Checks in an Electronic Age

Cash Flow Specialists, Inc.

Toll Free (800) 669-2700

As consumers persist in writing checks, businesses are embracing new means of accepting, verifying, and guaranteeing them, methods spawned in an electronic age.

By Joseph P. Tufo, President of Cash Flow Specialists, Inc.

Consumer check writing is far from a vanishing practice. Reports of the check's demise have been greatly exaggerated. Indeed, Americans are writing more of them annually-approximately 69 billion checks a year, with 18.1 billion written at the point of sale. And, it is estimated that check writing will continue to grow at a rate of 1.5% to 2% a year (Green Sheet, June). While credit cards and debit cards have made some inroads into the check-writing domain, it's apparent that check writing is still consumers' payment method of choice.

Debtors' payment habits may not be changing drastically, businesses are adopting newer methods of accepting, verifying, and guaranteeing checks-ones that incorporate the benefits of this electronic age.

More companies, like ours, are marketing systems that allow businesses to accept checks via phone, e-mail, and Internet. Some technology providers offer check imaging and check scoring services that can help streamline the check acceptance process and combat fraud. Others are reshaping check verification services into more of a cost management tool than a traditional loss prevention service. And for retailers, electronic systems are being designed for safer acceptance of checks at the point of sale.

Palm Springs-based ACH Direct has developed a product that allows businesses to take check payments through a number of channels. The software can guarantee checks through credit bureau services, such as CrossCheck, and either take immediate payments over the phone or schedule payments, says Jeff Thorness, president of ACH Direct. "Our product is a PC-, LAN-, or WAN-based software system that allows merchants to receive payments online, over the phone, or [via] a voice response unit," Thorness says. Customers can make payments using a credit card, debit card, check, or electronic funds transfer. Many customers either do not have a credit card or do not want to use revolving debt, but they still may be a good credit risk. Limiting payment options for them, Thorness says, may reduce a company's market share and recovery rates. "The name of the game," he says, "is customer convenience."

ACH Direct's service is typical of many check acceptance companies. To pay by check, for example, the consumer has to read off the routing number and account number for one of his checks, and then void it. That same day, the company produces a check for deposit on a standard printer located in its office. The printed check, which states that it was "verbally authorized by the depositor," is then processed through the Federal Reserve System. Eventually, it is returned to the customer with a bank statement like any other check, Thorness says. Currently hundreds of companies use our software, he says, and the company predicts that number will double in the next year.

Call It In

And in the check recovery business, collections agencies are going electronic. "More companies are leaning towards electronic resubmission of checks," says Jerry Federico, president of Waco, TX. -based EFG, a processor that specializes in check recovery. Although electronic resubmission is less than six years old, resubmitting checks electronically makes a lot of sense, he says. "Nine times out of 10," Federico says, "the money is there when the check returns." Most check returns are the result of mistakes on the part of a debtor who, for example, writes a check that clears too quickly, or counts on an automatic payroll deposit that is made a day later than expected.

By using electronic resubmission of checks, Federico says, an agency can recover money more quickly, and deposit funds on the same day. By comparison, the traditional method of collecting on bad checks-calling debtors and asking them to send a new check in the mail-can take as long as 45 days.

Electronic imaging, which scans and produces an image of a check, has fostered the growth of electronic acceptance, as well as resubmission, of checks. And, Federico says, there's another bonus: It cuts data entry errors.

When a bad check comes into a business, one way to try to collect the debt is to request a new check. But frequently a replacement check never arrives. With our system, Federico says, "a company only needs to obtain permission over the phone from the consumer to reauthorize the check. This allows the company to print a new check payable to itself, which they sign for the bill payer." In addition to eliminating the "check is in the mail excuse," and getting the check to the collections agency sooner, Federico says, our system notifies the business if a debtor is unwilling to pay so collections proceedings can begin earlier.

Other aspects of check services are changing as well. One of the biggest trends in check verification is the shift in function from a loss prevention to a cost management tool, says Arnold Feinberg, vice president of sales for Rocky Mountain Retail Systems, Lawrence, Kan. Traditionally, verification was strictly negative. The name of a consumer who wrote a bad check would show up in the database, and the creditor or collector would decline to accept another check from that individual. But today, Feinberg says, the emphasis is on positive data, with databases reflecting all known check writers, not just those with one or more strikes against them.

Scoring Checks

The expanded databases provide a larger context for determining how risky a check writer really is. And they have led to the development of check scoring systems that take into account a consumer's positive, as well as negative, check writing history.

There are essentially three reasons why checks bounce, says Feinberg. First, are the errors, such as a deposit not clearing on time, that account for about 50% of all bad checks. Second, debtors may write checks knowing they do not have the money in the account, but hoping the money will be there by the time the check clears. Third, are criminals who have no intention of paying.

However, says Feinberg, the majority of returned checks are written by honest people who will rectify the situation when asked. There are many good customers included in negative check writing databases simply because of human error, he says. As a result, companies may needlessly be declining their checks. One client of Feinberg's, AutoZone, an automotive parts distributor, became concerned that it was turning away too many potential customers because of negative information. "If Mr. Smith bounced one check, never at AutoZone, then should AutoZone turn away Mr. Smith as a customer?" Feinberg asks.

For customers like AutoZone and other retailers, accepting checks at the point of sale is becoming less of a credit risk-thanks to technology. In 1998 for instance, CrossCheck of Rohnert Park, CA introduced the Electronic Check Acceptance Service, which converts paper checks into electronic information at the point of sale. CrossCheck is the largest privately held check guarantee company in the USA. As part of its core check, CrossCheck has built a proprietary national database of check writers.

When a consumer presents a check at a retailer the information is sent electronically to CrossCheck. The firm searches its database, scores the check, and sends back an approval code. The in-store terminal then prints out a receipt, similar to a credit card receipt, that the customer signs authorizing CrossCheck to present the transaction to the customer's bank for payment, which CrossCheck does electronically through an automated clearinghouse network.

'Headaches and Risks'

"Since CrossCheck processes the check electronically, all the risk and headache of accepting checks is eliminated for the merchant," Michael Pedri of Field Sales claims. Customer acceptance is high-about 92%, he says, because the system is not an immediate transaction, so customers get the same float time they would if they were using a paper check. Also, since it's an electronic transaction, fewer people have access to a customer's name, address, telephone number, and other personal information than would be the case with a paper check.

At a time when Americans still refuse to kick the check writing habit, innovative solutions from vendors of check acceptance, verification, and recovery services are key to attaining increased efficiency. And with the array of electronic and online offerings available today, businesses don't need to rely on the age-old promise, "The check's in the mail."