Verification and Guarantee, are They The Same Product?
The simple answer to the question is NO, they are very different products; however, it is not the differences that anyone sees, but rather the similarities that cause the confusion.
Growth in "shared check information" has been increasing at a significant pace recently. It is, in part, due to several companies such as Electronic Transaction Corporation (ETC), which operates SCAN, and other companies such as Telecheck, having succeeded in convincing some large retailers to manage their own check programs. The check approval industry, as in other loss environments, refers to this process as "Self Insuring."
Self Insuring is not a new idea-it's as old as check acceptance itself. The retailer decides, through some review process, that a check is or is not acceptable, and to the extent the retailer later finds that the check is not honored by the consumer's bank, the retailer attempts collection of the item, and of course, incurs the loss if not collected.
How retailers decide which checks to accept and which to deny, varies. It is safe to say, however, that in the Self Insuring environment, a consumer is likely to be declined if the consumer has previously presented a dishonored check at the retailer's store. Most businesses have a Hot List with the names and various ID's of consumers who have written bad checks to their store. It is also safe to say that the more public the display of the consumer information (proudly displayed on a wall behind the cash register, as an example), the greater the difficulty the retailer had in the collection process.
Over the years the increase in shared check information and the desire of large retailers to provide loss information to a common information system, and to have access to that system, has often cycled from no interest to high interest, and back again.
During high interest phases, Self Insurance programs are very easy to sell to a retailer. The product, referred to in the industry as "Verification," can be an on-line product in which the retailer accesses a database of information on consumers who have previously passed a bad check, or an off-line product in which the retailer's data processing system houses consumer information provided and regularly updated by the Verification service.
This Verification product has many positive selling features. The product, especially the off-line version, is very inexpensive for the retailer, often just pennies a transaction. Database access is the primary cog in the Self Insurance mechanism. Since the retailer must bear the loss of any bad checks approved, it is only natural that the retailer would want to believe that they have a sophisticated acceptance process upon which to base decisions.
It is easy for the retailer to see the wisdom of having thousands of businesses contributing to the information base, so that, at some point, any consumer who had abused his or her check writing privileges would be precluded from writing checks.
And, don't forget the "get even with the consumer" factor. The retailer has, with the Verification product, the opportunity to input previous losses to the shared system. The retailer can feel better when their lists of "bad checks" previously received are added to the shared information, and expect that the new check Verification program will prevent a repeat of their check loss problems.
Does all of this make sense to the retailer?:
Once again, the simple answer is no, it is often confusing. The best measuring stick, however, is the ease and cost of collecting the item.
Planned expenditures and "must have" items are highly collectible:
In selected market segments, such as grocery stores and gas stations, collection results are very good and inexpensive compared to high risk or high dollar value collections. Why is this true? Well historically, consumers will assure their ability to get back and forth to work and eat, before the payment of other items. In this situation, Verification is probably the better service for the money, since the collection yield will be very good for the retailer. This easy collection will mean that the collection company can be a very good value, often with the collection company making some or all of their money on consumer check collection fees, rather than discounting collections to the retailer.
Impulse purchases and nice to have items:
The opposite end of the spectrum is high check value and high risk checks, where collectablity is not only more difficult, but the amount of loss will be extreme in relation to the cost of service. In this case the retailer is not only interested in risk management, but also looking for the check service provider to level out seasonal losses from period to period. In this case Guarantee is the better product or service, and is often more cost effective as you move up the level of average check or difficulty of collection.
While both Guarantee and Verification have an authorization process, merchants will not purchase Verification without a collection solution, even if it must be an in-house collection solution.
Of course, reducing check losses is really not what the retailer wants in the first place:
What the retailer really wants, is to be able to accept every sale that the consumer is willing to make in their store. The retailer also wants to be able to accept any method of payment that the consumer offers and to have no loss or risk when taking these payments.
What the retailer knows, however, is that the cost of a wide open check acceptance program, while increasing sales, is likely to increase losses beyond the level of the sales benefit. This problem is not limited to check acceptance, as retailers' experience risk in taking credit cards, travelers checks, and even cash.
Companies providing Guarantee services have a continuing charter to educate retailers to the fact that knowing a consumer's check writing history is not a panacea to check loss management. In fact, from a retailer's point of view, assuming that a Guarantee service is in place to protect the retailer from any loss, the retailer wants every possible check to be approved.
This means that retailers want to receive approvals for checks, even when the consumer may not have funds on deposit (transactions that would be declined in a point-of-sale debit environment). It also means that the retailer does not care if the consumer is a habitual bad check writer, to the extent that the Guarantee provider can manage the risk of these checks within the discount rate the retailer is willing to pay for increased sales.
Finally, what it means most, is that broader, not narrower, check acceptance is good for retail sales, and creates a positive consumer environment. We must all remember that nearly half of all U.S. consumers do not have a credit card and rely on checks as their primary payment method.
If the retailers' objective was only to reduce cost, then a retailer could stop taking checks and make their check cost absolutely zero. However, the reality is that the issue has always been about increasing sales, not reducing check losses, and no one historically has understood this better than small retailers who have had poor success with Self Insuring.
Perhaps the 1997 retail survey cited in the chart is telling us that the Verification versus Guarantee retailer mood swing is about to swing again.
