Larry D. McNabb, chief executive officer of Primary Payment Systems Inc., is predicting a 25% reduction in check volume within three years.
Admittedly "aggressive," the projection is based on rapid growth of relatively new initiatives such as electronic bill payments, financial electronic data interchange, and conversions of checks to electronic debits at the retail point of sale.
Mr. McNabb, who was chairman and CEO of BankAmerica Texas before taking the helm of Scottsdale, Ariz.-based Primary Payments last year, is not the first to talk about taking checks out of the system. A generation ago futurists were foreseeing a checkless society, but even modest attempts to improve efficiency have failed to stem the growth of U.S. check-writing.
But Mr. McNabb's bases his aspiration on some new realities that were discussed at the National Automated Clearing House Association's recent electronic check conference in New Orleans.
Next month Nacha will solicit comment on a proposed rule to support the conversion of paper checks to electronic payments at the point of sale. The rule could be implemented as early as next September and pave the way for wider adoption.
Mr. McNabb, whose company maintains a national checking account data base to prevent fraud, said about 18 billion of the 65 billion checks written each year are presented at the point of sale.
"There is an incredible opportunity there," he said.
Under the proposed Nacha rule, merchants would capture information from checks' magnetic-ink lines and convert them into automated clearing house items. Consumers would sign credit-card-like receipts and walk out of stores with merchandise and their checks in hand.
Nacha has already run a successful pilot, involving 200,000 retail payments at more than 4,000 participating merchant locations. TeleCheck Services Inc., a Houston-based unit of First Data Corp. and a participant in the Nacha pilot, found that 79% of consumers were comfortable using the system. TeleCheck currently converts checks at 1,000 merchant sites.
Other companies providing similar services-including Bankserv of San Francisco, Deluxe Electronic Payment Systems Inc. of Phoenix, and E-Funds Corp. of Tustin, Calif.-are converting more than a million checks a month at points of sale.
"It's fairly straightforward," Nacha general counsel Jane Larimer said of the proposed rule. "I don't anticipate any big hitches."
If implemented widely, this and similar forms of "check electronification" could help lower the costs of collection, which are about $1 per check, said Gary Craft, analyst at BancBoston Robertson Stephens.
"Is it reasonable to assume that within a five-year period there are 20% less checks processed in this country?" Mr. Craft asked.
"Yes," he said. "We could go down to less than 50 billion (checks) a year."
But electronification could alter the economics of the checking system, perhaps changing some fee-revenue streams that banks have come to count on.
Banks earned $21 billion in checking account fee revenue in 1996, or 18% of total payment systems revenues, according to a study last year by PSI Global Inc. of Tampa. For returned checks alone, banks collected $8.1 billion, according PSI Global.
Electronically converted checks would fall under the Regulation E guidelines that govern electronic funds transfers, not the Uniform Commercial Code that regulates the traditional paper-based system. Reg E gives consumers 60 days to report unauthorized debits of their accounts.
Phyllis Meyerson, a consultant with the Electronic Check Clearing House Organization in Dallas, predicts haggling between banks and merchants as they try to duck liabilities.
"Certainly, merchants and some bankers would prefer to see the transaction governed by the Uniform Commercial Code rather than be subject to the 60-day return privileges under Reg E," said David Kurrasch, a former banker at Wells Fargo & Co. and now president of Global Payments Advisors of Alameda, Calif.
Another issue surrounding the proposed rule involves whether merchants should keep the converted check or give it back to the customer. "We are a strong believer in allowing the consumer to walk away with the check at the point of sale," said Randy Templeton, senior vice president of TeleCheck.
Others contend that merchants may need the information on the check to track down consumers if ACH transactions are returned.
David F. Kvederis, president and chief executive officer of Bankserv, said Nacha should develop rules but avoid product design.
"Nacha needs to put together rules that tell the (paying bank) where to go and find the check, whether the merchant kept it or it was given back to the consumer," he said. Bankserv gives its merchants the option of keeping checks or not.
The Nacha rule's first version considers the "consumer as keeper," said Elliot McEntee, the association's president. Nacha will consider a "merchant as keeper" rule later, he said.
Another consideration is that electronic check conversion may clash with some banks' plans for debit cards. One New York banker, who asked not to be identified, said he sees check conversion as "an interim step to debit."
On-line debit transactions, which require personal identification numbers and run through ATM networks, would help stem most if not all of the fraud losses that banks and merchants suffer, the banker said.
Check fraud is a $1.34 billion annual problem for banks, according to Primary Payment Systems. Though check volumes are growing less than 2% each year, check fraud is growing more than 12%, said Leslie Michelassi, senior vice president.
Neil Godfrey, chief executive officer of E-Funds, said debit cards are a great idea, but "people like to write checks."