Bankers have tried to dull the public appetite for paper checks with no luck.
Now, instead of trying to coax people to use other payment methods, these banks have devised ways to convert the paper checks to debit transactions at the point of sale.
That way, the consumer can use his familiar checkbook, but the banks and merchants can save money by treating the sale as a debit transaction, and processing it electronically on the spot.
This process, known as check truncation, is not a new idea, but two prominent banking companies have just launched pilots of it, and there are signs that others will follow up. One test, which began Monday, is being led by BB&T Corp. of Winston-Salem, N.C.
Another, which so far only handles check verification, is being conducted by Star Systems Inc., the national point of sale and electronic funds transfer network being purchased by Concord EFS of Memphis.
Though the benefits for banks would be enormous if check truncation took off transactions that cost banks $2 to $3 each would now cost them pennies to process there are formidable obstacles. Retailers particularly the larger ones who could spur adoption of the process are resistant, because gearing up for check conversion requires them to buy a lot of new terminals (each of which costs in the $150 range) and to train or retrain all their cashiers. Consumers may not like the idea either, because the two to three days of float they get when they write a check disappears when the transaction is converted to debit.
The converted transactions run over one of the electronic funds transfer networks, and the money is debited from a checking account. The funds are switched through the automated clearing house network.
The test that began on Monday is a collaboration between BB&T Corp. of Winston-Salem, N.C., and SafeCheck LLC, a New York company that specializes in check conversion technology and is owned by a consortium of 11 banks and three electronic funds transfer networks. The companies gave participating merchants special point of sale scanners that read the magnetic ink character recognition lines of the checks, and convert the information into a debit transaction in real time. Consumers receive their canceled checks back right away.
Tom Mennecke, project manager for SafeCheck, said his company and its eleven bank owners have been working on this pilot for three years. SafeCheck now offers four different ways of converting checks, some of which actually debit the funds from the customers account, and some of which simply verify that the funds are available. The banks are testing and seeing, he said. Whatever comes out the best, theyll probably end up using.
SafeChecks bank owners include Bank of America Corp., J.P. Morgan Chase & Co., Citigroup Inc., First Union Corp., U.S. Bancorp., and Wells Fargo & Co. Its EFT owners are NYCE Corp., Pulse EFT Association, and Star Systems (which is also conducting its own separate check verification test).
In the Star Systems pilot which uses what the company calls the Star Check system a check presented at the point of sale is scanned in a special terminal and routed electronically to Equifax Inc., for a risk management assessment. Equifax checks the account against its negative files, and if questions persist, Equifax routes it for a second look to a database company owned by Star Systems, Primary Payment Systems Inc. of Scottsdale, Ariz. Within four seconds, the system returns a positive or negative recommendation for the check.
The pilot began in November, and plans call for the companies to begin doing more than just verifying checks. Thats the desire of many of the organizations, to eliminate the paper, said Nikki Waters, a Star Systems spokeswoman. But in order to migrate individuals to that payment methodology, theres a need to gradually introduce new payment systems and this is one way to do so.
Bankers think check truncation has the potential to reduce check fraud, which costs banks over a billion dollars a year, and retailers between $12 and $13 billion a year. Though approximately 13 billion checks were written at point of sale terminals last year, that number is expected to dwindle as debit card transactions grow more popular, said Robert Hunt, a senior research analyst at TowerGroup Inc., the financial technology consulting firm.
Checks are entering a long period of slow decline, Mr. Hunt said, citing the federal governments recent conversion from paper checks to electronic funds transfer.Corporations are also moving in this direction, he said, and only the consumer remains enamored with the check though less so because of debit cards.
Jeffrey Carbiener, senior vice president and general manager of Equifax Check Solutions, in St. Petersburg, Fla., said his company is finding the most resistance among retailers, who cite high turnover among cashiers and say they do not want to invest a lot of training for people who will only be there for a month or two. Consumers will also need to be trained to not think there is still a float to their transaction, he said.
Joe Kniceley, vice president of payment solutions for NCR Corp., predicted that verification systems will become commonplace and will make a big dent in check fraud. Once the verification systems take hold and migrate into check truncation, he said, people will probably cut back on their check habits, since there will be no reason to use a check instead of a debit card.
Industry experts say some merchants are wary that truncation will alienate customers who value their check float. But Ms. Waters of Star Systems said, Float is a very, very minor part of the payment process for the individual. Consumers use checks because they are comfortable using them, she said, and because it enhances record-keeping.