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Paper Trail of Check Presentment vs. Re-presentment

B y Brandes Elitch

ISOs from around the country have been asking for an update on point-of- sale check conversion, particularly regarding imaging and RCK (collecting a bad check with an ACH debit). Here is a status report and overview of the situation:

First, there is some confusion about what a merchant can do and cannot do to convert a check to an ACH debit entry against a consumer's checking account. There has been little noncompliance at point-of-sale with the rule requiring a signed consumer authorization. (There has been massive noncompliance with the rule for a signed authorization in the Mail Order/Telephone Order/Internet world, but that is a subject for another article.)

There are other issues, such as the possibility of merchant or merchant employee fraud and the whole question of who keeps the check (the rules are changing in January). Most operational issues revolve around the fact that, until now, there was no effective way to image the front and back of the check, so all the merchant had was a swipe of the Magnetic Ink Character Recognition (MICR) line. Without the image, the merchant lacked the information on the face of the check, such as name and address, telephone number and driver's license number - ways that guarantee companies have of finding the consumer.

(Just having an MICR line does not help in tracking down a deadbeat consumer; the guarantee company would have to build an in-house cross- reference file to the driver's license.)

Now, imaging of the check is starting to emerge as a viable product. It requires that the merchant attach an image reader to the terminal, add a high-speed modem and provide a way to store and retrieve the images. Up to now, this was a big issue. Large retailers who have thousands of multilane stores needed to find a financially stable vendor capable of large-scale implementation that would be around for the long haul. This proved to be problematic.

As a result, early attempts at POS conversion have gone nowhere. The large retailers decided to wait it out until a truly reliable imaging solution came down the pike. The first vendor in the conversion business (without imaging) went through, by my estimate, at least $10 million trying to implement a solution and has, for all intents and purposes, withdrawn from the business. Conversion is stalled, awaiting adoption by major retailers, who must have an imaging solution.

What kind of pitfalls can a conversion product bring to a merchant? Here is a note that I received from a company in the cash-management business that sells payment processing. What is interesting about this case study is that it points out concisely why check conversion doesn't always work for the merchant. In this case, it created more problems than it solved. The merchant incurred more fees, had customer-service problems, processing wasn't always timely, and customers were aggravated. What happened here was that the service provider didn't understand the merchant's business and tried to plug in its product anyway (sound familiar?).

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"We had called on this customer six months ago, and they were very interested. They sell product only via catalogue and Internet. They told us that six months ago they were receiving $20,000 per month in checks via the mail, and the average sale was $119. They were not sure they were interested in check guarantee because they were experiencing only one return per item per quarter, which cleared on the next presentment.

"They received a call from TeleCheck and decided to subscribe to its ACH online check product. They were anxious to automate check processing to the same level as their credit card processing. They did not want to handle and deposit paper checks.

"TeleCheck set an initial discount rate of 4.2 percent, then raised it to 4.7 percent after several months and 6 percent after six months. During this six-month period, the merchant received $4,000 per month in checks via mail, and $15,000 per month was processed via the TeleCheck ACH online check option. The merchant continued to see about one check per quarter returned and collected on these returns via deposit. However, TeleCheck informed the merchant that it was seeing nine return items per month, and that was the reason for the corresponding increases in the discount rate.

"With the merchant experience of processing 100 percent of their checks before using the TeleCheck ACH product as well as the experience of depositing their own checks alongside the TeleCheck ACH product, I would wager that the reason for the high percentage of returns at TeleCheck is a direct result of the use of paper check MICR lines as origination documents for ACH transactions.

"It is my guess that TeleCheck is experiencing administrative returns that it is resubmitting via RCK and that are being returned for the same reasons on the second and third presentment. I assume that this is a fully automated process that it is not prepared for, and it is not capable of turning these items back into paper checks, which would solve the problem.

"Needless to say, the merchant told TeleCheck to take a hike when it suggested a 6 percent discount rate. The merchant also is aggravated that TeleCheck was charging the same discount rate for denials, which were frequent, and that the Internet service was down on a regular basis, once for an entire week. This down time required phone calls and delays in response-time orders."

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We should not draw the wrong conclusions, however. Conversion can work in certain circumstances:

+ There are high-volume, low-dollar payments (and I mean high volume as in "grocery store").

+ Check handling is onerous.

