Electronic Check Presentment.a Solution Looking
for a Problem
(or another way to do debit)
Since the Financial Services marketplace is flooded with
propaganda about ECP, the marketing initiative touted as an advance
in the check payment system, we are printing our third article on ECP
since June. While this "idea" dubbed a "product" is directed at all
retail merchants, it will certainly have more appeal to merchants of
a certain type-generally merchants with low value checks of virtually
any quantity.
What is ECP?
ECP sometimes means Electronic Check Presentment (an action), but
it can also mean Electronic Check Processing (an organization or an
action) depending on who your are speaking with and what they are
attempting to convey. For the balance of this article I am going to
call "the idea" by what it actually is "Check-Point-of-Sale
Truncation" or a "Check-POST." This will allow us to discuss the
concept without confusing organizational names or product
descriptions that competing companies have created. In other words,
let's discuss cotton swabs, not Q-tips®.
The concept has to do with eliminating the paper check at the
point-of-sale (referred to as check truncation) because, as the
argument goes, it will bring checks into the 21st century. A number
of organizations are piloting programs around the country under the
Electronic Check Council's current pilot guidelines. Overall the
arguments for why we need to eliminate checks at the point-of-sale
and process them through the ACH (Automated Clearing House) are that
retailers will find this new method appealing enough to purchase it,
and that it is somehow better, i.e. cheaper, more convenient, or just
plain sexier.
The Process
The retailer will purchase a point-of-sale terminal and printer
uniquely designed for Check-POST transactions. Lipman has invested
significant effort to create the Nurit 2080 product with a Check-POST
capability, and VeriFone is right on their heels with a similar
product. After purchasing a Check-POST service, a retailer will scan
checks through a check reader and print a slip on the in-store
printer for the consumer's signature. The slip will tell the consumer
that their paper check will be "cleared" using the ACH system, and
the original check will either be given back to the consumer, or
collected and passed to the Check-POST company for filming and/or
storage. This process can be repeated each time a consumer visits the
retailer's store, or a card can be issued for future shopping visits,
since the MICR line need only be processed once.
The Check-POST company will attempt to clear the items several
times (generally three), and will also attempt to reconcile the items
that will not pass through the ACH system. Reconciliation is
necessary since ACH has problems with the significant dashes in
account numbers (9,000 banks and of course 9,000 On-Us account
configurations), and of course not all accounts have funds. Should
the ACH fail to clear after several attempts, the retailer will
likely have to eat the cost of the uncleared items, since collection
through normal check collection procedures is no longer possible, due
to the item being converted to an ACH transaction.
The retailer's account will be credited the following day for
either net of the items which did not clear or in full, with a
billing for the fees for the service and a charge for bounced or
unprocessed items.
What's the sales Pitch?
The pitch is actually very interesting. The merchant can be sold
convenience, cost savings, and an opportunity to have a card in the
consumer's wallet that will bring him back into the store. In fact,
an opportunity is created that can preclude the merchant from ever
having to go to the bank to deposit checks again. The following day
the checks will be credited to his account just like magic. Also the
charges to deposit checks will be gone, as will the return check
charges, since no items will ever bounce back to the merchant's
account.
What are the economics involved?
Naturally there is a charge for each transaction processed. The
charge is approximately $.30 to $.40 for each processing attempt.
After three attempts this adds up to $.90 to $1.20. The average
number of attempts will probably be 1.2 for an average cost of $.42
plus bounced items. Additionally, there is the cost of the "New"
specially designed equipment, which can mean big bucks. Perhaps some
money can be made on the card issuing side, so the consumer isn't
forced to present another one of those pesky paper checks to initiate
another transaction in that store. All the salesperson really needs
to worry about is getting the retailer to buy into how this is a
better deal than the plain old paper-based system they already have.
How Is It Better?
Showing the merchant how this is better begins by explaining the
benefits of not needing to go to the bank. If the merchant is small,
such as the business that accepts a couple of checks each day, we
would hope they also receive a lot of cash or other payments, or they
can't stay in business long. Assuming they must drop their cash
receipts by a lock box, or go to the bank for change once a week, it
would probably be beneficial to get those extra eight checks in the
bank 2 to 3 days earlier. At least that's the argument.
What about the cost to deposit checks which is eliminated by the
Check-POST system? Small businesses are generally charged $10 to $25
a month for a commercial bank account. I believe that upon review of
a bank statement, a merchant will not be able to find a charge for
check deposits. In fact, I believe if the merchant calls their bank
and asks if the monthly commercial account charge will be reduced if
they ACH deposit their 40 checks a month, the answer will be "No."
