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A good price, little-to-no risk and ease of use are essential factors when ISOs set out to choose a check- services company, merchant service providers generally agree.
"We weren't looking for a vendor," says Chris Ziegler, director of product partnerships at Total Merchant Services Inc., a Basalt, Colo.-based ISO.
Instead, the ISO wanted a "partner," she says. "To us, a partner shares a common interest and participates in achieving a goal."
It is that level of cooperation, along with viable products, ISOs seek when choosing a check- services provider, Ziegler says.
Americans wrote 30.6 billion checks worth $41.7 trillion in 2006, the most recent figure available from the Federal Reserve's 2007 Payments Study. Though that volume was down 6.4% from the 37.6 billion checks written in 2003, ISOs generally do not view checks as a payment form in decline.
Banks have been able to accept electronic images of paper checks since 2004, when Check Clearing for the 21st Century Act went into effect. Since then, several companies have developed products to take advantage of the law.
NACHA, which oversees the U.S. automated clearinghouse system, says consumers and businesses initiated 3.77 billion U.S. ACH transactions during the third quarter, a 1.6% increase from the 3.71 billion in the third quarter of 2008.
Indeed, a variety of check services exist. Besides electronic check processing, companies offer remote deposit capture, check-verification and check-guarantee programs, and other related check services.
ISOs generally want the ability to offer check services, often called value-added products, because they can help generate additional revenue and create one more service a merchant would have to contend with when deciding whether to switch merchant-service providers.
Remote deposit-capture services enable merchants to deposit checks into their bank accounts by using an image scanner connected to a payment device to send an electronic image of the drafts to the bank. This helps speed up the process for making deposits and reduces the need for the merchant to visit a bank branch.
Check-verification services determine whether checks are written from valid accounts, thereby reducing the potential to accept bad checks. Check-guarantee services place the risk for accepting checks on a guarantor company, which ensures the merchant receives the full amount if any check it approves later bounces.
Regardless of which check services an ISO offers its merchants, service is a paramount consideration, industry insiders say.
AN ADD-ON
"When the majority of our revenue comes from credit card processing, we have to trust that the check company we set our merchants up with will take care of them," says Rich Petru, a co-owner of an ISO affiliated with Merchants' Choice Payment Solutions, a processor based in The Woodlands, Texas. "Check services is just an add-on product for us."
While the residuals are a plus, the ISO must have trust that the add-on product is not going to cost the merchant, Petru says, noting his ISO uses EZCheck, a Houston-based check-services company.
Likewise, Andy Pitts, president of MLS Direct Network Inc., a Birmingham, Ala.-based ISO, looks for reassurance from check-services providers.
"We have used several [check-services companies] over the years and look for good pricing, solid service capabilities, a broad range of services and a good reimbursement rate on check guarantee," Pitts tells ISO&Agent.
Among smaller merchants, check-guarantee services have been growing in demand, says Don Singer, EZCheck vice president of sales and marketing.
"We have seen a lot more demand for check guarantee because the little merchant lives and dies by cash flow," Singer says. "They buy check guarantee because it protects their cash flow."
Total Merchant Services' Ziegler says her company offers a point-of-sale check-guarantee service expressly to serve small to midsize merchants. The company also offers a POS check-conversion product. Global eTelecom has supported both programs for more than a year, says Ziegler.
As the economy began to falter in 2008 and ISOs saw bankcard transaction activity decrease, Global eTelecom saw increased interest in its check services and related products, says Chris Brundage, president of the Destin, Fla.-based check-services provider and processor. But some ISOs, also faced with an ever-increasing need to make the best use of their own resources, intently focused on their core business of bankcard sales, he adds.
"Merchants and ISOs are beginning to embrace this newer technology as a means to electronically deposit paper checks," Brundage says. "Our August 2009 volume has increased 96% over August 2008." Brundage would not provide specific tallies for those months.
Requests to integrate ACH products into online payment gateways "has surged in the past six months from software providers, third-party payment gateways and virtual terminal [providers], Brundage says. Online payment gateways rely on Internet connectivity to move transactions from the point of sale to processors and on to issuers.
In 2008, Global eTelecom had a "handful" of third-party companies integrated into its gateway. Now there are more than 25 with 30 more in the process of becoming certified to use it, Brundage says.
