By Brandes Elitch
CrossCheck Inc.
Here in Sonoma County, we're getting ready for the harvest season, which lasts from August to November. We received about 15 inches of rain this year, half our normal rainfall. We're in a severe drought. It appears growers won't be overly impacted now, but they'll certainly have smaller harvests next year. It takes about five gallons of water to make one gallon of wine. We are coming off two excellent vintages; plenty of wine is still ready to be bottled.
In my little town of Healdsburg, about 3 million gallons worth of storage tanks are being built, with more on the way. Growers have had to modify their processing to sell wine – the real goal. One example of new approaches to winemaking involves the wine barrel. Oak barrels are necessary, not just to impart an oaky aroma, but also to create the softening and aging process called "micro-oxidation."
French oak barrels can cost $1,200, and American oak barrels about half of that. It takes about four barrels per ton of grapes. You can get about 23 cases of wine per barrel, which is about $4 per bottle for oak barrel aging. Winemakers have responded by putting oak planks or tubes with oak chips inside stainless steel barrels. This is called "oak-infused" wine. Since most consumers have a specific price point for buying wine, this allows winemakers to reach a wider audience by tailoring wine to the price point.
Winemakers can also do this by blending various wines. A blend might consist of "Bordeaux-type" grapes, such as Malbec, Petit Verdot, Cabernet Franc and Merlot. Instead of trying to sell a few thousand cases of each, which could be rather difficult, the winemaker can make a blend, call it "Meritage," and have a product that is easier to sell and stock for distributors and wine shops. Everybody benefits. Winemakers have to determine early on what price points will work for their individual distribution networks. Distributors are their real clients.
The same is true for ISOs seeking a payment platform that meets their clients' needs (except here the clients are the businesses selling to consumers or other businesses). ISOs focus on card processing, but certain clients need additional payment products, typically check and automated clearing house (ACH).
Here are some typical remarks we hear from ISOs about checks.
None of these remarks is true. The Federal Reserve does a check study every three years. It estimated that about 20 billion checks were written in the United States last year. Virtually all business-to-business payments are by check. Yes, consumers have shifted to debit card for small-dollar payments (the average debit card payment is less than $50), and many consumers pay bills via home banking, but checks are used for high-dollar payments.
All payments begin and end in the checking account, even credit card bills. About 20 percent of Americans don't have checking accounts; about 30 percent of Americans don't have credit cards either. Half of those with credit cards have little or no "open to buy" on their cards. How do they pay for large-ticket items? At a doctor's office, they might open a Care Credit account. For online purchases, they might open a Bill Me Later account. If they are subprime (below 660 FICO) they will get credit from a subprime lender. In all these cases, borrowers will pay double-digit interest rates. Other alternatives are more draconian: payday loans, pawnshops and title loans, for example.
An old axiom states that if you are a merchant, you need to take whatever form of payment the buyer wants to use. If the consumer wants to use a check and the amount is less than $100 (roughly the size of the average credit card payment), the retailer might use a check verification service. This will ping several databases to determine if the consumer is who he or she claims to be, and if the account is open or closed. It gives the retailer an indication that the consumer is good for the check, but it doesn't guarantee payment if it bounces.
However, certain retailers routinely take large-dollar checks – typically in the thousands of dollars. They can't afford to risk that the checks may bounce, particularly if they are depositing three or four checks for a purchase up to 60 days in the future. This is a common occurrence in a car dealership or at a repair shop, where the down payment could be $2,000 or a transmission repair might be $2,500.
This offering, called "hold check," or "multiple check," does not require that the consumer pay interest or fill out a credit application. It makes a sale happen for the car dealer that wouldn't happen otherwise. The check guarantee company provides a real-time authorization at the POS. If the check bounces, the right to payment is assigned to the guarantee provider, who pays a claim to the merchant for the face amount approved, and even does the banking, via a remote deposit capture application.
If you are calling on auto dealers, the auto aftermarket, building supply, veterinarians, funeral homes, wherever there is a high-ticket sale, you will want this option for your merchants, because they will ask you for it.
Now, how does ACH differ from check? The ACH is a batch, store-and-forward, next business day settlement, designed for recurring small-dollar payments where there is a signed authorization. Your insurance payment or car payment is a typical example of ACH. Or it can be used to push payments, like payroll. In an ACH transaction, there is an originator, the company that is collecting money, their bank, the switch (either The Clearing House or the Federal Reserve), the receiver's bank, and the receiver, whose account is being charged in a debit transaction.
The ACH is governed by Regulation E, which gives consumers 60 days to tell their banks a debit was unauthorized and should be returned. It also takes the transaction outside of the Uniform Commercial Code and banking law, which is where merchants desiring payment want to be.
The ACH works well for recurring payments; it was never designed for one-time payments. It's tough to use in Internet and card-not-present environments, because it is not always easy to determine that buyers are who they say they are and, of course, there is the question of getting a valid signature.
There are 28 return reason codes for ACH. Small banks typically resist taking ACH clients, and large banks can be difficult to work with. Thus, a large portion of ACH processing has always been handled by third-party processors (TPPs). I asked Jeff Thorness at Forte Payment Systems, a large TPP, to describe what an ISO should look for in a processor. He suggested the following:
The TPP can be a great ally in providing the critical banking support merchants may not be able to get on their own. This is where a TPP can provide tremendous value for a merchant. If you lose your originating bank, you cannot send an ACH file, which is a serious situation.
Think of the ACH when you are calling on merchants with any recurring billing scenario, like subscriptions, alarm monitoring, fitness, property management, utilities, etc. ACH is not good for high-risk businesses or those prohibited from processing by the card companies.
Ask your merchants how they are handling checks and ACH. As an ISO, you want to be a one-stop shop for your merchants. You want them to look to you as their trusted financial partner. Banks have always lagged in this area, but they are getting better, so pay attention. Just like the winemakers, who have to understand how their clients work and what they need to run their business, a good ISO will "think like a customer" and provide a whole suite of products to meet client payment processing needs, including checks and ACH.
Brandes Elitch, Director of Partner Acquisition for CrossCheck Inc., has been a cash management practitioner for several Fortune 500 companies, sold cash management services for major banks and served as a consultant to bankcard acquirers. A Certified Cash Manager and Accredited ACH Professional, Brandes has a Master's in Business Administration from New York University and a Juris Doctor from Santa Clara University. He can be reached at brandese@cross-check.com.
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