A group of banks have formed a company that will use automated teller machine networks to turn checks written at merchant check-out counters into the equivalent of disposable debit cards.
The banks who are part owners of the new company, SafeCheck LLC, see this as the first step in a plan to eliminate the processing of 18 billion checks accepted annually by merchants at the point of sale.
The technique is an advance upon other methods the industry has pursued over the past decade.
Besides eliminating merchants' risk of accepting fraudulent checks, SafeCheck has the potential to strengthen banks' relationships with their merchant customers and raises the possibility of new revenue streams.
Rolled out fully, the new check-truncation procedure "will dramatically change the nature of check transactions at the point of sale," said Hank Farrar, president and chief operating officer of Small Value Payments Co., a bank-owned unit of the New York Clearing House Association.
SVPCo. is spearheading the effort along with 11 banking companies - ABN Amro Holding NV, Bank of America Corp., BB&T Corp., Chase Manhattan Corp., Citigroup Inc., First Union Corp., Summit Bancorp, Bank of Tokyo-Mitsubishi Ltd.'s Union Bank of California, Union Planters Corp., U.S. Bancorp, and Wells Fargo & Co. Collectively these companies account for 40% of the nation's demand-deposit accounts. Three ATM networks, Nyce Corp., Pulse, and Star, are also owners.
Last week SafeCheck put about 100 transactions through its system in a test that proved that ATM networks could be used to verify the availability of funds for checks written at merchant points of sale.
"As far as we know, for the first time in history, we have actually processed a check through the EFT network and accessed in real time the DDA account," Mr. Farrar said.
This success puts SafeCheck on track to test within the next 90 days the actual debiting of funds from the accounts. Buyers would sign credit card-like receipts to authorize transactions and would get the voided checks handed back to them.
By letting merchants debit accounts in real time and receive funds immediately, the service would virtually eliminate the possibility of fraud. Merchants suffer an estimated $12 billion of losses annually from accepting bad or fraudulent checks.
Until now merchants had to rely on imperfect methods of verifying checking-account funds. Usually they have hired third-party providers of historical check-writing databases. Such companies examine whether an account actually exists and the customer's history of bounced checks. SafeCheck in contrast offers a definite, real-time decision.
The immediacy of debits also is an improvement over methods that have been advocated in the past. Nacha, the electronic payments association, has striven for years to facilitate the conversion of checks at the point of sale into automated clearing house transactions. While this method eliminates paper, the batch processing procedures of the ACH require merchants to wait one to two days for payments to clear.
"The ACH process won't take fraud out of the process," Mr. Farrar said. "This will."
Keith Theisen, a senior vice president at Wells, said SafeCheck "puts the financial industry back in control of the payment process. You really have to ping against a bank account to make this all happen." He added that the ability to verify funds and collect them in real time "is something that is not at all available today anywhere. It is a brand new payment stream for retailers."
In last week's pilot, SafeCheck captured check information at a point of sale using equipment from International Check Services, an acquirer of point-of-sale transactions, check authorization, and guarantee services, which bought part of National Processing Co. The data was transmitted through Nyce to First Union to determine the sufficiency of funds.
"Our plan is to work with banks and get them to subscribe to this so we can get access to their DDA accounts," Mr. Farrar said. "My goal is to electronify 18.1 billion checks, and SVPCo's charter is to capture the check as early in the system as possible."
SafeCheck is about two years away from establishing pricing models. Bank companies probably would collect nominal fees from merchants every time a checking account was tapped for information, and another fee on top of that for the debit. In addition, ATM networks would probably charge merchants for each transaction. The total cost of a SafeCheck transaction would probably be about 25 cents.
In traditional methods, merchants pay fees to check acceptance companies. They also pay banks to clear checks.
Some bankers have questioned the need to invest in a system that may just be an interim step to fully electronic debit card payments. Others have argued that unless banks try to seize control of the check conversion business, they will lose it to nonbank processors.
Either way, few observers see any waning in the consumer's love affair with checks. According to the latest estimate by the New York Clearing House, 68 billion of them are written each year.
Meanwhile, customer response to automated clearing house conversion efforts by companies such as Bankserv of San Francisco, E-Funds Corp. of Milwaukee, and First Data Corp.'s Telecheck Services subsidiary in Houston has been favorable.
First Union has been particularly aggressive in pursuing check truncation based on the automated clearing house, signing on Creative Hairdressers Inc., a Falls Church, Va.-based company that operates a chain of 700 HairCuttery salons.
Carol Malicki, a senior vice president at First Union, said she envisions her bank offering both ACH- and ATM-based conversion services to merchant customers.
The ATM-based version would help re-intermediate banks in the check verification process, which has been offered to merchants largely by nonbank providers.
"We certainly think it will enable the banks to work with merchant processors and verification companies a little more closely than we had in the past by providing them this new service and offering them this new way to move funds more rapidly," she said.
SafeCheck poses a threat to third-party check acceptance companies. In the longer term, merchants might choose to get the information directly from banks.
Christopher O'Hara, president and chief operating officer of Riverdale, N.J.-based ICS, said his company could continue to play an important role in merchant services. The electronic fund transfer network can provide absolute data regarding whether a check will clear at that point in time.
