Electronic check conversion - turning paper checks into e-transactions - is catching on with merchants, and that is helping its standing in the industry's effort to cut paper use.
Point of sale checks conversion are still a trickle in the paper-check stream but are rapidly becoming more prevalent. Even small merchants are touting benefits such as reduced fraud and expense.
"I haven't had a check bounce here in about two years," said Leroy Freeland, the owner of The Fish Place, a Fort Worth pet store. "Before, I used to get about three every months. There's nothing as bad as the news that a check is coming back."
The Fish Place has been using conversion systems for more than five years, which puts it in the vanguard, alongside Wal-Mart Stores Inc. Mr. Freeland said that his customers started getting more comfortable with the concept once some of the area's larger retailers began installing check scanners at their registers.
"In the beginning, people were very confused," he said. "Some of them would just scratch their head when I gave them back their checks."
Wal-Mart did a pilot in 1999 and expanded it in 2001 to 200 of its 3,300 stores, using handouts and signs to explain why cashiers were returning shoppers' checks.
"There were some eyebrows raised at first, but that's happening less and less," said Roger Christiansen, the director of payment services at Wal-Mart. "I would say it's gaining more and more acceptance."
He said that the Bentonville, Ark., company has not scheduled a further expansion of the program but that it finds the technology promising. "Electronic checks have the potential to be a more efficient and more cost-effective means of processing payments," he said.
The Federal Reserve Board has estimated that in the United States, 42.5 billion checks a year are written (excluding converted checks, which are not counted as paper transactions).
Data from Nacha indicate that e-checks numbered around 100 million last year Most e-checks are routed through the automated clearing house network, though some go through Visa U.S.A.'s network and other proprietary conduits.
According to Nacha, more than 28 million ACH-based check conversions were processed at the point of sale in the third quarter of 2002, up 85% from the third quarter of 2001. Visa reports its system is handling 20,000 a month.
"Check conversion is a faster, and often cheaper, way to handle payments than paper checks," said Nancy Grant, senior director of electronic check services at Nacha. "Customers still want to write checks, and this is a way to process those checks more efficiently."
She said the smallest merchants have also taken to the technology, mainly because it reduces fraud loss and is easy to implement. Eliminating frequent trips to the bank to deposit the checks is another attraction.
When a shopper writes a check, the clerk runs the paper through a scanner that reads the magnetic-ink character-recognition (MICR) data. Some systems image the entire check, creating an electronic picture of it - which costs more and can be more secure, though it is not required. The information is then transmitted to the merchant's bank for processing. The check, no longer needed, is handed back to the customer.
The resulting transaction can be processed faster and at a lower cost to the merchants. And whereas paper checks offer little security for the merchant - especially smaller ones who often can do nothing more than write the customer's driver license number atop the check - converted checks can be verified against a negative database. In some cases the service can even guarantee the transaction and take on the task of tracking down customers when a check is returned.
Experts say check conversion systems will continue to gain ground.
"You should see e-checks at larger merchants that end up with a lot of paper checks," said Alenka Grealish, a senior analyst with Celent Communications LLC, a financial technology research firm in Boston. She said demographic trends also suggest the technology will be become popular in rural and lower- to middle-income areas where use of paper checks is still more common than debit cards.
Jennifer Kenneally, vice president and treasurer for Price Chopper Supermarket in Schenectady, N.Y. , said, "I would say the main advantage for us is the reduction in back-office labor."
Using an in-house center, Price Chopper processes paper very cost-efficiently, but Ms. Kenneally said eliminating that labor altogether is cheaper still. Price Chopper began a pilot program with two stores last July, and was so pleased with the results that it is expanding to every store (it hopes to complete the transition by April).
Another key is speed: Ms. Kenneally said it often takes two days to get paper checks to the bank and another day or two for the company to receive the funds, depending on the bank and the check amount.
Since it has 102 stores in six states, Price Chopper has relationships with several banks and has to transfer deposits at them into the main corporate account. Bad weather can cause delays by keeping armored cars off the road or making it hard for employees to get to work.
"We don't want to have the flow of money stopped because of nature," Ms. Kenneally said. "Electronic checks are processed as an ACH transaction, so it always takes 48 hours. Every check in the chain is settled at the same time."
Visa says its system offers better security than ACH, because it uses the same communication network for e-checks as it does for processing credit card transactions. The network links about 90% of the nation's banks, and merchants processing electronic checks through it can compare the transaction amount against the actual balance in the customer's demand deposit account (DDA). In contrast, check processing vendors using ACH make authorizations based on negative databases.
"There is a higher level of risk" with ACH e-check services, said Dante Terrana, the director of business development for Visa U.S.A.'s point of sale check service.
Visa's network is still being put in place. Though it links nearly every U.S. bank, the banks need to install new equipment to receive MICR data as well as credit card transactions; without these systems, they cannot interpret the e-check and compare the purchase against the DDA balance. Mr. Terrana said only 15% of the transactions using the Visa point of sale check service can be verified against the deposit demand account balance, and the rest are routed onto the automated clearing house network.
This added security can cost more than ACH transactions. Provident Bank in Cincinnati is one of just three U.S. banks processing Visa's e-checks; Jerry Meyer, senior vice president of corporate services at Provident, said it typically charges 13 to 18 cents per transaction.
Celent's Ms. Grealish said an ACH transaction often costs just "pennies," and Mr. Freeland of The Fish Place vouched for that, saying his per-check processing cost is about 5 cents for electronic checks.
Price Chopper has put a lot of effort into streamlining check processing, and had attempted to negotiate favorable fees from its banks based on high check volumes, so in some cases it costs about the same or slightly more to take checks in electronic form.
However, Ms. Kenneally said the system's other advantages and the lower labor costs make e-checks a better bet. Wal-Mart's Mr. Christiansen would not disclose its processing fees but said they are comparable to those of credit card transaction handling.
All three merchants have partnered with check processing vendors using the ACH, and all of their rates are significantly lower than the $1.22 that Visa's Mr. Terrana reports as the industry average fee for handling a paper check.
Wal-Mart's processing partner is Telecheck, a Houston subsidiary of Denver-based First Data Corp.
Telecheck has more than 90% of the total volume for e-checks, according to Jerry Mosbacher, senior vice president at the company.
He points out that scanning the check often spares the customer the tedium of filling out the paper completely. And not having to check customers' driver licenses or telephone numbers means checkout lines move faster, he said.
"Anybody who's in a multilane environment will like that," including Wal-Mart and other high-volume stores, Mr. Mosbacher said. "It's such a big marketplace that it's going to take a while for check conversion to get everywhere, but from our viewpoint it looks like it will continue to grow exponentially."
