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."
