hecks are old hat. But Americans continue to write billions of them every year at the POS and elsewhere. A confluence of events, however, is tipping the balance in favor of electronic payments, even for payments that start out as old-fashioned paper checks.

Celent LLC, a New York-based research and consulting firm, expects that by the end of this year, 45% of checks written in the United States will be cleared electronically, and 12% will clear as checks converted to automated clearing house (ACH) debits.

Bob Meara, a Senior Analyst with Celent, authored the report "Check Electronification: Roads to Rome Revisted." He credits a pending change in ACH rules, in part, for the anticipated increase in ACH check conversions.

Known as back-office check conversion (BOC), the rule change takes effect in March. And it removes cumbersome customer-notice requirements that have been blamed for lackluster merchant adoption of check conversion.

John Leekley, founder and Chief Executive Officer of RemoteDepositCapture.com, concurs. "We see increasing opportunities for ISOs and transaction acquirers in the RDC [remote deposit capture] space," he said. Check acceptance eventually will more closely resemble card acceptance at the POS, he added.

BOC doesn't get all the credit for setting the POS check truncation trend in motion. "Merchants want to reduce risks and eliminate paper inefficiencies," said Michelle Graff, Marketing Vice President at NOVA Information Systems, the acquiring arm of U.S. Bancorp. "BOC doesn't really do anything to address the risk."

Improve it

BOC does prompt acquirers and their partners to develop better check services - turnkey offerings that combine real-time check authorization and electronic clearing. These new services aim to support POS check-acceptance alternatives that are transparent to merchants and customers, while offering enhanced fraud protection and improved funds availability for merchants.

In November 2006, NOVA announced an enhanced version of its electronic check service (ECS) designed specifically for multilane retailers. The service combines real-time check authorization and risk mitigation with back-office image conversion and uploading.

Customer checks are handled at checkout the same as always: Paper checks are passed through MICR readers that connect to POS card terminals and support real-time authorization and guarantee routines. Then they are placed in the cash drawer. Later, in the store's backroom, the checks are run through a tabletop image-capture device, and the images are uploaded to NOVA.

NOVA determines how best to clear each payment and is responsible for back-end handling, including exceptions processing, returns management and reporting. Clearing options include direct debiting of customer checking accounts, imaged-based electronic check clearing or converting checks to ACH debits.

Like many acquirers, NOVA already had an ECS for smaller retail locations. These solutions typically rely on countertop imaging devices ported to (or actually built into) card terminals.

Scrap it

The shift away from paper to electronic payment clearing started in 2000, when ACH rules began allowing conversion of certain checks into electronic debits for clearing through the ACH. The shift gained momentum with passage of the federal Check Clearing for the 21st Century Act (Check 21), which became effective in 2004 and eliminated legal impediments to check truncation.

BOC promises to further boost check truncation by removing remaining obstacles to merchant adoption of POS check conversion.

Under BOC, merchants wanting to convert customer checks to ACH debits need not mark checks "void" and return them to customers at the POS, as had been mandated previously. Instead, they can retain the voided checks in their cash drawers, then batch image and convert them to electronic checks or ACH files.

The voided-check requirement was intended to provide written disclosure to customers that their checks had been used to create electronic payments.

But merchants complained that the requirement left them vulnerable to bad checks unless they also invested in POS imaging technologies.

Now merchants can simply run checks through standard MICR-reading POS devices to support authorizations and retain the paper for imaging later.

A simple sign at the POS notifying customers of the store's electronic check acceptance suffices for customer disclosures.

Tip it

Based on data from the Federal Reserve as well as the consultancies Financial Insights and Celent, Americans wrote an estimated 31 billion checks last year. Celent estimates check writing in the United States is waning by 6% to 10% a year.

Also, the 2005/2006 Study of Consumer Payment Preferences conducted by Dove Consulting and the American Bankers Association found that 11% of the average 46 in-store purchases consumers make each month are paid for by check.

Perhaps of greatest interest to proponents of electronic payments, 34% of Americans told Dove in a 2003 survey they would use checks less often if stores always truncated them. (Two-thirds of respondents said they'd probably switch to using debit or credit cards.)

According to the Dove/ABA research, consumer preferences have already reached a tipping point in favor of electronic-payment options.

In 2005, 56% of in-store purchases were made using some form of card (credit, prepaid, or online or offline debit). Cash plus checks accounted for only 44% of POS payments.

Just four years earlier, a similar Dove/ABA survey found the split to be 51% cash and checks to only 49% cards. Leading up to its March start, BOC is further tipping the balance. "ISOs and transaction acquirers have contacted us in the past year at an increasing rate," Leekley said.

"They believe that combining [remote deposit capture] with their credit card services will provide a complete receivables solution to their clients. Already, there are check scanners [available in the marketplace] which also accept credit cards."

Additionally, Dan Fisher, President and CEO of The Copper River Group Inc. in Fargo, N.D., said scanners today "are like flat screen televisions were three years ago; prices are plummeting."

Scan it

In September 2006, San Francisco-based Bankserv, a provider of electronic-payment technology and services, began offering a multifunction dual-sided scanner at the rock-bottom price of $225.

Known as the SB1000, the device was developed for clients using Bankserv's DepositNow accounts receivable system for QuickBooks. Andrew Torre, Bankserv General Manager of the Enterprise Business Unit, said additional versions of DepositNow will soon be released for users of Peachtree and Microsoft Small Business Accounting software.

Most POS terminal developers have integrated check imagers from leading vendors MagTek Inc. and RDM Corp. into their terminal lines.

MagTek offers single-sided and dual-sided check image scanners. The dual-sided model, Excella STX, costs from $400 to $500, according to John Arato, MagTek's Vice President, Business Unit Manager, Retail Products.

RDM Corp., headquartered in Waterloo, Ontario, offers an extensive line of check-image scanners. Its Synergy model combines card-acceptance and check-imaging functionality in a box about the size of a traditional card terminal. Larger, more sophisticated devices for back-office check imaging are available from Unisys Corp. and from Panini North America. Prices start at about $1,000.

First Data Corp.'s TASQ Technology unit offers Panini scanners as part of its equipment line for remote check capture and depositing. From the merchant and acquirer perspectives dual-sided imaging is crucial to the success of any check truncation program. Merchants also want the same - if not better - POS options, back-end processing and funding now available from traditional check services.

BOC, by itself, misses the mark because under ACH rules, only consumer checks can be converted to ACH debits. That's why companies like NOVA are fortifying POS check-acceptance offerings with image-based check clearing and real-time access to demand deposit accounts (DDAs).

NOVA can directly access about 30% of consumer checking accounts using Visa U.S.A.'s POS check service, according to Graff. First Data has a similar offering, dubbed Star Chek.

Both services access checking accounts directly using the ATM/POS debit card networks for real-time authorization and DDA debiting.

Imaged-based check clearing takes advantage of an inter-bank clearing process known as electronic check presentment (ECP), which expedites traditional check clearing routines by replacing handoffs of paper checks with electronic file exchanges.

ECP adoption among banks has been on a steep upward trajectory since Check 21 took effect.

SVPCO, an ECP network made up of 17 of the country's largest banks (including giants Bank of America Corp. and JPMorgan Chase & Co.), reported a 15-fold increase in its image-clearing work in the United States.

Last year it was used to clear 747 million images of checks worth an estimated $2 trillion, a spokesman said. This year, SVPCO is bracing for 2 billion check image exchanges.