Neil Godfrey is not very popular with some bankers.

He may be affable and witty, but his company poses a threat to the careers of check-processing veterans.

Mr. Godfrey, 61, is chief executive officer of E-Funds Corp., which has a system for converting checks at the point of sale into electronic funds transfers. He half-jokingly claims to enter banks "through back doors, late at night, with a false mustache and a wig on."

Mr. Godfrey could disrupt some of the stable income streams in banking by streamlining certain aspects of check processing. Banks earned $21 billion of fee revenue from check processing in 1996, according to PSI Global of Tampa.

"You have a very strong contingent within every bank that is very hostile to this," said Mr. Godfrey. "You are destroying what they are doing."

Mr. Godfrey's company, formed in 1991, converts 500,000 checks a month into electronic formats, representing just the beginnings of an industry he envisions having revenues of about $10 billion annually.

Checks are converted directly at checkout points, using E-Funds software that is sold and supported through companies like Deluxe Corp. and National Data Corp.

Another service, which E-Funds sells directly to merchants, relies on the automated clearing house to effect payments on hard-to-collect checks.

Merchants pass off the uncollectible checks to E-Funds, rather than resending them to their bank for a second try at collection.

Merchants are eager to enjoy the benefits of reduced paper processing and easier collectibility of funds in a format that can aid cash management, Mr. Godfrey said.

But bankers-although they own a logical distribution channel for E-Funds and a few competing alternatives-are wary.

"Banks in general don't have a good handle on what this 'electronification' really does" to their revenue and expense equations, said Larry D. McNabb, chief executive officer of Primary Payments Inc., which sells fraud prevention services to E-Funds.

"Anytime the bankers are not in the lead, they will clearly be somewhat concerned as to how this impacts them," Mr. McNabb said. "But there is nothing that Neil is doing that a bank couldn't do."

First Hawaiian Inc., an E-Funds customer, examined the merits and pitfalls of electronic conversions "gingerly" before launching a pilot program in February, said Gary Williams, senior vice president of corporate services at the Honolulu company, now part of BancWest Corp.

The $8.1 billion-asset bank resells E-Funds software to its merchants as "a value-added service that complements our existing point-of-sale debit and credit services," Mr. Williams said.

Weighing heavily in the bank's decision was the cost of transporting paper checks to the mainland.

Consumers seem to have few objections to having their paper checks converted to electronic bits, as long as merchants explain the process, Mr. Williams said.

Meanwhile, the bank's merchants are reducing bookkeeping tasks and "eliminating chargebacks."

Mr. Godfrey has been most successful at selling his check collection software directly to merchants. Since 1994 he has sold it to 4,000 merchants nationally.

By getting merchants to use the software, instead of re-presenting uncollectible checks to their banks, E-Funds is taking pokes at the $8.1 billion of annual revenues banks collect on returned items, according to 1996 data from PSI.

Mr. Godfrey said banks can make up for the lost income by charging for intraday account information. "The place you make the money is in cash management and control of funds," Mr. Godfrey said.

He said he stumbled upon the potential leaks in bank revenue flows quite by accident.

Hailing from Santa Rosa, Calif., Mr. Godfrey graduated from the University of Southern California in 1962 and remained there for 10 years to work in the advanced computer technology program.

He then started a software company, Information Management Associates, which sold business software, including an application that could instantly determine a consumer's creditworthiness. Mr. Godfrey called that "a smashing success."

In the early 1980s, he sold the company to Barclays Bank. He and several employees stayed on until the London-based bank shut the unit down in 1991.

"You can just imagine a California software company fitting in with Barclays," he said, sarcastically. "No culture shock there!"

Mr. Godfrey then formed E-Funds, which he conceded was, for many years, "an operation in search of a business."

He first targeted national newspapers with a paperless subscription-fee payment service through the automated clearing house network.

With little commitment to marketing from the 40 customers he signed, the business was "a disaster," he said.

A chance opportunity from a small collections agency in San Diego gave the company a new lease on life. E-Funds failed to convince that company to buy its system for telephone-based electronic payments, but the proprietor pulled a sack of uncollectible checks from his closet and asked Mr. Godfrey to take a stab at getting the funds.

The 10,000-odd checks-some more than two years old-were written for amounts no larger than $35. The costs of collecting them through normal legal channels would have been prohibitive.

Mr. Godfrey created an ACH payment file using bank account information from the magnetic ink lines of the bad checks, and gave the file to his bank to originate paperless debits. He successfully collected 13% of the total value.

"This was pretty good," Mr. Godfrey said, recalling his enthusiasm. "We thought we had a business."

The National Automated Clearing House Association zeroed in on Mr. Godfrey's business, somewhat concerned about the automated debits unknowingly hitting checking accounts, but also intrigued.

The association convinced E-Funds to participate in an empirical study to investigate the potential of melding check and ACH payments. That helped form the basis of a recently passed rule for re-presenting returned checks through the ACH. E-Funds also participated in a 1996 Nacha pilot to electronically convert checks at the point of sale.

E-Funds also attracted the attention of payments industry leaders such as Charles T. Russell, the former Visa International chief executive officer who retired in 1994.

Mr. Russell, an early investor in E-Funds, became vice chairman last year. He equates current check electronification efforts to the state of the credit card industry in the early 1980s, before instantaneous electronic authorizations were common.

"Checks are much more numerous than card transactions," Mr. Russell said.

"Even today, cards represent less than 20% of the transactions at the point of sale. I see this as an enormous opportunity to do for checks what was done for cards."

He said the life of check conversions may be limited as alternatives like debit cards take hold.

Mr. Godfrey said, "Two years ago, I would have said, 'This is insane, they are not going to keep writing checks."

But, he added, "I am beginning to wonder if this is ever going to end. People seem to like these silly pieces of paper."

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