Great Expectations

  Some merchants believe check payments routed electronically through the automated clearinghouse system can help reduce their costs associated with accepting bank-issued debit and credit cards. Others, though, believe ACH payments at the point of sale represent a market with limited potential.
  Looking to reduce its costs associated with debit and credit card acceptance, SuperValu Inc. recently began to embrace electronic check transactions routed through the automated clearinghouse system as a lower-cost option.
  "Our cost of payments is rising," Jacki Snyder, SuperValu director of electronic payments, told attendees at a Food Marketing Institute conference in January. "The line item for our bankcard fees is certainly out of control, so we felt the need to take some sort of control over our destiny."
  Thirty years ago, a group of bankers dreamed up the first ACH network as electronic relief from a blizzard of paper checks. Today, many merchants such as SuperValu hope the recent rise in products that enable ACH payments at the point of sale will beat back bankers' efforts to encourage consumers to use credit and debit cards, which can cost more to accept than electronic check payments.
  Where in the payments chain ACH transactions can, will and should compete with plastic is a matter of debate among payment services vendors, merchants, analysts and the ACH network's overseers. Some contend ACH transaction routing should remain predominately in bill payments and leave product purchases to the card networks. Others believe the ACH system can steal more transactions from plastic not only in checkout lanes but for purchases made by telephone and on the Internet.
  At least three companies, PayPal Inc., Pay By Touch and Debitman Card Inc., essentially have staked their futures on using the ACH system to support payments made at the point of sale. And NACHA-The Electronic Payments Association, the Herndon, Va.-based organization that oversees ACH rule-making, favors the ACH system as a payment tool.
  But NACHA's spokesperson, Michael Herd, is careful not to stoke expectations too high that ACH transactions can compete with credit and debit card payments in every venue. "Whenever I talk about the ACH and card thing, I always figure that I'm sounding too negative about ACH," Herd says. "There has been this unrealistic expectation that retailers have that there's some magic savior out there."
  Indeed, there are such believers. Analyst Gwenn B?zard of Boston-based consultancy Aite Group LLC, for example, believes the ACH system has the potential to compete with other electronic payments. "ACH is cheap. [Merchants] use the network that is cheap," B?zard says. He adds that processors are able to add value onto the network by adding services like biometric authentication or check-guarantee services as needed.
  ACH services continually morph to meet merchant and customer expectations for new transaction methods such as online bill pay, lower processing fees and greater fraud prevention. But it is still the same simple system it always was in that it allows financial institutions to exchange funds via the Federal Reserve system (see sidebar, page 34).
  "The ACH is a dumb network. It's not very sophisticated," B?zard says. "You cannot verify in real time how much money is in an account. You do not have sophisticated fraud mechanisms like a Visa, MasterCard and EFT (electronic funds transfer) network." Instead of checking funds availability on each pending transaction immediately, ACH transactions are collected then sent later as batches for processing, often once a day.
  But those seeming limitations do not matter as much as they used to for many payment venues and situations in which vendors can add applications and services to the ACH system to reduce risk, B?zard says. "With new technology like biometric and Internet authorization, it is possible to leverage the dumb ACH network and get something good out of it," he says.
  Real and perceived risk are two reasons the growth of ACH payments has been solid for the payment types it tackled first: consumers paying utility bills, insurance premiums, mortgages and credit card balances-all supported by trusted billers who know the customer or who can withhold services or repossess property from those who do not pay up.
  But the ACH system has had a difficult time expanding into retail purchases, where the risk is higher that unknown customers, whom Internet retailers cannot even see, can use stolen tenders or bounce ACH "e-checks."
  But a crook would not pay someone else's insurance policy, and if any payment is not good, the insurance company can just cancel the policy, says Ed Bachelder, an analyst at Boston-based Dove Consulting Group Inc. "Their risk is very low," he says of the billers. "The other extreme would be a customer walking out with a 72-inch, $5,000 TV. If they get out of the store and the check is bad, that's a big problem. There's a huge risk."
  Such big-risk purchases have become the domain of branded credit or debit cards, which are linked to credit lines or checking-account balances that can be checked during transactions and are backed by neural networks and war rooms of highly paid crime fighters.
  Sure, vendors can add risk-management technology and services to counter the ACH system's inability to ensure sufficient funds are in accounts and to make sure customers are who they say they are. But that costs money. "ACH is back to checks. They're not real time, unless you pay for a guarantee service," Bachelder says. "But the cost is then approaching credit and debit cards."
  The vast plain between no and too much risk is where merchants have to decide when, and how, to enable and allow ACH payments. "Everything in between is along that price-value continuum," Bachelder says.