What about that huge account that deposits hundreds, maybe
thousands, of checks each month? Well, this type of commercial
banking relationship is generally based on an account analysis in
which the use of funds by the bank is measured against the number of
banking services utilized, from deposits to returned items, and a
charge occurs only if the net result is negative.
To recap: On one side we have convenience and assumed existing
cost that may or may not go away, an on the other side we have the
cost of new equipment, a $.42 fee on each item, and the cost of
bounced items, which will be uncollectible. And if that wasn't
enough, the ACH cleared check can be returned up to 60 days later if
the consumer argues it wasn't authorized.
What about the consumer?
Surveys suggest that consumers don't have strong feelings one way
or the other about truncation, but they are generally distrustful of
change and would like for there to be something in it for them, which
there isn't. It is also true that most consumers really have no idea
how their account is charged for checks in the first place. While the
current Check-POST pilot programs are simply tests of various
versions of the concept, the greatest risk of the plug being
pulled on the test by the National Clearing House Association is a
consumer backlash. Should consumer activists become concerned
about the loss of Regulation E consumer protections, or the fact that
the ACH clearing conversion of the physical check at the
point-of-sale eliminates the consumer's ability to place a Stop
Payment dispute, consumer protectionists could make the idea DOA. In
fact, everyone is worried that checks will be processed more than
once as a result of errors or unscrupulous merchant activity.
And the big consumer question: When does a truncated check stop
being a check and become a pre-authorized electronic item? With 125
years of case law supporting the U.S. check clearing system, it seems
reasonable to be a bit concerned about zero years of "No Check" check
law. We have time-tested standards to support the continued use of
the paper check, and none for the paperless approach. We have a
national infrastructure for check collection, including the U.S.
mail, the check processing capabilities at every depository
institution or its agent, local clearings, correspondent banks, and
perhaps for a couple more years, the Reserve Banks. But, we have no
idea what the future holds for non-bank organizations handling
non-checks.
So, you say it looks like debit!
Let step back for just a moment and evaluate the steps that have
just been described. Check-POST transactions will debit a
consumer's direct deposit account (DDA) if the account has money. The
transaction will originate either from the MICR number on a check or
from a card issued by the retailer and will be cleared through a
system other than the check clearing system. In any event, it is a
check transaction without a check. A Debit transaction (using
a Pinless Check Card) will also debit a consumer's direct deposit
account (DDA) if the account has money. The transaction will
originate from the cross-referenced card number on the card issued by
VISA or MasterCard and will be cleared through a system other than
the check clearing system. In any event it is a check transaction
without a check. Big difference, HUH? Actually there is a difference.
The Check-POST retailer's card is good in their store, and VISA and
MasterCard are good "EVERWHERE you want to be." Also, retailers are
upset with Visa and MasterCard because at $.50 per debit, they feel
it's much more expensive than paper checks. So.will they like $.42
plus the cost of returned items better? Therein lies the opportunity.
To contact NACH or The Electronic Check Council call (703)742-9190.
Watch for Part Two.Is ACH Really Cheaper Than Paper Checks?
Case Study:
Tom Gray, owner of Soccer and Sports in Rohnert Park,
California, signed a Check-POST program agreement with a Southern
California company, but was never informed that the check truncation
program was a pilot or test program. Tom notes, "If the salesman had
told me that this was a test program, I would never have leased the
equipment."
Overall Tom is not thrilled with the program, noting several times
that his staff has on-going difficulty balancing check receipts. He
is also concerned that money may be siphoned off in the process. "The
savings that you think are going to be there aren't there," notes
Tom. "Twenty to thirty percent of my checks must be manually
processed anyway, and if you take ALL the costs, including my store
labor, the truncation of checks at the point-of-sale costs me more to
handle."
Tom notes, "At program start-up we had some initial difficulty
with the terminal reading some personal checks, but those problems
seem to be fixed," although he is still getting faxes from his
processor informing him of items which did not clear through the
system. In addition some checks have cleared so quickly that it has
caught regular customers short at their bank, causing them return
check charges. Tom says that his staff now reminds customers that
their money will need to be in the bank the same day to avoid the
problem.
Currently Tom is holding six months worth of checks in his store,
since he also was not told that the check pilot rules require him to
give the check back to the consumer. The thought that someone in his
store could run the checks again, or the possibility of store theft
of the items had not crossed his mind.
When pressed for positive thoughts on his "Check-POST" experience,
Tom notes, "Sometimes we insert the check in the reader just to
determine if the check will get an OK or not. If we're concerned
about the check, doing this step can be a benefit, even if you don't
run the check through for settlement."
[Go Back]