he Federal Reserve is preparing a new study into the scope of check writing in the United States. The study, a follow-up to the landmark research the Fed undertook in 2001, will take the pulse of the payments system next spring. Rich Oliver, retail payments wonk for the Federal Reserve Bank System, says the 2004 study together with the 2001 study will establish "data points" from which the Fed can better track ongoing trends in payments.

It seems like a good idea. The Fed's 2001 undertaking was the first such research in 22 years, and, not surprisingly, it suggested check writing was on the wane. Some folks (no doubt with the help of a few good PR professionals) have been spinning the data to suggest checks are out of vogue. It's been enough to scare some check writers, especially chronic check writers like my friend Cinda.

Cinda is an aging baby boomer who has a bit of difficulty acclimating to new technologies. Cinda says she's much more comfortable paying with checks than with debit cards. But she got nervous when she saw a recent news report that suggested that checks are a dying payment method. "I thought to myself, 'Damn, am I the only person left writing checks?' " Cinda recounted.

Of course she isn't!

Next to cash, checks are the most popular method of payment in America. According to the Fed's data, consumers wrote an estimated 12 billion checks at the point-of-sale last year. Even if check usage declines by 3-4% a year (which most experts agree is the case), there will be billions and billions of checks written each year at the point-of-sale and elsewhere into the foreseeable future.

So what do you - the acquirer, the processor, ISOs and Merchant Level Salespersons - need to know about checks? Read on.

Question: Just how popular are checks?

Answer: Checks represent 60% of non-cash payments in America. In raw numbers, there were roughly 43 billion checks written in 2001 representing $39.3 trillion in payments. Consumers write the most checks (51%) by sheer numbers, but businesses write (62%) and receive (56%) the most checks by value, according to the Federal Reserve. A little more than one-third of all checks (33.9%) are written by consumers to businesses. Between 20% and 30% of all checks are written at the point-of-sale.

Q: Which financial institutions offer checking accounts?

A: Federally insured banks are the only institutions that actually offer "checking accounts." Other financial services firms (such as credit unions and mutual funds) offer deposit accounts that support financial instruments that look and act like checks. Also, some credit card issuers offer "courtesy checks," which cardholders can use to draw funds against pre-determined lines of credit. These alternatives look and function just like checks, although some may take longer to clear and some may be more difficult to authorize.

Q: What is the MICR line?

A: MICR stands for magnetic ink character recognition. The MICR line is printed at the bottom of a check using special machine-readable ink. It details information about the bank and the account on which a check is drawn and helps automate the collection of checks between banks.

Q: What are the laws and regulations governing check payments?

A: The primary laws governing checks are contained in: the Federal Reserve Act of 1913, which created a national check collection infrastructure and related rules; the Uniform Commercial Code, which establishes a uniform set of state laws governing commercial transactions; and the Expedited Funds Availability Act of 1987, which, among other things, set limits on the length of time banks can withhold access to funds represented by check deposits. Legislation currently pending in Congress - the Check 21 Act - could add another law that effectively sets a legal framework for truncated checks.

Q: What is check truncation?

A: Truncation stops the flow of the paper through the check collection system, replacing paper processes with technologies that support electronic exchanges of check information. A check can be truncated at the bank where it is initially deposited or elsewhere throughout the collection cycle.

Q: What is electronic check conversion and how does it differ from check truncation?

A: Electronic check conversion is a variation on truncation in which payment data captured from a check (at the point-of-sale or a remittance processing center, for example) is converted to an automated clearinghouse (ACH) transaction. The original (paper) check is either destroyed (in the case of remittances) or returned to the check writer (in POS check conversion).

The payment becomes an electronic transaction governed by ACH rules and Federal Reserve Regulation E, and the paper check is no longer negotiable. (A signed receipt, obtained along with the returned check, serves as the customer's authorization to convert the check in the POS scenario.) The advantages to merchants of electronic check conversion include reduced handling costs, better availability and improved collections.

Q: How does check imaging work?

A: Check imaging supports paperless check exchange. Checks can be converted to digitized images at various points along the collection stream, eliminating the need for paper hand-offs in support of clearing and settlement. Imaging was introduced in banking nearly 20 years ago and slowly has gained momentum as a work-process improvement tool.

Technology improvements over the last several years, however, have made it possible for retailers to image checks using small POS peripherals in support of POS check conversion, debt collection and marketing.

Q: What is the relative cost of checks versus other forms of payment?

A: The average cost of collecting a check - to banks, payees and processors, combined - ranges from $2.78 to $3.09, according to the Federal Reserve. This compares to a cost of between $1.15 and $1.47 to collect a check converted to an electronic ACH transaction. Global Concepts, Inc., a payments consulting firm, estimates that it costs a merchant (on average) $0.22 to accept a cash payment versus $0.45 for a check, $1.07 for a credit card payment and $0.29-$0.80 for a debit card payment.

Q: How serious a problem is check fraud?

A: Commercial banks alone lost nearly $700 billion to check fraud in 2001, according to the American Bankers Association. The National Retail Federation estimates that retailers amass nearly $6 billion a year in bad check losses. Throughout the U.S. economy, check fraud is believed to be a $10 billion a year problem.

Q: What is check verification?

A: Check verification is a merchant's number one defense against rubber checks. It has been estimated that nearly a half-million merchants today use verification services to support check acceptance. Check verification services allow merchants to access negative or positive databases to determine if a consumer has a history of bad check writing or has outstanding bad checks (in the case of negative databases) and/or is writing a check against an active checking account in good standing (in the case of positive databases).

Some check verification companies provide value-added services, scoring the relative risk of a merchant's acceptance of individual check payments in accordance with pre-established parameters in support of an authorization decision. Many large retail chains perform check scoring and authorization in house.

Q: What is check guarantee?

A: Check guarantee takes check fraud defenses a step further than verification. Check guarantee is especially useful for high-ticket transactions or when a transaction triggers some other high-risk warning. Merchants pay an upfront fee (typically, less than 1% of the face amount of the check), and the service provider agrees to reimburse the retailer for any check it authorizes for guarantee that is returned by the paying bank for insufficient funds or other reasons.

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