First Union Corp. is about to put itself on the check truncation firing line.
Within two months the Charlotte, N.C., banking company plans to begin testing a service that converts checks written by consumers at retail stores into debits that clear electronically through the automated clearing house network.
Working initially with 20 locations of a hair-cutting chain, the $233 billion-asset First Union would be the first major bank to support this much-discussed type of check "electronification."
Checks would be scanned by a terminal that captures the necessary account information. Consumers would authorize electronic debits to their accounts by signing credit-card-like receipts. The merchant would void the check after it is scanned and return it to the customer.
The National Automated Clearing House Association, which sets rules for the paperless payment system, promoted the point of sale truncation idea with guidelines issued in 1996. But most of the efforts that followed were initiated by nonbank payment services companies.
Bankers were reluctant to get involved in part out of fear that they would be jeopardizing their considerable checking-related revenues, said Lawrence Forman, a cash management analyst at Ernst & Young.
Some bankers have also questioned the need to invest in a system that may just be an interim step to fully electronic debit card payments. But others have argued that unless banks try to seize control of the check conversion business, they will lose it to nonbank processors.
Few observers see any waning in the consumer's love affair with checks, and customer response to POS conversion efforts by companies such as Bankserv of San Francisco, E-Funds Corp. of Tustin, Calif., and First Data Corp.'s Telecheck Services subsidiary in Houston has been favorable.
Mr. Forman said one positive attribute is that the collection process is simplified for both banks and merchants.
"The big advantage is that no one has to touch checks," Mr. Forman said. "Granted, paper systems are good, but I do not think this is a negative for banks."
Charles Sherrill, assistant vice president and product developer at First Union, said electronic items would bring in less revenue than checks, but profitability would improve.
"This is something that has been under the radar of cash management organizations," he said. "As far as I know, we are the only ones who are proactively trying to sell the service from a banking standpoint."
The only other bank to have developed a similar service is First Hawaiian of Honolulu, using software and services from Deluxe Corp. and E- Funds Corp., which Deluxe recently agreed to buy.
First Union's service promises to reduce check fraud, improve collections rates, and spare merchants the need to make paper-based deposits into multiple accounts in various regions, Mr. Sherrill said.
The bank would have software and hardware supplied by Bankserv, which has also been selling directly to merchants.
First Union's pilot should begin within two months with Creative Hairdressers Inc., a Falls Church, Va.-based company that operates a chain of 700 HairCuttery salons.
Creative Hairdressers treasurer Lawrence Hirsh said the company does most of its transactions in cash, yet it still must deal with 80,000 checks a year.
"I am hoping to validate my suspicion that the cost will be less overall than dealing with paper items," Mr. Hirsh said.
He said the pilot would gauge consumer acceptance, adding to the body of knowledge from other tests in which more than a million checks are being turned into ACH debits each month at thousands of merchant locations.
First Union's move "shows that this type of a service is a viable cash management product that banks can add to their repertoire of check and ACH collection services," said William Nelson, executive vice president of Nacha.
The estimated number of checks written at the point of sale is 18 billion annually, according to Primary Payment Systems Inc., which maintains an anti-fraud data base on 90 million checking accounts.
Total check volume, currently at about 66 billion items a year, is expected to continue growing through 2010, Mr. Sherrill said. "Even when it stops increasing, it's not like people will stop writing checks at the point of sale."
Nacha is sifting through comments it received for a formal rule to support point of sale check conversions. The rule could be implemented by late 2000.
"If I was at a bank, I would be looking hard at this because you need to stay in the payments process with your merchants,"said Larry D. McNabb, the former BankAmerica Corp. executive who is chief executive officer of Primary Payments in Scottsdale, Ariz.
"Merchants are big cash management customers of banks," he said.