POST, or Point-of-Sale "Check" Truncation (sometimes termed ECP, Electronic Check Presentment) continues to be a hot topic in our industry. ISOs are inquiring about various programs and insiders are talking about the players who hold patents on various aspects of the concept.
As you know from previous articles, ChequeMARK (Robert Hills) holds a patent on a POST process and VeriFone holds a patent on a different approach. (The VeriFone patent precedes the ChequeMARK patent). In addition, a fair amount of "prior art" exists which precedes the VeriFone patent, however, for now, the battle lines seem to be drawn between ChequeMARK and VeriFone.
In "Voluntary ECP Patent Compliance" (97:12:03) you will remember that ChequeMARK is requesting that potential infringers voluntarily comply and agree to the controlling nature of Cheque-MARK's patent. They argue that their system is the practical method, the one currently being used, and the approach that is currently legally possible under NACHAóapproved Electronic Check Council guidelines.
Many industry figures who conduct significant POST business, such as TeleCheck and their ECP program called ECP-Electronic Check Processing, and San Francisco's BANKSERV, disagree. In recent discussions with two such organizations, I found that both organizations believe that the ChequeMARK patent is defeated by the VeriFone patent, due to "prior art."
If the VeriFone patent indeed defeats the ChequeMARK patent, it will have to be because the patent office made some mistake in granting the ChequeMARK patent in the first place. In the alternative, one could argue that the ChequeMARK patent is significantly different from the VeriFone patent, and perhaps is in fact the business model (regardless of how some organizations say their system works) that is actually in place in most pilot programs. So let us consider the differences between the VeriFone Patent and the ChequeMARK patent.
First off, it appears that the VeriFone patent claims a system which is designed for a single, end-use operation whether said end-user is a one-site or multi-site merchant. It is not designed for a multitude of merchants to use the system at the same time. It seems also to require "on-site" operations which, in each instance, involve processing conducted exclusively for the end-user's own account, without permitting other merchants to use the system and without reliance upon external systems or services.
In contrast, ChequeMARK claims a central system capable of processing for a number of different merchants and a plurality of terminal locations. The daily totals of merchant credits and individual consumer payments are formatted by the ChequeMARK system, as originator, for presentment by ChequeMARK's originating bank through the ACH network for settlement at the receiving banks. Specified accounts are identified in the electronic file that is created as part of the point-of-sale operation of the ChequeMARK patent.
The VeriFone patent seems to require a check as a negotiable instrument at the point-of-sale. The system underlying the VeriFone patent seems to us to rely upon a merchant accepting a consumer's check with the "acceptance" constituting payment. Thus the check's role as a "negotiable" instrument is maintained both legally and in the mind of the consumer tendering the check to the merchant. Subsequent to the act of accepting the check as payment, the VeriFone patent requires a sophisticated system capable of imposing variable standards, or thresholds, for sorting checks based upon pre-selected criteria. This results in varying methods for proceeding with a settlement attempt. Processing selected checks for settlement through the facilities of the ACH is one of the manners suggested by the VeriFone patent.
In contrast, the ChequeMARK patent eliminates or "replaces" the consumer's check rather than merely proposing a more expeditious settlement option. Thus, the ChequeMARK System ends any requirement for "acceptance" of a consumer's check as payment. The significance of the physical check is reduced to that of a quasi-access device.
The consumer knows that the check is not accepted as payment but rather that he or she is specifically and expressly authorizing the electronic debiting of an approved checking account in payment for goods purchased at the point-of-sale. The role of a check under the ChequeMARK patent is expressly limited to identifying the source depository account for payment. The check need not be filled-out and, in fact, is preferably left blank. Following the "swiping" procedure, the specimen check is returned to the consumer "unused." Thereafter the consumer's check could subsequently be used for identification at another merchant location, including one theoretically serviced under the VeriFone patent.
While a receipt may be given by the VeriFone system, the check is still a negotiable instrumentóExpress authorization is not present in processing a payment at the point-of-sale, and the VeriFone patent suggests that the consumer, in certain instances, may receive a "receipt." Even in these instances however, the consumer's check is written and accepted as payment by the end-user merchant. While the means of settlement can be selectively changed, the role of the check as a negotiable instrument cannot. Again, this is what appears to us to be a fundamental distinction between the VeriFone and the ChequeMARK patents. In addition, the VeriFone patent does not discuss or suggest an express authorization for electronic access to an account for debit.
