Check Tech ë96- Part II
The primary discussion of the Faulker & Gray Check Tech conference in January was ECP. So what exactly is ECP? And why should we be interested in it?
To get an answer to this question we need to look both inside and outside banking. However, the answers will likely differ greatly, depending on who you ask. While many will explain the acronym literally as Electronic Check Presentment (ECP), meaning that the drawee bank will receive information about a check electronically, and before they receive the check physically; others really mean any program that eliminates, stops electronically, stores or truncates the paper based check anywhere between the point of issuance and the point of return to the maker.
Most futurists can see the advantages of paper checks being eliminated completely from the process. There are, however, significant legal and regulatory stumbling blocks (UCC3, UCC4, Reg. C and J), and perhaps more importantly the American consumer will lose in the process.
Why won’t consumers like ECP and a speedier process? The Answer is based for the most part on the very reason Banking embraces the concept, i.e., Float Reduction. ECP will reduce systemic float, or if you will, increase the velocity of money.
In most early ECP models, the number of check float days is reduced 50% to 60%, but of course it will create huge processing cost reductions and more bank profit as well.
In the early stages of ECP most consumers will be unaware that check processing systems which they have grown to know and love are changing.
In the current environment, check clearing is the result of a check physically moving between the Payee’s bank and the Maker’s bank. This process takes time, is cumbersome and when sufficient funds are not available, takes just as long to return through the process.
This, of course, is good for the consumer since most checks that can be redeposited (averages 75%) will be redeposited, allowing consumers to gain float (time), and as we all know, time is money.
ECP is, of course, already creeping into our lives and reducing float. Many bank initiatives are already creating "paper to follow" processes in which they transmit the information about a check, i.e., account number and amount, directly to the Maker’s bank (or a private or Federal go between, and then on to the Maker’s bank). Through this evolutionary step, aggressive banks are gaining an earlier knowledge of potential dishonored checks and can then reach agreements to settle with "paper to follow."
At the same time that some early ECP initiatives are beginning to reduce consumer float, banks are, on yet another related front, offering consumers "check safe keeping" programs. By returning the image of the check rather than the check itself, they are preparing for the next step which is a "no paper to follow" check clearing system. This system exchanges electronic settlement information as well as electronic images between banks, with the Payee’s bank retaining the original check, rather than the Maker’s bank.
We know today that affluent consumers are more likely to go on-line with their bank than to get in-line at their bank. It stands to reason that one of the additional reasons, besides the obvious float and cost savings opportunities, that banks are running head on at an ECP or Paperless Settlement Systems, is that some of their more powerful customers want it.
Customers such as Insurance and Utilities companies want to initiate "Forward Pay Systems" in which they, the potential Payee, originate the paperless check and have it cleared against the Maker’s (their customers’) account.
This will, of course, eliminate even more of the consumers’ float time, i.e., mail time. While this particular ECP initiative would on the surface seem consumer friendly, it seems to us that consumers will want to determine themselves when payment will occur.
One of the primary reasons that home Electronic Payment Systems (like Quicken) are growing slowly, is that too few entities that consumers want to pay electronically, are able to receive payments electronically.
In addition to Pilot Programs for insurance and utility bills, bankers say that some large retailers also want to know that checks are going to bounce against their account at an earlier point.
Retailing giants like Melville Corporation (owners of nearly 4,000 specialty retail stores from shoes to furniture) are still waiting an average of 20 days from the check date to the return date, to receive bounced checks from their bank.
Through ECP, Melville is able to know that the check is going to bounce in only 9 days, giving them an 11 day head start on collecting the check, and an 11 day use of funds loss as well.
While many retailers may well want early warning of Dishonored Items, what they want most are Sales.
Melville, which includes retail stores such as Kay Bee Toys, Consumer Value Stores (CVS), Wilson’s Leather, Linens ën Things, FootAction USA, Thom McAnn and This End Up furniture, has an enormous volume of check activity to model. After reviewing and modeling its data (50 Million checks per year with 300 thousand bouncing), they found that 45% of all returned checks were checks numbered 300 or below.
This, of course, would suggest to many Check Risk managers, that Melville should stop taking checks numbered below 300 since it would eliminate nearly half of their losses. However, their internal data also told them that they would lose $9.5 Million in sales to eliminate $1 Million in bad checks, a poor trade at best.
While Melville’s data is wonderfully illustrative of the complexities and opportunities of checks at retail, many smaller retailers have not realized how profitable checks really are.
Nationally, approximately 1% of bad checks are dishonored. This 1% is less than the national credit card processing costs, so checks overall are very profitable -- but it may indeed require banking to help make the loss percentage more manageable, but in ways banking may not like.
In general, banking could make a significant impact on bad checks if they simply improved their account opening procedures.
In addition to the Melville Corporation loss data above, their check history also reflected that 26% of all bad checks and 47% of all losses were due to Account Closed checks. In addition, Melville was also able to see that one particular bank returned 69% of its checks "Account Closed."
Noting that there is much that Banking could be doing to help stem the tide of bad checks, including improved account opening procedures, using national data bases, verifying employment and home addresses, credit bureau reporting and the reduction of check starter kits, ECP is only going to make what is already going to bounce, bounce more quickly.
[Go Back]
