The National Automated Clearing House Association has declared success in its test of converting checks into electronic debits at retail points of sale and is creating rules to support the activity more widely.
The pilot test, begun in late 1996, "has been phenomenally accepted with very little consumer resistance," said Louise Clynes, director of Nacha's Electronic Check Council. With 1,669 participating merchants, the program is converting 200,000 checks per month, averaging $80 each.
The terminals capture bank transit/routing numbers and consumer account information from a blank check's line of magnetic-ink characters.
Merchants void the check, then either hand it back to the customer or keep it. The payment then flows through the ACH network. Customers need only sign an authorization slip.
Ms. Clynes said the program introduces "reluctant consumers" to a more efficient payment method "in a way that does not require a change in behavior."
Nacha has been working for years to make a dent in national check volume, now estimated at 65 billion items annually. More electronics would reduce paper-based fraud. BancAmerica Robertson Stephens has estimated that check fraud is growing 30% annually.
Some are questioning the long-term viability of "check electronification" in light of the growth of debit card use. Richard Burke, chairman of the Electronic Check Council and managing director of National Returns Clearing House Ltd., Exton, Pa., said the "point of sale conversion transaction is interim."
But he added that the banking industry should become interested in this emerging transaction method if only to keep a grip on a payments business that could be usurped by nonbanks.
In credit cards, Mr. Burke pointed out, nonbank processors and independent sales organizations muscled banks out of much of the processing business - a trend many bankers regretted and are trying to rectify.
A Nacha work group is expected to complete a draft of rules governing paper-to-electronic transaction conversions in the fourth quarter.
Paper checks are governed by the Uniform Commercial Code and Federal Reserve Regulation CC, but checks converted to electronics at the point of sale would fall under Regulation E and the Electronic Funds Transfer Act.
A source familiar with the rulemaking said a debate is likely to ensue on whether the rule would require merchants to retain the check presented at the point of sale or return it to the consumer.
William Nelson, executive vice president at Nacha in Herndon, Va., said returning checks is "clearly the consumer preference" and would support the legal framework.
But the anonymous source was concerned that returning all converted checks to consumers would leave merchants with no convenient method to capture and store names and addresses. In theory, any transaction processor with national skip-tracing capability could become more competitive than those that lack such a service.
Most banks and processors "can't do skip tracing," said the source.
Vendors involved in Nacha's pilot test include Telecheck Services, National Processing Corp., E-Funds Corp., Electronic Check Processing Inc., and Bankserv Inc.
