Five years after their debut, electronic checks are finally gaining a toehold.
Support for the technology, which enables consumers to use information from paper checks to buy merchandise online, is far from widespread, but it is starting to come from influential places. Wells Fargo & Co. and eBay Inc. created a big stir when they said last month they would work to make e-checks available on eBay's popular online auction site. Morgan Stanley Dean Witter, Wachovia Corp., and FleetBoston Financial Group also have recently thrown their weight behind the concept.
Electronic checks may have been ahead of their time five years ago when the Financial Services Technology Consortium first demonstrated them. Now, as Internet payments take off, they are filling a need as companies look for new ways to execute electronic payments.
Wells Fargo's plans are indicative of where Internet payments are headed and how e-checks fit in. "Wells Fargo wants to offer a menu of services, so you, the merchant, can offer credit cards and e-checks," said Debra Rossi, a Wells executive vice president. "We also hope to be able to offer stored value, or gift certificates, or even micro cash."
E-checks will help Wells replicate online the physical-world choices of credit cards, checks, or cash, Ms. Rossi said. And she said there is good reason to pursue substitutes for credit cards, which are used in 81% of online purchases.
Internet transactions are the most expensive kind of card payment for merchants, because of the extra risk involved in not dealing with cardholders face-to-face. Merchant fees, which usually run about 2% of the value of a transaction for regular credit card purchases, can double or triple when purchases are made online or by telephone.
Those costs are magnified by chargebacks incurred when Internet payments are returned because of fraud or nondelivery of goods. Industry sources say that 6% to 7% of online purchases are charged back.
"There are people who do not have credit cards or prefer not to use a credit card on the Internet," Ms. Rossi said. "You have to wonder why checks are still the largest payments system in the physical world when in the 1970s there was talk of a paperless society."
Wells is testing e-checks with a few eBay customers, and ultimately will market them to the 10,000 Wells Fargo merchant customers who do business on the Web. It will be an option for all sellers on eBay by the end of the summer.
Ms. Rossi said she believes Internet checks will coexist with credit cards. "So far, even in the physical world, credit cards have had tremendous growth. After all of those years of talk about checks going away, checks have not gone away."
Morgan Stanley Dean Witter Online is turning to e-checks as a way for consumers to add funds to their brokerage accounts. Rather than using the mail, overnight delivery services, or wire transfers to move money into accounts, customers could write an electronic check while logged on to Morgan Stanley's Web site.
The brokerage is using eCheck Secure software from Troy Group Inc. to offer the service, which will be available at the end of this month. The existence of the account is verified in advance by Equifax Inc. of Atlanta, one of three major credit bureaus.
Wachovia is seeking to make e-checks a standard form of payment for its merchant customers who operate Web sites. So far, 35 of Wachovia's merchants have opted to accept Internet checks.
Wachovia encrypts check payment information entered by customers and transmits it to Telecheck, a Houston-based check acceptance unit of First Data Corp., which matches the information against its checking account databases.
Wachovia is reselling the Telecheck service to its merchant customers "to provide more payment alternatives," said Kevin Gallagher, a director of E-Business Strategies at Wachovia Merchant Services.
As a participant in the original e-check initiative of the Financial Services Technology Consortium, FleetBoston Financial Group has a longstanding interest in the checks. Along with Bank of America, Fleet is a sponsor of an FSTC test of Internet checks with the U.S. Treasury that began in 1998.
Based on the FSTC pilot, Fleet determined that e-checks were an opportunity to be explored. In March, it spun off a company, Clareon, to develop e-checks as a commercial product. Fleet holds a 17% stake in the company, which also has secured $15 million of funding from Mayfield Fund, Berkshire Partners LLC, and BancBoston Ventures.
Portland, Maine-based Clareon now has 60 employees, including vice president Frank Jaffe, formerly a technologist at Fleet and point person on the FSTC project. FSTC was successful in proving the merits of the technology, Mr. Jaffe said, but also showed that the technology had "some serious adoption problems," which Clareon will seek to rectify.
E-checks also face issues of regulatory oversight. "The full force of the law" has not yet determined whether Internet checks fall under Regulation E guidelines, said David Kurrasch, president of Global Payments Advisors of Alameda, Calif. Regulation E offers stronger consumer protections than the Uniform Commercial Code laws that govern checks.
"As long as there is a doubt, the informed individual will say, 'I think I will use my credit card so I know that I am protected by Reg E,' " Mr. Kurrasch said. "As long as that happens, it is always going to be difficult for the check events to be popular over the Internet."
Steve Fabes, director of financial services at Commerce One, a leading provider of business-to-business electronic commerce software, said his company is exploring a wide range of payment alternatives for buyers and suppliers on marketplaces supported by Commerce One.
Mr. Fabes, a 16-year veteran of Bank of America, said he is in discussions with Clareon and particularly liked the "remarkable simplicity" of e-checks.
"Merchants need alternatives," Mr. Fabes said. "They need all existing payment schemes, and they are absolutely ripe to look at new ones. There is a sense of a frontier land out here."