A return on returns

As long as paper checks are in use, some, inevitably, will bounce. Depending on the face value of those checks, a merchant's cash flow can be affected. And tracking down people who write bad checks can be a drain on a company's resources.

Harry Johnson, President of Money Transfer Systems Inc. and 20-year payments industry veteran, was one of the original technology providers to Chase Paymentech LLC. "We saw an opening in both automated clearing house [ACH] and electronic check recovery," he said, adding that those products promised healthy margins and high residuals in a largely untapped market.

Money Transfer Systems created a separate Web site for its check recovery arm, checXchange. "We separate them because people tend to get them confused," Johnson said. "We really brand this product a lot under other resellers and financial institutions, so the brand is checXchange."

How it works

When a deposited check shows insufficient funds, standard banking procedure is to try only one more time to make the deposit. When a check is converted to an electronic version, it can be submitted three times, Johnson said.

He added that electronic items are first in the submission queue. In addition, checXchange gauges the best time to resubmit the check, based on when the account is most likely to have sufficient funds.

Many people are paid on Friday or at the beginning, middle or end of the month, making those the best times to resubmit. "By pinpointing or strategically timing when we're going to re-present that item, moving to the front of the line, and getting a second try, that's how we achieve 80 to 85 percent recovery for the merchant," Johnson said. The merchant isn't charged for the recovery, and checXchange pays the merchant the face value of all checks recovered.

With full online reporting, merchants can view all checks, front and back, that are in the recovery process, as well as the current status of each one. For checks that are not recovered by resubmitting, checXchange offers two options: Merchants can either take checks back and pursue other recovery options independently, or they can forward checks directly from checXchange to a secondary collections agency.

An easy sell

CheckXchange relies on the ISO channel to sell its check recovery program. Johnson said the ease of setup and enrollment attracts ISOs to the product – which compliments credit card and ACH products. He refers to the simple, one-page enrollment form as the "crayon form."

A copy is faxed to the bank by the merchant and to checXchange by the merchant level salesperson (MLS).

The form tells the bank to forward bad checks to checXchange. When checXchange receives the application, its system enters the check and creates a welcome kit for the merchant enrollee.

Though checXchange does not provide remote deposit capture, the check recovery service is a "perfect marriage or add-on" for it, Johnson said. "The target market for us is direct sales to merchants because it's a very easy addition for the sales rep to add this." He noted that ChecXchange makes its money on the fee the merchant charges to the bad check writer and shares "a large percentage of that" with the MLS who signed the merchant up.

"So it's a very large – it's dollars, not pennies – lifetime residual, as long as that merchant is on our books," Johnson added. "In the day of compressing margins for the sales rep, if the merchant had two or three bad checks in one month, they could easily make more off a returned check income than they would off the credit card income."

Rick Brennes, Chief Executive Officer and President of The Brennes-Jones Group Inc., said when he was first approached by checXchange, the company mentioned a collection rate of "80 to 85 percent, which frankly sounded like a sales pitch because normally I would've expected 50 to 60 percent. But from our own merchant experience, now I can say that 85 percent is legit. It's been a wonderful product."

Brennes noted that he basically gives the product away because there's no cost to the merchant – ever. "Once a merchant signs up, they're free to come or go," he added.

"There are no minimums or monthly fees. It's a dream product for salespeople because it can be used as an add-on."

Brennes' salespeople now offer checXchange on cold calls; when they follow up to see how the service is going, they can sell processing or other products to a merchant who is already a satisfied customer, Brennes said.

Taking it to the bank

Banks that sign up for checXchange send a letter to all their commercial customers notifying them they are automatically enrolled in the checXchange program, which will cost them nothing.

The letter also includes instructions on how to decline enrollment. "On average, 1 to 3 percent of the merchants will opt out of the program," Johnson said.

Processing bad paper checks is still a manual process for banks; someone handles the checks one at a time and sends them out with letters to merchants. Enrolled banks take all those checks from their participating merchants and mail them in one envelope to checXchange – or scan them and send them electronically. ChecXchange encourages banks to use image exchange to ease the burden of manually reviewing checks and stuffing envelopes.

"So it eases back-office operations, and it provides a new revenue stream back to the bank, because we're sharing, on average, $5 per check back to the bank," Johnson said. "Now they're making $5 a check where they never made any money before. It's found money for the bank and it's a great convenience for the commercial customers."

Steve Zahorian, CEO at Patriot Bank, said, "We love it as a product because our customers love it. The best testimony for it is the customers. We've had zero customer complaints."

Patriot Bank automatically provides checXchange services to all business clients who accept check payments, but participation is not mandatory. "I can count on one hand how many customers have opted out," Zahorian noted.

According to Johnson, ISOs working with banks in a referral capacity can make money from every returned check from those banks, which also strengthens their relationships with the banks.

"Not only are they making great income off of the leads from the bank, now they're going to make money off the returned checks," he said.

Almost 50 banks nationwide are using checXchange. "Each bank may have several thousand commercial customers," Johnson said. He added that the recession has helped checXchange because "it's more enticing for banks or partners to want to bring this product in" as a new source of income that also reduces their expenses.

Another plus

Johnson noted that his company relies on banks that aren't signed up for checXchange to notice whether a merchant is enrolled in the program. Sometimes banks send bad checks back to merchants, as they are accustomed to doing.

That's where checXchange Plus comes in. The "plus" entitles the merchant to a new depository stamp with a line under the usual text instructing the bank to send returned items to Money Transfer Systems' bank.

"We get that check at the exact same time the merchant's originating depository bank would have gotten it, so it routes around them," Johnson said. "And since their bank doesn't see it, their bank can't charge them a fee."

ChecXchange charges around $5, as opposed to the $15 or so a bank would charge. And the check is in the system faster, resulting in faster returns and a higher recovery rate. "It's really a no-brainer at that point if the merchant has any volume of returned checks," Johnson said.

According to Johnson, the biggest challenge the company has faced is ensuring the checXchange product does not get confused with check conversion or check guarantee. Another challenge has been getting banks to buy in. "It's a little more difficult sale than just a merchant sale, but we have sales staff that understands that," he noted. "If an ISO has a bank opening, we hold their hand through the sale process.

"You need to be able to speak the bank's lingo and have an understanding of how a bank operates. … We'll even visit the bank in person with them, or we'll do a webinar. And usually in a 15 minute webinar, the banks get it instantly." Johnson mentioned that only 200 of the 8,000 U.S. banks are currently using a check recovery service like this.

Johnson said that the company is driven by three core values:

• Do what you say you're going to do.
• Pay what you say you're going to pay.
• Pay what you say you're going to pay on time.

It may be a while before checks are a bygone payment instrument. In the meantime, companies like checXchange strive to help merchants deal with the expense and nuisance of bounced checks. And perhaps it's a way ISOs and MLSs can befriend new prospects or solidify relationships with established clients.

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