As interest grows among banks and merchants in converting paper checks to automated clearing house debits, debate is growing among payments industry executives about what safety measures are needed to thwart fraud in this nascent area of operation.
Some say that truncation - at a lockbox, for example - is safer than point of sale conversion, because truncation involves recording a digital image of the check.
Only a few merchants are doing conversion now, and most of them use devices that merely record a check's magnetic ink character recognition (MICR) line, which carries information about the consumer's bank and account number.
It is certainly possible - though more costly - for merchants to image the checks too. Wal-Mart Stores Inc., which is ahead of all other retailers in its use of conversion technology, says it has not decided whether to invest in imaging.
Then again, those sounding the alarm about converting checks without imaging them tend to have a vested interest.
Rob Evans, the NCR Corp. executive in charge of analyzing automated teller machine regulations, said checks that are imaged and truncated after deposit in ATMs are safer than checks converted at the point of sale.
His company is lobbying for legislation to free banks that image such checks from having to return them to the bank of origin.
Consumers also consider conversion less safe, Mr. Evans said. "The consumers' perception is that the ATM transaction is more secure, because they believe the ATM to be safe," he said. "It's kind of like the phenomenon of the consumers who will not use the credit card online … but they'll stick that same card in an ATM."
Experts are also divided on whether point of sale transactions should be routed through an electronic funds transfer network or the automated clearing house.
Anne O'Toole, the executive director of New York-based SafeCheck, is a proponent of EFTs. Her company, a part of the SVPCo division of the New York Clearing House, authorizes paper checks and can electronically debit them against actual account balances at the point of sale.
Checks that go through an EFT are settled right away, Ms. O'Toole pointed out; those going through the ACH usually take a day or two, so they are more susceptible to bouncing.
"SafeCheck eliminates the need to have an image, because it's real-time," Ms. O'Toole said. "If the transaction is approved, it's done; if the transaction is denied, it's done as well. There's no need for the image."
There is also some wiggle room if the EFT route is taken, Ms. O'Toole said. Even if funds are insufficient, a bank may choose to approve a debit for what it considers a reliable customer, she said.
SafeCheck's board is made up of 11 major banks and the three major EFT networks - Star, NYCE, and Pulse. Transactions under SafeCheck's auspices are routed through those networks rather than the ACH.
"There is a need for an image when it goes down the ACH, because the check could be returned, it could bounce," Ms. O'Toole said. Without an image of the check, which must be returned immediately at the point of sale, the merchant may have neither the person's real name nor address. If a bank is not associated with SafeCheck or the EFT network that covers the merchant, such checks are sent down the ACH, she said.
TeleCheck, a subsidiary of Denver-based First Data Corp., is unapologetic about using the ACH to transmit converted checks. TeleCheck, which counts Wal-Mart as a customer, offers merchants different types of check readers, including models that only read the MICR line. But in those cases, "typically the merchant would also require another form of ID, like a driver's license number," said Jeff Fowler, a TeleCheck spokesman.
TeleCheck also makes readers that can image checks and store those images in the company's database to be called up when problems arise.
Mr. Fowler said using the ACH helps the consumer, because it provides float. "It might not be quite as long of a float as a paper check, but there is a one- or two-day period," he said. "To the check-writing population, that's a benefit."
These issues and related ones may well be taken up by Congress. In December the Federal Reserve Board sent a proposal to Congress for a Check Truncation Act, which would provide guidelines to banks on imaging. Though Fed Chairman Alan Greenspan has championed the proposal, it has yet to be introduced formally in either house.
The legislation, which is also heartily supported in the payments industry, could bring more order to the current hodgepodge of arrangements. Some banks do not return canceled checks to their customers, but instead give them printed images of the checks in monthly statements. Billers that receive checks in the mail are also using check truncation in a form that often includes image capture but is governed under Regulation E.
Banks are pushing for the Check Truncation Act because it would reduce their spending for moving paper checks by armored cars and airlines.
"You have to pick up the deposits every day in order to meet the presentment deadlines," said Kimberly Hoover, an outside counsel for AirNet, a company that transports checks.
A bank that wants to send only a check image, not the check itself, to another bank can now do so only if that bank agrees. No such agreement would be needed under the Bank Truncation Act; the electronic image would have the same legal status as the original.
The proposed law would not cover check conversion - whose regulation involves some complications.
Ms. O'Toole of SafeCheck pointed out that a paper check is regulated by the Uniform Commercial Code unless converted to an electronic debit at the point of sale. Then it becomes subject to Federal Reserve control under Regulation E.
Ms. Hoover said that AirNet opposes check truncation at the ATM, but not conversion at the point of sale, even though both would someday take business away from check-carrying companies. "We're not the Flat Earth Society," she said. "We understand that the goal is to get to electronic payments eventually."
With a point of sale conversion, she said, the merchant is "dealing face-to-face with the person who wrote the check, and they're fully informed of what's going on." ATM truncation, on the other hand, might leave multiple images of a check floating through the system, so the check could conceivably be debited several times, Ms. Hoover said.
If banks want to eliminate paper checks, they need to provide an incentive for people to stop writing them, she said. "That would be a better solution, instead of a scheme where you turn a paper check into an electronic transmission and back into paper when you need to."
So far, point of sale check conversion is a relatively small business. SafeCheck, which began offering its service just over a year ago, has signed up only five banks. Ms. O'Toole said there will be four more by yearend.
Last year the automated clearing house handled 88 million check truncations. Nacha, the electronic payments association, predicts that the clearing house will handle 200 million such transactions this year.
