Check Woes Increase at the Point-of-Sale
Businesses absorbed more than $13 billion in bad checks last year, an estimated 18 percent jump from 1995. This increase in the number of bad checks recently has caused many merchants to rethink their strategy for check approval and the amount they are willing to pay for a more open system that will not strangle their business growth.
In early 1997 Americans' most popular payment method for a variety of purposes continued to be personal checks. (See the 1997 Check Study released September 8, 1997, by The Green Sheet, Inc., for complete details). The American love affair with checks, long thought to be based on "check float" has since been proven to be based on other factors including simplicity, universal acceptance, convenience, control, and above all else, low cost.
Alternate Methods
While the Federal Reserve was experiencing an unprecedented 40% increase in electronic settlement in 1996 and Visa was also reporting 1996 debit card growth at 40%, retailers were reporting continued check growth, with 3.4 million new checks coming into the marketplace each and every day. In late 1996, retailers were asked the following leading question by STORES Magazine and The Reid System in an on-line survey: "Have your stores experienced a decline in check use over the past year?" Fifty three percent of the merchants reported that they had not had a decline in check use.
Check Use
All available research continues to show that checks continue to be a significant part of the overall payment system, representing 23%-24% of retail sales. Checks represented 23.3% of all retail transactions in 1993, up from 20.5% in 1992, according to Arthur Anderson & Co. While check use has continued to increase, so have bad checks. Retailers, particularly in the middle market, are becoming more interested in Check Guarantee.
Check Risk
In terms of all checks, 58% are relatively risk free. This percentage represents all government checks, business payments to government and individuals (principally payroll checks), and individual consumer's checks drawn for purposes other than retail payments. As an example, the highest proportion of check losses in 1995 occurred for checks written by consumers against their personal accounts. In terms of the highest risk checks, the primary risk associated with checks are for checks drawn for payments at the point-of-sale and business-to-business checks. In the survey reported by STORES Magazine in January 1997, responding merchants indicated their concerns over increasing check losses, with 64.7% responding that their stores had experienced an increase in bad checks over the past year. Even so, check losses for the business segment of the marketplace are difficult to determine. Such data is not maintained by any national reporting source and check losses result from fraudulent and legitimate checks passed against all types of business accounts at both the retail and wholesale levels. Additionally, although check loss at the retail point-of-sale is by far the largest check loss segment, a portion of this loss is reimbursed to some retailers through risk management.
Check risk is managed in the United States in one of two ways: First, businesses determine which checks they will or will not accept, and subsequently attempt to collect those checks which are dishonored. These events may be supported through the use of individual or combined negative check writing history and through the use of third-party collection assistance, with the resulting costs and write-offs born by the merchant. This risk management approach is called Verification/Collection. Alternately, businesses may contract for a third-party to provide approval and guarantee services in which the third-party has the collection and loss responsibilities for checks, and the merchant pays a fee for such services. This risk management option is referred to as Guarantee. Given the risk management options, Ernst & Young found in their 1996 survey that, "One in four merchants avail themselves of third-party verification services to perform check authorization services. Another 16% say they use manual approval methods and 13.3% have established an in-house authorization system." While historically, both Verification and Guarantee have addressed certain market needs, recently merchants were asked, "Do you feel the greater protection offered by Check Guarantee services justifies their additional cost;1 64.7% of retailers responded "Yes."
1Stores Magazine, and The Reid System, "Retailers See Rise in Bad Checks," January 1997.
