hree years ago electronic checks were poised to become the next big leap in retail payments. Today, what has come to be known as POS check conversion barely registers a blip on the payments radar screen. Some of the most vocal champions of POS check conversion have exited the business, and the few remaining seem to have scaled back on expectations.

In POS check conversion, a check tendered as payment at the point of sale is run through a check-reading device, which captures information pertinent to the transaction (like bank routing and account numbers) for authorization and then converts the information for electronic processing through the automated clearinghouse (ACH) system. In most cases, the consumer receives the check back (marked "void" or "canceled") after it has been run through the check reader, along with a receipt from the cashier. The transaction information is then stored and bundled together with the information from similarly converted checks for clearing and settlement through the ACH, which is a two- to three-day process.

Proponents say converting paper checks to ACH payments slashes the time it takes to process transactions, helps control float and allows merchants to learn more quickly of non-sufficient funds (NSF) and outright fraudulent checks. But the two- to three-day settlement process eliminates much of that appeal, because most checks written at the retail checkout are drawn on local banks, which typically equates to next-day availability on check deposits. Then, of course, there is the need for dual check acceptance procedures.

"There's no way a merchant can ever achieve 100 percent check conversion," says Paul Martaus of Martaus & Associates.

About 70,000 merchants today subscribe to POS check conversion services, and most of those are small "mom and pop" shops. None of the really big retail chains has committed to the systems changes needed to support wide-scale adoption of this new payment option.

Just last summer, Price Chopper, a regional supermarket chain in upstate New York, began testing the check conversion process. With 97 stores in six northeastern states, Price Chopper is the quintessential regional retailer and an ideal test bed for widespread adoption of POS check conversion. While executives at Price Chopper and BankServ (provider of the service) claim the test went well, Price Chopper never signed on for the long haul.

Meanwhile, BankServ has stopped selling POS check conversion, although people close to the company insist BankServ remains committed to being a "back-end engine" for check conversion and other payments companies.

eFunds, a company name that was synonymous with POS check conversion in the early days, has had little to nothing to say on the subject in the last two years. A small California upstart, eFunds was purchased by Deluxe Corp. two years ago. The nation's largest check printer, Deluxe also ran several e-payments companies, including a company that provides the underlying technologies that support ATM networks and ACH processing.

Last year Deluxe spun off those units, along with its check conversion operations, into a new company, which it affixed with the eFunds moniker. Since then, the company has announced one new customer for POS check conversion - an apparel chain with several hundred stores in about 30 states.

TeleCheck, a unit of First Data Corp., has the largest share of check conversion customers. About 38,000 merchants subscribe to the TeleCheck conversion service, which is combined with check guarantee, according to Caroline Hassell, vice president for strategic development at TeleCheck.

Hassell concedes that large, multilane merchants have been slow to adopt check conversion but blames the situation on over-extended technology staffs. "There are backlogs of technology projects," she said.

Martaus says the culprit is the underlying technology: the magnetic ink character recognition (MICR) line on the bottom of checks that is the basis for check conversion.

"The primary reason that check conversion doesn't work is that the MICR line was never intended to be anything more than aid to banks for routing paper through the check clearing system," Martaus says.

On any given day, 3 percent of the checks processed through the banking system are rejected because the MICR lines cannot be read. Then there are the millions of checking accounts that are cleared via "payable through" institutions. The MICR numbers on these accounts have no direct connection to individual accounts, which are maintained at credit unions and various other types of non-bank financial institutions. "Those checks are rejected right off the bat," explains Martaus.

So what companies are left to peddle POS check conversion? The latest issue of Green Sheet Quarterly lists 10 companies, including TeleCheck and eFunds. At least one of the remaining eight companies will be sold in the next several months, we've been told. Whether that acquisition will ignite competition over this seemingly moribund retail payments option, or simply eliminate another competitor, remains to be seen.

While check conversion lacks appeal at the physical point of sale, it could prove to be a viable alternative for non-face-to-face retail transactions, such as those initiated via the Internet or a telephone sales center. But at best, even then, electronic (ACH) checks will be just one of several payment options. It's doubtful that check conversion will ever become a preferred payment option in the American consuming marketplace.

Observes Martaus: "The most active and vocal proponents of this that remain are those with the most vested interest in its success."

And so it is.

Patti Murphy is Contributing Editor of The Green Sheet and President of Takoma Group. She can be reached at pmurphy@takomagroup.com.