TRANSACTIONS AND HARDWARE
Janet Sancho, senior vice president at Blackstone Merchant Services LLC, a Miami-based ISO, says the advent of small-merchant interest in remote deposit capture and related check services prompted her company to scout for an additional provider. Blackstone continues to use First Data Corp.'s Telecheck check-acceptance service, but it added Wausau Financial System Inc.'s RDC Plus product for smaller merchants wanting check services without the additional cost of check guarantee, Sancho tells ISO&Agent.
A check processor since 1974, Mosinee, Wis.-based Wausau Financial Systems earlier this year began offering RDC Plus, which provides remote deposit capture services. Blackstone evaluated three check-services companies and judged them based on several key criteria, Sancho says. "We wanted a competitively priced program at zero risk to ISOs," she says. "You also need to partner with a financially sound company whose going to give 100% support to its ISOs with training and the right sales tools."
Blackstone also wanted next-day funding, recognizing that sales agents and merchants depend on cash flow, Sancho says. The company set up its revenue plan so agents-whether directly employed by Blackstone or as independents-receive upfront hardware commissions and recurring revenue from check- services transactions, she says. As a sales agent, the ISO gets the added benefit of strengthening the tie to merchants that use Blackstone's bankcard and check services, Sancho says.
Check programs can be configured differently, depending on what an ISO wants, notes Mary Winingham, Wausau Financial vice president of ISO channel development. The ISO or Wausau, for example, could assume the risk for checks returned for insufficient funds, she says.
Whichever entity holds the risk would assume any losses from accepting bad check. Accordingly, an ISO could receive a larger piece of the check-services revenue if it assumes the risk, Winingham says.
As for the potential financial return on offering check services, the specific formula varies. But check volume is key to ensuring a quick return on the investment for the merchant and the ISO, notes EZCheck's Singer.
"Nobody typically buys a check imager when they get three checks a month," Singer says.
However, the revenue potential from a check-guarantee program depends primarily on the dollar value of transactions because the fees often are based on a percentage of the checks' value, Singer says.
Wausau Financial's Winingham notes that merchants with five checks worth $5 each may not be as interested in a speedy deposit as might a merchant holding five checks valued at $15,000 each. And it can be more difficult for a merchant that typically has a low volume of checks with low dollar amounts to justify advanced check-acceptance services, she says.
Check-services programs often are distinguished by the type of payment methods a merchant uses as opposed to the size of the merchant, Global eTelecom's Brundage says.
"Therefore, ISOs gravitate toward the products that fit their merchants appropriately," whether that is point-of-sale equipment, accepting checks online or by phone, or setting up recurring ACH debit transactions, he says.
A UNIQUE OFFERING
Customization also is important for ISOs that wants to offer a service that is different from what others offer.
It was important, for example, that Total Merchant Services offer a "white label" program, which ISOs can rebrand with their own logos and related sales materials, Ziegler says.
One ISO, Electronic Payment Systems LLC, has taken customization a step further.
Launched earlier this year, its EPS 90 check service enables merchants to offer 90 days of financing on purchases to consumers paying by check, says Anthony S. Maley, chief operating officer of the Englewood, Colo.-based ISO.
While at checkout, the merchant sets the consumer up with a 90-day payment plan during which the customer can writes checks for the amounts and days specified in the plan. Electronic Payment Systems then processes the checks on the scheduled dates and sends the deposits to the merchant's account. The ISO guarantees checks for up to $5,000 in the EPS 90 plan, Maley says.
"It gets us into merchants who are already processing higher-volume, higher-ticket transactions," Maley says. "And it gets us their credit card business. That's really the goal."
Electronic Payment Systems wrote the software programming for the payment terminals to work with EPS 90 and relies on a third-party company to check for applicants who may have histories of writing bad checks, Maley says, noting targeted merchants include dental offices and furniture and appliance stores.
How much an ISO relies on a check-services company and how merchants react to them is important, but the essential criteria is to have a plan that meets an ISO's needs.
"A good check-services program can also combat attrition, especially when the check imager was provided at no cost," Total Merchant Services' Ziegler says. "Check services with a good partner can contribute to making a sales, and keeping a deal, as well as provide a nice revenue stream in between."
As ISOs reinforce their roles as payment consultants to merchants, the ability to offer check services could be seen as yet another tool.
