dollar amount. The check itself becomes a “source document” in ACH terminology, meaning it supplies the data for the electronic entry but is not deposited. Magnetic ink was designed for high-speed machine reading, and the error rate is far lower than manual keying, which is what makes ARC economically viable for lockbox operations processing thousands of items a day.

After scanning, workers stamp or write “VOID” across the face of the check. Voiding prevents double-clearing, where both the electronic debit and the paper check hit the consumer’s account. The business then has to retain an image of the front of the check for two years from the settlement date. If the consumer’s bank asks for a copy inside that window, the converting business has 10 banking days to produce it.¹

The scanned data is packaged into an ACH file with the Standard Entry Class code “ARC” and sent to the business’s bank, the Originating Depository Financial Institution. That bank forwards the file into the ACH network, which routes it to the consumer’s bank, the Receiving Depository Financial Institution. The consumer’s bank verifies the account, checks funds, and either authorizes the debit or returns it.²

Traditional ACH settlement takes one to two business days, but ARC entries also qualify for Same Day ACH processing. The Same Day ACH per-payment limit was raised to $1 million in March 2022, so every ARC transaction sits well within the ceiling.³

On the consumer’s bank statement, the transaction appears with the “ARC” descriptor rather than the check number the consumer wrote, and because the physical check is never deposited, the check image will not appear in online banking. This catches many consumers off guard the first time they see it.

The Notice a Business Has to Give

Federal law requires the business to tell the check writer, before accepting the payment, that the check may be converted to an electronic debit. That obligation comes from Regulation E, codified at 12 CFR Part 1005, which governs electronic fund transfers. The rule says the person initiating the transfer using a consumer’s check as a source of information must provide notice that the transaction will or may be processed electronically and must obtain the consumer’s authorization.⁴

The notice has to communicate three things in plain terms: the check will be used to create an electronic fund transfer, funds may leave the consumer’s account as soon as the same day the payment is received, and the consumer will not get the physical check back from their bank. Regulation E’s model clause spells this out almost word for word.⁵

For mailed payments, businesses typically print the notice on the billing statement or payment coupon. For drop-box payments, signage at the drop-box location does the same job. The notice has to appear somewhere the consumer will realistically see it before submitting the check.

When an ARC Transaction Fails

If the consumer’s bank cannot honor the debit, it returns the entry through the ACH network using a standardized reason code. Several apply specifically to ARC:

R01 (Insufficient Funds) — the account balance cannot cover the debit. The most common return.
R09 (Uncollected Funds) — ledger balance is sufficient, but available funds are not, usually because a recent deposit has not cleared.
R10 (Customer Advises Unauthorized) — the consumer tells their bank the transaction was not authorized or the signature on the source document is not authentic.
R19 (Amount Error) — the entry exceeds the $25,000 ARC limit.
R37 (Source Document Presented) — the paper check was also presented for payment, meaning the voiding step failed.
R38 (Stop Payment on Source Document) — the consumer placed a stop payment order on the original check.
R39 (Improper Source Document) — the source document does not meet eligibility requirements, or both the ARC entry and paper check posted to the account.

R37 and R39 are the codes that point to process failures on the business side. Recurring hits on either one signal that the voiding procedure has broken down.

Consumer Rights After Conversion

Once a check is converted, it becomes an electronic fund transfer governed by Regulation E, and the consumer gains protections that do not apply to paper checks.

Error Resolution

A consumer who spots an unauthorized or incorrect ARC entry has 60 days from the date the statement was sent to notify their bank. The bank then has to investigate and resolve the dispute under Regulation E’s error resolution procedures. Miss the 60-day window and the bank is not required to investigate.⁶

Liability for Unauthorized Transfers

If someone converts a check without proper authorization, the consumer’s liability depends on how quickly they report the problem. Reporting within two business days of learning about an unauthorized transfer caps liability at $50. Waiting longer than two days but reporting within 60 days of the statement raises the cap to $500. After 60 days, the consumer could face unlimited liability for transfers the bank can show would have been prevented by timely notice.⁷

Review bank statements monthly. ARC entries are easy to overlook because they look unfamiliar, and that 60-day clock starts running whether or not the transaction is recognized.

Stop Payment

Regulation E’s right to stop preauthorized recurring transfers does not apply to ARC, because ARC entries are one-time debits. A consumer can still ask their bank to place a stop payment on the original check, which triggers return code R38 if the ARC entry has not yet settled, but the timing is tight. Once the electronic debit clears, the remedy shifts to the error resolution process above.

Penalties for Skipping the Notice

A business that converts checks without providing the required Regulation E notice exposes itself to liability under the Electronic Fund Transfer Act:

Actual damages the consumer suffered because of the violation.
Statutory damages in an individual action of $100 to $1,000 per consumer, even without any actual financial loss.
Statutory damages in a class action of up to the lesser of $500,000 or 1 percent of the business’s net worth.
Reasonable attorney’s fees and court costs for a prevailing consumer.

Courts weigh how persistent the noncompliance was and whether it was intentional when setting the statutory amount. A business can defend by showing the violation was an unintentional bona fide error despite procedures in place to prevent it, but that defense is harder to sustain when no notice procedure existed in the first place.⁸

Enforcement authority sits with the Consumer Financial Protection Bureau for most businesses and with the relevant prudential regulator for banks and credit unions.

How ARC Differs From POP and BOC

ARC is one of three ACH standard entry class codes used for check conversion, and each applies to a different physical setting where the business first receives the check. POP (Point-of-Purchase) covers checks handed to a cashier in person, scanned at the register, voided, and returned on the spot. BOC (Back Office Conversion), introduced in 2007, also covers in-person checks but delays the conversion to a centralized back office instead of holding up the checkout line. ARC is the correct method any time a check arrives by mail or lands in a lockbox, where the check writer is not present when conversion happens. All three share the $25,000 ceiling and the prohibition on converting business checks.²

1
Internal Revenue Service. PMTA 2010-04 – Check Conversion Notice Requirements
2
Nacha. ACH File Details
3
Federal Reserve Financial Services. Same Day ACH Resource Center
4
eCFR. 12 CFR Part 1005 – Electronic Fund Transfers (Regulation E)
5
eCFR. 12 CFR Part 1005 – Electronic Fund Transfers (Regulation E) – Section: Appendix A-6
6
Consumer Financial Protection Bureau. 12 CFR Part 1005 (Regulation E) – 1005.11 Procedures for Resolving Errors
7
eCFR. 12 CFR 205.6 – Liability of Consumer for Unauthorized Transfers
8
Office of the Law Revision Counsel. 15 USC 1693m – Civil Liability