consumer payment technology in more than a decade. This is a debate about the check, but not the check that's worth money -- it's about the voided check.
Americans, like no other consumers in the world, love their checks. True, growth in check volume has slowed in recent years, but it's still growing. Nothing, it seems, can motivate the public to give up their checks -- so technology has to change to make checks more efficient and bring them into the 21st century.
That technological change is the electronic check, which converts a paper check into an electronic transaction at the point of sale. And it is gaining momentum. With electronic checks, banks and retailers enjoy the same or better revenue streams but rid themselves of paper, which lowers costs and speeds up funds clearing by an average of 10 days. Best of all, consumers get to keep writing checks.
But disagreement about who should keep the voided check -- the consumer or the merchant -- threatens to undermine electronic checks. This is occurring even though the "consumer-as-keeper" of the converted check is the most logical, most widely accepted model. In fact, extensive studies show that consumers prefer to keep their checks.
In focus groups conducted by the National Automated Clearing House Association, consumers cited safety, security, and record keeping as reasons they wanted to retain their checks.
Subsequent market tests and pilot research by eFunds and other major electronic-check service providers support that original finding. For instance, in a consumer-as-keeper test with First Hawaiian Bank, eFunds conducted market research (observation at the retail counter and exit interviews) where consumers weighed in with neutral to positive comments about check conversion.
In its 18-month existence, the First Hawaiian consumer-as-keeper program has received virtually no consumer complaints.
In addition, following extensive research and rigorous debate, Nacha and the automated clearing house community last April declared consumer-as-keeper the industry standard. It was subsequently written into the network operating rules, which take effect this month. But hold on -- a new proposal is now under consideration that would allow both consumer-as-keeper and merchant-as-keeper models to exist side by side.
It won't work to have it both ways. A single standard is needed to allow electronic checks to flourish to everyone's benefit. Dual models will only confuse consumers -- remember the VHS-versus-Beta videotape wars -- also making life more difficult for banks and retailers and stifling the overall development of electronic checks.
What's wrong with dual models?
Firstly, they threaten the banks' relationships with consumers. When consumers have a question about a check, they expect their bank to help them. This is an important customer-service role and one that intimately binds the consumer with the bank. Trouble is, if the merchant keeps the check, does the consumer then call the merchant for a copy? Does the merchant want those calls?
More important, will the merchant be prepared to answer the calls? (That is, will the merchant be staffed and able to resolve the consumer's problem)? If not, will the merchant want to forgo the savings from electronic checks to pay for outsourcing this new bank-like service? Further, does the bank want to hand off its customer relationships to merchants?
Secondly, dual models will result in confusion. Pity the consumer who has to figure out whom to call when there is a problem with a check. With merchant-as-keeper and consumer-as-keeper existing side by side, the consumer must keep two processes in mind -- and understand the difference. This damages the ease of use consumers have come to associate with check writing and ultimately will erode confidence in electronic checks.
Pity, also, the banks, which will have to operate under dual legal frameworks for consumers' rights. For example, certain regulations apply to the transaction in the consumer-as-keeper model (because it is considered an electronic funds transfer) that are different from those that apply when the merchant keeps the check. Banks would have to apply the differing rules, merchant by merchant.
And pity the merchants. Do they really want to keep all those checks? Do they store them on site? Electronically? Physically? Or do they pay to outsource?
The answer is no, of course. That is why merchants want electronic checks in the first place: to get rid of paper and to drive down costs and decrease their check-return rates. Merchants don't want to take on a bank's customer relations function, but that will happen when they assume responsibility for all those checks.
Merchant-as-keeper has other drawbacks -- one being higher risk, which was discovered during the initial electronic-check pilots. Participating merchants mistakenly deposited checks after the electronic payments had been settled, causing consumers' accounts to be debited twice. Training cashiers to determine which checks to retain and which ones to deposit is a major headache for merchants, and double-debiting continues to happen with those operating under the merchant-as-keeper model.
The merchant-as-keeper proponents argue that check retention is necessary to track down people who write checks with insufficient funds. But technology exists to capture the necessary data to locate these people. Our own experience shows that collection rates can actually be increased through electronic check, even without the voided check.
Additionally, these proponents argue that the original magnetic ink character recognition line on checks is necessary to resolve administrative rejects (the transactions that weren't formatted successfully for automated clearing house debiting). But the real solution is to make this conversion correctly in the first place. Again, technology exists to address this issue.
Financial service companies, retailers, and consumers all benefit from electronic check conversion. Let's firmly support the consumer-as-keeper rule that has been established -- and stick to one standard -- so consumers have a consistent experience everywhere they encounter check conversion, and so banks and merchants can conduct business the only way it makes sense.