Compare this to the ChequeMARK patent which anticipates that an integral part of each "Electronic Checking" transaction is consummated by a consumer's execution of an ACH debit authorization. The affected consumer, thereby, acknowledges and authorizes in advance the electronic means of payment for goods or services purchased. The ACH authorization then becomes a receipt for the consumer detailing the sale and the authority conveyed for electronic settlement. Under the ChequeMARK patent, a point-of-sale express authorization for ACH settlement exists. The VeriFone patent only discusses an option for a receipt to acknowledge the sale event, not any express authority by the consumer for the merchant to debit the consumer's account.
While it remains to be seen how pilot guidelines will further evolve, ChequeMARK is concerned about procedural issues with the VeriFone patent which, from their view, may make the VeriFone system unusable. As an example, from ChequeMARK's perspective, it is not clear that the VeriFone patent is in compliance with the legal requirements and/or mandatory procedures associated with clearing checks via the ACH network. This in turn leads to issues relating to whether or not the VeriFone patent has an enabling disclosure. For Example:
"Receipt" versus "Express Authorization" --ACH guidelines and operational law require that where attempting to conduct an electronic debit (ACH) the consumer must provide his or her express (signed) authority. The VeriFone patent does not address this legal prerequisite. The VeriFone patent discusses only the possibility, under certain unspecified circumstances, of providing a receipt, not the express authority required in the form of an ACH authorization by the consumer and at the time of payment. Neither existing law nor proposed law permits the signature on a check to constitute lawful authority for accessing a consumer's depository account for electronic debit.
The VeriFone patent further suggests that for checks "accepted" as payment to be sorted for ACH settlement, the end-user would submit electronic debit notices from its on-site "system" directly to the consumer's bank or Receiving Depository Financial Institution (RDFI). It appears to us that this is simply not permissible under ACH guidelines and/or prevailing or proposed laws. All electronic debit or credit files must be sponsored onto the ACH network by an Originating Depository Financial Institution (ODFI) whereupon the entry is processed through the ACH network and only then delivered to the affected RDFI where a consumer's depository account is domiciled. Return and/or rejection notifications are similarly processed in the reverse order from the RDFI through the ACH network to the ODFI, and only then to the originating end-user. Suggestions to the contrary (whereby a merchant could independently process directly) are not currently supported by the law.
Under the most recent rules and regulations governing ACH submissions as promulgated by NACHA, the use of a consumer's check, where originally issued in good faith as a "negotiable instrument," can, under limited "pilot" parameters ("proposed amendments"), be converted to an electronic debit event solely for those instances of a reprocessing attempt. Such a proposed class of ACH event, categorized as a Reprocessed Check (RCK) does not require compulsory honoring of the electronic representment by all ACH network banks.
From our analysis of both patents (very dull stuff) significant differences exist between the VeriFone and ChequeMARK patents. In the VeriFone patent the check remains the method of payment with any suggestion regarding ACH settlement referring only to a portion of the overall checks "accepted." By its own description, the VeriFone patent contemplates a single user for each system. The ChequeMARK patent seems to propose a system capable of processing for a multiplicity of merchants and locations with each transaction being formatted for settlement through the facilities of the ACH network and properly supported by the express authority of the affected consumers.
With this in mind, the next question then becomes obvious: If the developing point-of-sale check truncation organizations do not feel that they need to contract for patent use with ChequeMARK because their activity functions more like the VeriFone patent, then they must also believe that VeriFone is not expecting some royalty down the road either. Otherwise, they would be concerned about how much money they are going to owe VeriFone instead.
In fact they must believe that VeriFone will gladly realize all of its future benefits from their POST transaction patent through the sale of MICR readers or something like that, or perhaps VeriFone is just a great organization that isn't concerned about possible patent infringement. (Let's not forget that VeriFone now belongs to Hewlett-Packard).
In either event, it seems that either the cost of POST transactions will increase slightly, due to royalty payments to one of the above patent holders, or the cost may increase greatly as lawyers get rich trying to sort out the question of "prior art" and how and if these two patents actually differ.
Stay tuned. We have more to report on POST transactions and about some merchant's experiences.