  And where there is market and profit potential, vendors appear. Joe Keller helped build Minneapolis-based processor Solutran by helping merchants try to attain that cost-risk balance. Solutran processes paper checks and ACH transactions for large, brick-and-mortar retailers.
  As Solutran's president and CEO and now one of its board directors, Keller pitches two benefits of ACH at the point of sale: cheaper transaction fees and ? la carte risk-management options such as check-guarantee services, account verification, and re-presentment of bounced checks up to two times through the ACH network.
  Today, with rising bankcard interchange rates, merchants are taking closer looks at ACH payment options, Keller says.
  Meanwhile, the Fed keeps ACH processing fees reasonable. "In the ACH world, the largest ACH processor out there is the Federal Reserve, and virtually any bank in the country has access to the Federal Reserve," Keller says. "Any bank can take a file and process through the Federal Reserve. That takes the competition through ACH and expands it dramatically."
  PayPal was among the first online companies to venture into Internet ACH payments. So far, the San Jose, Calif.-based payments company seems to be profiting from allowing customers to fund their PayPal accounts using ACH debits from their bank demand deposit accounts. Consumers and online merchants use PayPal accounts to settle purchases or funds transfers.
  But ACH payments have not wandered much outside of PayPal for Internet purchases, says NACHA's Herd.
  Meanwhile, as brick-and-mortar retailers continue to watch for the much-prophesized end of paper check use, many hope that ACH payment alternatives can take the place of paper checks instead of relinquishing those transactions to credit and debit. Cardholder-present $40 Visa transactions average around 72.4 cents in interchange for credit and 58 cents for signature debit, Visa says. The Star EFT network charges low-volume merchants 38 cents for a similar purchase initiated with a PIN, but PIN-debit fees have been climbing.
  By comparison, merchants pay 2.5 cents to 25 cents per ACH transaction. But so far, success for ACH has been elusive in most checkout lanes.
  Point-of-purchase (POP) check conversion has worked well among small retailers who can afford to put terminals that read check magnetic ink character recognition (MICR) line data in their single lanes and whose cashiers have time to explain to customers why they are handing back their checks, as occurs with POP transactions. But many multilane retailers complain that it requires additional training of cashiers, a job that experiences a high turnover rate.
  Hy-Vee Inc., a West Des Moines, Iowa-based chain of 220 supermarkets, has considered check conversion but considers it too confusing to cashiers and customers. "We haven't grown comfortable with the process," says John Briggs,
  Hy-Vee senior vice president and chief financial officer. Briggs also served for three years as chair of the Food Marketing Institute's Electronic Payments Committee.
  Briggs believes PIN-based debit routed by EFT networks provides the best answers to his questions about security and speed at checkout. "The problem is, there's really an unreasonable fee structure associated with it."
  Briggs says Hy-Vee is considering biometric authentication offered by vendors such as Biometric Access Corp., which Hy-Vee uses for payroll check cashing, and Pay by Touch, which says its fingerprint-biometric system is being tested or rolled out at 2,000 stores across the country.
  More ACH Options
  Like many retailers, Briggs also is waiting to see what happens with an expected NACHA rule change that would allow retailers to smile and thank customers for their paper checks then let processors figure out later how to route them. This would help alleviate confusion among customers when clerks hand their checks back to them.
  Under back-office conversion, which NACHA could implement in September, well-trained store employees or the store's processor would take checks collected at the point of sale throughout the day and handle them as required. They would swipe consumer and small-business checks in MICR readers to process them electronically as ACH transactions. Checks that do not qualify, such as those by large businesses, or small businesses that want to opt out of POP, could be fully scanned and their electronic images sent to the issuing banks for settlement.
  Big chains with deep pockets, such as SuperValu, are testing a number of paper check conversion and non-check ACH payment options.
  SuperValu is rolling out Pay By Touch systems to support its ACH initiative. Store officials believe customers are ready for biometric technology and that the technology is ready for them, with fewer misreads leading to false positives or false negatives.
  The initial pilot required considerable employee and consumer education but went well, Snyder said. At most of its stores, SuperValu decided to only allow Pay By Touch to link to a "thin wallet," one that would allow participants to pay via ACH or with government electronic benefits transfer cards, but not with branded credit or debit cards. However, at Farm Fresh, SuperValu also allowed biometric payments linked to the Discover card, which assesses a lower interchange rate-about 1% to 1.5% of the sale - than other credit card brands.
  Customers who do not opt to use Pay By Touch still can use their payment cards by swiping them in the terminal, whose display reads: "Please select Pay by Touch or swipe your card." For Pay By Touch users, the ACH option is presented first.
  "We haven't had any negative consumer comments," Snyder said. "We've had a lot of positive feedback."
