With the Right Knowledge, Check Services Do Sell Well

A fter years of being "the redheaded stepchild to bankcard," check services are attracting the interest of a growing number of ISOs and even financial institutions.

The reason, of course, is that check conversion has made selling checks sexy. However, check verification and check guarantee also are being sold as complementary products (after all, conversion is just about how the merchant will get paid, not IF the merchant will get paid) as well as stand- alone products.

While the decade-old argument of "verification is cheaper" is always met with the flip-side argument, "you get what you pay for," guarantee is outselling verification three to one - mostly because of check conversion. So it might help to review some of the pros and cons and how to explain these real and perceived differences in check guarantee vs. check verification.

We thought that the best of all possible ways to look at how these competing products are sold would be to review sales literature or a sales presentation prepared from a verification company's point of view.

While this sales information is the product of a particular company, we have found it widely used by a number of verification companies to compare the relative value of verification services to guarantee services. We will exclude their name because we don't want to pick on them.

The Pencil Close

The particular sales presentation we will review is called a pencil close. The idea is to show the potential customer the benefits of your service, from a financial point of view, and let the results of the presentation close the sale. The key to making the pencil close work is to make the merchant see that the product or service being compared has a superior financial return.

When the verification presentation on table 1 and the guarantee presentation on table 2 are compared, the verification product has a 64.5 percent recovery rate (so says the pencil close) rather than a 25 percent recovery rate for guarantee. Let's see what, if anything, is wrong with the assumptions:

Guarantee rates are assumed to be nearly the same as the bad check loss (1.5 percent vs. 2 percent). While guarantee companies would love to have this average revenue level, this has not been true for more than a decade. While it varies by industry, the rate is always less than the loss, and in many cases the loss is three to four times the rate.

It is assumed that the merchant will get a 65 percent collection recovery or will be paid 65 percent of the dishonored checks. And while our verification company notes that their national recovery rate averages 65 percent, they are likely an exception to the rule; few collection agencies do this well. The more important issue, however, is that the guarantee product guarantees 100 percent payment to the merchant, collected or not.

It is assumed that the approval process in both verification and guarantee are the same. The fact is, the verification company has no reason whatsoever to approve a check (recommend approval) when a consumer has an outstanding item on file or has previously written a bad check. The verification company believes its job is to say no because the merchant will lose at least 35 percent of the sale (sale less 65 percent assumed recovery rate) when it's wrong.

With the guarantee product, the guarantee company has many reasons to approve rather than decline a check because the guarantee company believes its job is to increase sales, not decline checks.

Many verification companies have as their only revenue source the fees they charge over the face amount of the check. This means that return bank fees are generally not reimbursed to the merchant because these fees might be the only source of income to the verification company beyond a modest monthly service fee.

In looking at the verification pencil close again, the presentation notes that the effective recovery rate is 64.5 percent. This assumes, of course, that all collections will be at this level and that the merchant's loss therefore will not exceed 35.5 percent or, in this example, a $1,180 loss (.72 percent of the merchant's revenue).

While this presentation does not assure that this will happen, it is the assumption that the recovery rate is a proper comparison to a 100 percent guaranteed payment of dishonored checks by a guarantee service.

Finally, the most important comparison factor is the increased sales to the retailer using guarantee over verification. This factor is, of course, ignored in the pencil close that we have been reviewing because this is not a positive element of the verification product.

To best understand this point, we must recognize that retailers do not need any check- approval company to help them reduce check losses. They simply can stop taking checks, and their losses are zero. So it is not check losses that retail needs help with, assuming retailers can benefit from check assistance, but increased sales, at a risk or expense level that is acceptable based on the value of the increased sales.

The benefits in terms of covering a portion or even all of the cost of the guarantee service is an important part of the business proposition and therefore must be included in the pencil close.

In addition to the financial benefit of increased sales, the reality is that if the guarantee rate reflects the same percent of loss (.70 percent compared to 2 percent, which is the same result as an assumption that 65 percent collection will result in 35 percent uncollected checks), the guarantee product is still much better because the return is guaranteed.

In short, the worst-case scenario for guarantee - no increase in sales - actually has the same financial return as the best-case scenario for verification, assuming 65 percent collection and all collection proceeds paid to the retailer.