he paper check remains at the heart of the U.S. payments system. According to industry expert and founder of The Green Sheet, Paul Green, the earliest known check on record was written in 1659 as payment to a London goldsmith. Did you know that more than 15 billion checks are written at the point of sale each year? Did you know, too, that billions of dollars are lost every year from check fraud and uncollected funds and that on average, merchants pay about $1.22 for each check accepted?

A closer look at returned checks finds that more than $169 million worth of checks bounce daily in the United States; banks reject them because of insufficient funds, closed accounts or stop payment orders. The number of bad checks has surpassed 250 million annually, worth nearly $19 billion.

Almost one quarter of all bounced checks are never turned over for collection because the dollar value of the check is too low to justify the collection expense. Of the $5.9 billion that the National Retail Federation estimates that retailers lose to bad checks annually, 70% are for non-sufficient funds (NSF) and 30% are from fraud.

While all parties-retailers, financial institutions and consumers-have a number of reasons to remain enthusiastic supporters of paper checks, merchants and banks are well aware of the inefficiencies, high costs and risks inherent with paper checks. These include:

• Check fraud and uncollected funds-a problem that gets worse every year

• Extensive handling by retailers and banks, with the average check touched between six to 12 times, resulting in inefficient operations and increased risk

• High processing costs for financial institutions as checks move step-by-step through the payments system

Electronic Check Opportunities Abound

In October 2003, the Check Clearing for the 21st Century Act, known as Check 21, was signed into law. It permits banks to process check information electronically. Information contained in the new electronic check can be used in cases of disputed charges or NSF.

Banks will offer lock-box services to collect merchant checks and provide conversion services prior to electronic deposit through the ACH.

However, the entire check process becomes more efficient the closer the process gets to the point of sale. By capturing an image of the check at the merchant's POS, paper is removed from the system at the point of entry.

Electronic check conversion, which transforms paper checks into electronic files at the POS, was designed to allow consumers to continue to enjoy the benefits of writing checks, while offering numerous advantages for merchants and banks.

Today, the advent of sophisticated check imaging solutions is injecting new life into electronic check conversion, making the process significantly more efficient and cost-effective for merchants and banks.

Paper check guarantee services have been around for years; however, even though the funds are guaranteed, the paperwork and process of requesting the funds requires considerable and labor for merchants.

With electronic check services, "guarantee" means guaranteed cash flow-an electronic item is submitted and the merchant never has to worry about that item again. The transaction is processed. The funds are deposited. Period. End of the paper check. It's that simple.

A Look at Service Options for Electronic Check Conversion

Electronic check conversion seamlessly transforms paper checks into electronic transactions, authorizes the availability of funds and automatically settles the funds into a merchant's checking account at the end of the day through the same networks used to process credit and debit card transactions.

Complete images of the checks are captured on an imaging device that is connected to the payment terminal and sent to a secure location for storage. Checks returned for insufficient funds are electronically resubmitted, and merchants rarely need to get involved.

A variety of service offerings are available in the market. Let's explore the options to best meet the needs of a merchant's business.

• Visa POS Check or ACH: Acquirers supporting Visa's POS Check program have the ability to actually go online, check fund availability and hold the funds in more than 22,000,000 DDA accounts. This is expected to rise to include 25% of all checking accounts by the end of the year. And now, through Visa POS providers such as the NOVA Network, ISOs can offer the same programs endorsed by leading banks including US Bank, Wachovia, Key, Regions and Bank of the West. Accounts that don't have debit access are settled through the ACH.

• Verification or Guarantee: Most merchants prefer a guarantee service, which can eliminate the risk, paperwork and headaches associated with check collection. As stated earlier, electronic guarantee is fully automated; merchants never have to fill out forms to claim their funding. Merchants willing to take the risk can choose verification-only services.

• NSF Service Fee Processing: Merchants willing to manage their own risk and handle collections can opt for verification-only services and automatically collect fees for items returned for insufficient funds. NSF Service Fee processing allows merchants to electronically collect on bounced checks. Once the resubmitted check successfully clears, an NSF Service Fee may be initiated via the ACH at the state maximum dollar amount allowed.

  Funds received from collected return check transactions are then automatically credited to the merchant's bank account. If funds can't be electronically collected, the merchant has an exact image of the check, including the address and any information written, such as the phone number.

• Collection Services: Collecting on returned checks can be outsourced to a check collections company and merchants can still collect on a percentage of the face value. And since all of the work can be done electronically, there are no additional labor costs and processing required for the merchant.

Are you armed with the knowledge necessary to offer electronic check services to your merchant customers? Do you have confidence in the electronic check service (ECS) provider you've partnered with? Let's take a look at a few things you'll need to know:

• ECS Provider: There are a number of check providers in the market today, giving you and your merchants a wide variety of options. As electronic check programs continue to grow, make sure you understand the program offerings that best fit your business model.

• Bank-endorsed or Third-party: Do you have the confidence in your provider to know that it is backed by leading banks in the industry to provide debit and credit processing services? Or is it a third-party company that competes with the banks? Is the provider well funded and established? Who assumes the financial risk if something happens to their business?

  As a merchant services provider, you want to sell services that will not be problematic for you or the merchant.

• End-to-end Service and Support: Does the merchant have one number to call for any questions regarding their electronic check program? Does the service provider you've partnered with provide end-to-end programs from POS to verification to settlement and reporting?

• Target Markets: Though retail businesses of all types accept checks, the following have been identified as ideal candidates for electronic check conversion, either because of the quantity of checks accepted, or because of the risk associated with selling high-ticket items. Below are some key businesses that should be targeted:
  • Appliance Sales/Service
  • Automobile Service Shops
  • Beauty/Barber Shops
  • Car and Truck Dealers
  • Consumer Electronics Dealers
  • Dry Cleaners
  • Independent Grocers/Food Stores
  • Medical/Dental Service Providers
  • Veterinary Services

Electronic check is certainly a program that payment providers can confidently sell to merchants. Not only are labor and processing costs reduced, but also peace of mind is guaranteed, and merchants will never have to handle another consumer's paper check.

This is an application that is still in its infancy. As major retailers come on board, make sure you are partnered with the right provider for the long haul.

Michelle Graff is Vice President of Marketing for NOVA Information Systems. E-mail her at michelle.graff@novainfo.net