+ There are multiple locations that require multiple bank accounts and the attendant money movement, idle balances, bank fees, etc.

+ The consumers are repeat buyers, so the data can be scrubbed at the front end (using Notifications of Change and prenotes).

Often, particularly when there is a higher average ticket or more risk in the transaction, merchants ask that the converted item be guaranteed. There may or may not be a need for guarantee in these circumstances. Remember, speaking for CrossCheck, our primary role is not to do verification or collection - it is to make the sale happen by standing in when the consumer does not have enough funds in his or her account to cover the purchase, regardless of how it is originated.

If we can increase sales by 5 to 10 percent, why wouldn't the merchant pay 1 or 2 percent for that? The need for this - for someone to stand in and approve the sale in advance when no money is there - is not going to go away because the payment is settled as an ACH or an ATM transaction; in fact, it might even increase.

Is there any other way to meet the merchant's needs for reduced check handling without using the ACH? Of course, I wouldn't ask the question if I didn't have a solution. The answer is: Use a paper draft. How does this work? Let's use a couple of examples.

First, in the non-face-to-face world, when you take a payment over the phone or over the Internet, you aren't getting a check from the consumer. But rather than create an ACH item, the merchant (or the processor) can create a paper item. Yes, you can print a check on the consumer's account and deposit it, even though it doesn't have a signature (it's legal!). There are a number of providers who sell the ability to print checks in this manner. Here's what you need to look for:

+ Is the payment being guaranteed? From one to 10 percent of the time the money is not going to be there, for one reason or another. Do you really want to try to collect it yourself?

+ Is the bank going to reject the item? Many check-printing systems do not comply with the rigorous standards imposed by the Bank Administration Institute for check printing. If you print your checks with a bubble jet printer, I can guarantee that when the bank puts them in its high-speed reader/sorter, they are going to stick together like a brick.

Even if they don't, if you are not using an MICR toner cartridge, the bank will have to outsort them and process them as an exception item. Banks HATE exception items. If you have any kind of volume, it is only a matter of time before the bank asks you to close your account and find another home.

+ How are you going to deal with the issue of administrative returns? You can count on at least 3 percent of the items you convert to come back and visit you again. This is because the bank where the account lies is not always the bank that is doing the data and item processing. This problem is actually getting worse with POS conversion because you don't have the traditional checks (NOC and prenotes) that you have for recurring payments.

+ Who is going to print the checks for you if you have high volume? Do you really want to print a few thousand checks a day? Some vendors, such as CrossCheck, will provide a seamless, all-electronic back end with automatic funding of the merchant's account.

Well, that covers some of the issues with "presentment." Now, what is "representment?" This occurs when the original item is returned and you are faced with the decision, "What do I do with it now?"

If it has been converted to an ACH debit, you can return it via the ACH network. This is called an "RCK," which is short for "returned check" (all ACH categories have a three-letter abbreviation). The NACHA rules say that you can represent this twice and that's it. However, you can represent a paper check drawn on a consumer's account as often as you want. The same goes for the service fee, which can be particularly important in certain sectors where there is low dollar, high volume and a high percentage of return items.

You can only go after the service fee twice with an ACH; not so with a paper draft. Plus, with a paper draft you can avoid the NACHA rules and regulations, which almost require a full-time interpreter. ACH aficionados will say that it's cheaper and faster to submit an ACH item, but that isn't true; if you submit an encoded-items cashletter, your bank is going to charge you less than 10 cents per item and give you around a 1.5-day availability.

If you submit it via the ACH, you will pay 20 cents per item (we have heard reports of as much as 75 cents!) and wait three days for settlement (plus have rolling reserves and other credit enhancements). You can use software, such as the "ChecksNow" product from CrossCheck, to print a draft from any source (you just fill in the appropriate fields) and if you use an MICR toner cartridge and the recommended paper, you will be compliant with the Bank Administration Institute (BAI) specs, so your bank won't get mad at you. Now you can make a paper RCK, and isn't that a lot easier than trying to create an ACH file?

So, now that you know all about presentment, you can see why "representment" can make more sense with a paper draft than with an ACH. Bet you didn't think you'd believe that when you started reading this.

I would be interested in similar case studies. If you have one that you believe our readers would be interested in, please e-mail it to me at brandese@cross-check.com.