  The biggest challenge was getting customers to bring paper checks with them to register their checking accounts for payment access when using Pay By Touch, Snyder said. "People aren't carrying their checkbooks around like they used to," she says.
  SuperValu has rolled out biometrics to as many as 120 of its stores under different names around the country, Snyder said.
  The company also is piloting electronic check conversion. In-lane MICR readers used to convert checks jam occasionally as ink builds from the information they print on the backs of checks clerks return to consumers as official notice that the check debit will be routed electronically, Synder says. But they usually work fine if cleaned every day.
  So far, SuperValu's use of Pay By Touch has decreased the number of paper checks it handles and has pulled some transactions away from branded debit cards. "We see about 75% of our ACH use coming from paper checks and about 25% coming from debit," Snyder said. "We would like to see more coming from debit, but we are pleased to see the check writers instead of moving to debit moving to a tender that works for us."
  Snyder said that SuperValu probably will employ a combination of payment methods, such as ACH via Pay by Touch and, as long as paper checks persist, check electronification through POP and Check 21 imaging.
  Check 21, named for the federal Check Clearing for 21st Century Act that became law in 2004, says that electronic images of checks, or printed re-creations of those electronic images, suffice as legal stand-ins for original paper checks.
  Another emerging ACH payment on retailers' radars is the Debitman network. Debitman enables merchants to issue debit cards that route purchases through the ACH system and avoid using bank issuers or acquirers in the transaction process. Customers can use Debitman cards to pay for purchases at any participating stores.
  ACH cards have been around for some 20 years, but they were designed as loyalty cards to enable payments only at the specific stores that issued them. "The problem is that the card only works at the location where [customers] got it," says R. Scott Hatfield, Debitman's founder and president. It was another piece of plastic cluttering an already full wallet, he says.
  Binghamton Giant Markets Inc., a Vestal, N.Y.-based chain of 12 supermarkets, supported its own ACH payment card program since 1989 but announced in February it planned to switch to Debitman's system. That will mean reissuing cards to up to 50,000 people, says Jim Whittaker, Giant Markets' chief information officer.
  But those customers will now be able to use the cards at other retailers that participate in the program. Whittaker says he is asking other area merchants to accept the card, including a movie theater, flower shop and furniture store, pitching the lower fees of the cards.
  "It's a retailer-based card, which benefits the retailer with lower fees," Whittaker says.
  Debitman cards can be used, so far, at more than 200,000 U.S. stores that accept them, making them more useful for customers. "Fifth Third Bank was our first major processor," Hatfield says. "We now have three." RBS Lynk and Paymentech also enable their merchant customers to issue and accept Debitman cards. Some major stores that accept Debitman cards include Wal-Mart, Sam's Club, CVS, Duane Reade, Walgreens, Barnes & Noble, Bed Bath and Beyond, and Eckerd.
  Merchants that issue the cards pay Debitman 9 cents in interchange when their cards are used at their own stores, and they earn 6 cents in interchange when their cards are used at other stores. Merchants that accept but do not issue the cards pay a flat 15 cents per Debitman transaction, still lower that what Visa and MasterCard charge for their branded debit and credit cards.
  About 20 merchants issue Debitman cards, according to the Chico, Calif.-based based company. Hatfield would not say how many transactions pass through the network or how many Debitman cards have been issued.
  Hatfield says he welcomes competition from other vendors offering ACH payment options to retailers. "I applaud all innovations and utilizations of the ACH," he says.
  Meanwhile, the struggle will continue for which electronic payment types will fill the void left by paper. Credit and debit card networks, for example, are encouraging billers to enable their customers to pay using plastic, and issuers are encouraging card use by pitching rewards to customers who use their cards to pay recurring and one-time bill payments. Some billers are responding by making credit and debit card payment options less appealing by charging fees for their use.
  ACH Rewards?
  Many ACH fans argue that merchants should respond by offering their own rewards to customers who opt to pay using the ACH system instead of by credit and debit card. Solutran's Keller is one of them. "You can look at the interchange to clear those (credit and debit card) transactions, and that is the amount of money you have to spend (on rewards)," he says.
  NACHA's Herd supports any ACH payment option, but he cautions users that to date ACH usage does not show ACH competing significantly with credit and debit cards outside of bill payments and a bit of
  Web-purchase activity. "There's plenty of room for all types of electronic payments to keep growing, even in some areas where there is some overlap," he says. "But when you take a realistic look at the numbers, that issue is overblown."
  Despite such temperate assessments, merchants hope that rules changes will help paper-check conversions expand ACH use at the point of sale. And they hope emerging technologies that support ACH payments will give credit and debit networks more reason to lower their fees.
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