Part I
If you missed Faulkner & Gray's High Tech Check Conference in Miami, Florida on January 22 and 23, you missed some really interesting information from the check industry, and you missed hearing it from some of the industry's best and brightest.
The Check Guarantee attendees included, as you would expect, Equifax, TeleCheck, CrossCheck and NPC Check Services. The Verification representatives included, Check Rite and Scan/ETC. Among the banks, were Bank of America, Michigan National, Chase Manhattan, Chemical, Crestar, NationsBank, Washington State, Imperial, Citibank and First Interstate. All the Federal Reserve bank locations were represented, along with the Chicago Clearing House, Visa, the Justice Department, and a host of Payment Services consulting firms. Even an ISO was present, Michael McCormick, president of Bankcard Systems, Inc.
Paul M. Connolly, first vice president of the Federal Reserve Bank of Boston, and the Fed.'s Retail Payments Product Director, delivered the Keynote speech. It was very open and fact filled. Connolly reported on the thinking at the Federal Reserve Bank, noting that "the Fed wants to collect the check payment not the paper, wanting to get rid of the physical item as early in the process as possible."
Test Programs
The conference addressed growing Electronic Check Presentment (ECP) test programs often referred to as "check truncation". These programs are all trying to eliminate the physical item without increasing the risk of check acceptance too greatly. Many test programs through the next year are likely to originate with the acceptors of checks such as the "Baby Bell" test, debiting the phone company's customers for their phone bill rather than the customer writing a check. This concept is also true for Allstate Insurance, testing the same approach.
For many years the Federal Reserve has wanted to find a way to reduce the cost of check handling, and of course, banks are just as eager, but are frightened by the potential for fraud. Now while we are on the subject of the possible future of check fraud, let's consider the various ways to approach check truncation, or to eliminate the paper check.
What is "Check Truncation," you might ask? Well, Bankers and those affiliated with the Automated Clearing House system have long wished to find a way to eliminate the physical check item.
It seems that these players may soon get their wish. That is, at least a test of check truncation. To hear the banking industry tell it, a large scale test is just around the corner. That is, a pilot program testing retail giants like, Target Stores, Wal-Mart, Toys-R-Us and Kmart, in which the retailers handle all the drudge work -- namely, stopping the flow of checks and converting the transactions to ACH debts.
Questions Posed
King Rogers, vice president of Loss Prevention,Target Stores Inc., says, "I think there are some big outstanding questions that I have not heard answers to." NO KIDDING! The potential problems boggle the mind.
Does Banking have the proper systems in place to move check information (without the physical check), through the ACH and to provide the descriptive data you and I will want on our checking account statement? Remember this is just like ACH debit or an ATM transaction, however, without any of the on line encryption protection or PIN numbers.
If you are like me, this begins to make you ask questions:
The worst of all possible scenarios is a future environment in which anyone can print a check (laser printed MICR encoded checks). The check, when it bounces, is not returned since it was never sent in the first place, but rather truncated.
From a historical perspective, attendees were reminded that in 1966 there was a prediction that by 1985 checks would disappear as a payment mechanism. (Note that in 1995 the Fed. handled more than 60 Billion checks, ten years after they were supposed to have been eliminated.)
One of the results of ECP, if and when it becomes a wide spread success, is to remove Float from the system, something that the Fed would like to see, and that consumers will likely find a problem.
These were the largest and second largest increases in charges of any banking fees during 1995.
These numbers were reported previously by Janice Shields, Researcher for the Center for Study of Responive law. They were based on a survey of 271 banks in 25 states in August 1995, by the Public Interest Research Groups (U.S. PIRG). Overall average fees, according to the U.S. PIRG, for bouncing a check rose to $19.18 in 1995, from $18.35 in 1994 (an increase of 5%). According to the earlier study, when New York (which capped bounced check fees at $15) is deleted, the annual average for other banks surveyed was $19.72, an increase of 7%, while the number of banks charging a DIR increased from 35% in 1991 to 85% in 1994 to 100% in 1995. According to the PIRG's 1995 survey, "past studies have found that bank fees exceed cost and fees are being increased faster than cost has risen. Fees for bounced checks are 7.5 times the bank's administrative costs and fraud losses."
Information provided by Synergistics Research Corporation's Vice President Genie M. Driskill reported on a wide array of consumer payment mechanism preferences, including Checking, ATM, and Debit Card preferences.
[Go Back]
The Fed.'s Connolly, further explained barriers which include, legal and regulatory issues not the least of which is the requirement that the check be returned to the bank upon which it is drawn, at least when it is originated by the consumer.
Connolly closed by reminding the attendees, "Personal checks are still the payment method of choice for American Consumers."
Overall, the conference was very fact filled. Although not all the facts came from the same source, nor did these sources even agree on what the facts said.
The Federal Reserve Advisory Group on Electronic Check Presentment (ECP), says "there are a number of initiatives underway in the Federal Reserve and the banking industry to expand ECP. Currently, there is not a common industry approach to ECP. Several systems and products have been implemented to promote ECP. They are serving different niches in the industry and have different objectives. The industry needs a shared strategy for converting from paper to Electronic Check Presentment."
Commenting on a very bad day in the Federal Reserve system (January 8, 1996), the Fed.'s Connolly noted that the Float between the Federal Reserve banks on that day was $3 Billion, while the Float on ACH, was zero.
ECP vs. Float
Consideration of the nature of the float problem to consumers is reflected in the information provided by Patricia A. Murphy, Editor of Checks & Checking Newsletter, and co-sponsor along with the Consumer Bankers Association of a Checking account survey completed in late 1995.
Two of the most significant results on the survey, were:
Overall, both consumer advocacy groups as well as the Commercial banks agree, that bounced check return fees are up, even if they are unable to agree on why they are up. While consumers' groups see the increase in return check fees as price gouging, the Consumer banks respond by explaining that it is simple cost recovery, and that bad check losses are on the rise, something that Electronic Check Presentment will help to reduce.
Considering further the number of checks that are not good at the time of presentment, it is unlikely that earlier presentment through ECP will create fewer return check charges for consumers, although this seems to be the general argument being made by the banking industry.
Check writing rises with income level
Driskill noted such things as the fact that 51% of Consumers are light ATM users (1-4 trans. a month), and that consumers write more checks the higher their income level. This increase averaged 20 checks per month for each $15,000 a year in income.
Considering both New Opportunities and New Perils, Bank of America's Joseph Hollis, Senior Vice President, Product Management, reminded us all that Bill Gates had previously called banks "dinosaurs". More recently Gates apologized, according to Hollis, not to banks, rather to all those people who like dinosaurs.
