For Now, E-Checks Fail Their Physical

M y friend Maggie Scarborough called the other day. She had been at the doctor's office, preparing to write out a check for her insurance co-payment, when the clerk advised her that the doctor no longer accepted checks. "I did my first ECK," Maggie said excitedly, using the bygone vernacular of electronic check conversion.

"So what's the big deal?" you might be wondering. Well, when I first met Maggie, sometime in 1996, she was working for NACHA-The Electronic Payments Association, the Herndon, Va.-based group that oversees initiatives involving the automated clearinghouse (ACH) system.

Her job at the time: direct an initiative that would assess market readiness and develop transaction-formatting standards for check truncation via the ACH (today known as electronic check conversion).

Maggie left NACHA a year or two later and today runs a consultancy, VisionSharp Strategies, based in Ellicott City, Md. Her husband, Joe Spatarella, is a former banker who today is a salesman for BankServ.

Based in San Francisco, BankServ was a pioneer in the electronic check conversion movement. These days, the company offers a respected check conversion product that integrates with check guarantee services from Insta-Check, through a joint venture known as BankServ Check Services, Inc., headquartered in Miami. BankServ is also a leading provider of backroom ACH and wire services to financial institutions.

As steeped as these folks are in the payments business, generally, and ACH and e-check payments, specifically, I would have expected Maggie's first personal e-check experience to have occurred several years ago. That it happened in 2002 speaks loudly to the pace of change in payments.

For those of you who are new to payments or otherwise unfamiliar with electronic check conversion, here's the process, in a nutshell: A merchant presented with a check for payment runs the paper through a check-reading device, which captures the pertinent transaction information (such as bank routing and account numbers and the payment amount) and converts it to ACH formatting for electronic clearing and settlement.

The customer (in most cases) gets back a check marked "void" or "canceled" and a disclosure explaining the regulatory ground rules for consumer electronic payments.

The transaction shows up as an electronic debit on the customer's next monthly bank statement, and the merchant gets good funds within a day or two.

Maggie, the consummate marketing consultant, immediately began spinning the event. "This is a perfect application for check conversion - low-dollar transactions like insurance co-pays," she offered.

Perhaps, but check conversion hasn't exactly caught on, at medical offices or other points-of-purchase. NACHA counted just 32 million electronic checks processed as debits through the ACH in 2000, the most recent year for which data is complete.

Using the latest data from the Federal Reserve (see GS issue 02:01:02, published Jan. 28), we know consumers wrote at least 7 billion checks at the point-of-sale in 2000. That means less than 0.5% of checks written by consumers at the point-of-sale in 2000 made it into the ACH as electronic debits. Maybe E-Checks Can Find a Place on the Internet It has always seemed logical to me that the Internet would be a good testing ground for electronic checks. My friend Paul Martaus disagrees.

"It's ethereal at best," the researcher and consultant says from his office in Mountain Home, Ark. Electronic check conversion will never gain widespread acceptance, on the Internet or at the physical point-of-sale, Paul insists, because Americans depend upon the paper check as a source document that can substantiate legal claims. "Tangibility is the issue," says Paul.

But tangibility for whom? How often does the typical consumer have a disputed check claim? Rarely.

I opened a checking account in the 1980s with a financial institution (an S&L) that technically could not offer checking accounts. S&Ls in those days offered NOW accounts - check-like payments, similar to credit union share drafts.

Instead of returning paid checks, my financial institution lists each cleared check by number, along with ATM and POS transactions on my monthly account statement. It's electronic check truncation in its most basic form.

Mine was one of the lucky S&Ls. It survived the mass failures of the 1980s, got caught up in the merger and acquisition craze of the 1990s, and today my account is serviced by a major U.S. commercial bank that acquired it through merger.

In all these years, I have only twice needed copies of checks for proof of payment or other reasons, and the institution always has responded quickly with photocopies.

I'm not alone in my preference for this form of check truncation. When the S&L where I opened the account was first acquired by a commercial bank, in the early 1990s, the new owners tried to switch the acquired accounts to traditional check return. But I and thousands of customers balked, and the bank backed down.

The only reason consumers want their paid checks returned by mail every month is that banks have made it standard operating procedure for checking accounts.

If banks were to stop returning paid checks to check writers or reposition check return as a pricey option (as many banks have done already), it wouldn't take long to wean American consumers of their penchant for storing canceled checks in shoeboxes.

Better yet, forget paper entirely and position electronic checks as an alternative payment instrument, designed for the Internet.

Americans (albeit a small number) have been paying bills "online" for years, filling out mock checks on their PC screens that generate scores of checks to payees on the back end, by way of services like CheckFree.

Need a copy of the draft (check) for proof of payment? The online bank or bill-pay service can accommodate you with the draft (check) that cleared and was posted to your account. Better yet, most will work to resolve the dispute on your behalf.

A few bank and non-bank companies are trying to position electronic checks for Internet retailers. The pitch: It's safer than credit cards, especially when it's bundled with a check guarantee service.

Typically, the online consumer fills out a check-like document (at a secure Web site separate from the merchant) and the back-end service provider processes a paper demand draft through the banking system, sometimes, but not always, using the ACH. The merchant sees good funds in about two days.

This, indeed, could become a perfect application for e-checks. Forget the physical point-of-sale, let's focus on the Internet as a testing ground for e-checks.