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The Risks of Accepting Checks

Bounced checks, fraudulent check writers--these problems can potentially cost you big bucks. Follow these guidelines to reduce your risk.

Q: I'm opening a business and want to know what kind of check policy I should have. If someone bounces a check, do I lose the money? How can I protect myself against fraud and returned checks? How does accepting checks over the Internet differ from accepting paper checks? Do the same rules apply?

A: To help prevent returned checks, follow these fraud-prevention tips from experts such as the National Crime Prevention Council, the National Check Fraud Center and Bankrate.com:

  • Always ask to see the check writer's driver's license or identification card. Compare the signature and the address on the card with the information on the check. A photo ID is even better.
  • Ask the purchaser to sign the check in your presence and compare it with the signature on the identification.
  • Accepting check cards, such as MasterCard's Master Money Card and the Visa Check Card, may actually be safer than taking paper checks. A check card is an instantaneous debit from the purchaser's bank account, while paper checks can take up to 14 days to clear. In addition, the billing address on the check card can be verified with the Address Verification Service, the same system used to verify addresses for credit cards.
  • Never accept a double-endorsed check, which is a check made out to someone else, who then supposedly signs it over to the person who submits it as his or her payment for a purchase.
  • Never accept payroll checks.
  • Watch for checks with low numbers. Nine out of 10 bad checks bear numbers from 101 to 499, which usually indicates a new account.
  • Look for apparent alterations in the check (e.g., changes in the handwriting, water spots, color or background picture). This could mean it's a forgery.
  • Don't accept pre-dated or post-dated checks. The funds may not be available in the account when you try to deposit it.
  • Compare the last three or four digits of the Federal Reserve number in the right-hand corner of the check with the first three or four digits of the routing and transit numbers on the bottom left of the check. They should match.
  • Establish a waiting period for refunds. Make certain your customer's check clears before refunding the money.

Guarantee Your Money
Checks are most frequently returned for nonsufficient funds or closed bank accounts. If you accept checks as payment for goods and or services and you want to ensure that you receive your funds, you may want to contract with a check guarantee service. If your credit card processor is a one-stop-shop transaction processing company, signing up for check guarantee services is as simple as checking off a box on your merchant application.

With a check guarantee service, you run your customer's check through your point-of-sale terminal, which connects directly to the check guarantee service. The service reviews its database of good and bad check writers, and if your customer does not appear in the negative database, you can probably accept the check. Keep in mind, this review does not guarantee that there are sufficient funds to cover the check. If it bounces, your bank account will be debited for the full amount. But you can then submit the check for reimbursement, following the service's specific criteria, and they will reimburse you for that bad check.

Internet Checks
Virtual checks, an online payment option rapidly growing in popularity, present some additional challenges. Because this is a non-face-to-face transaction, you can't ask for a driver's license to compare the signature. There is no signature-only the consumer's online agreement. And because it is not a physical check, you can't look for the inconsistencies mentioned earlier. To protect yourself from Internet fraud, don't ship the merchandise until the virtual check clears.

Check Policy
Post your check policy in full view of your customers-whether it's a brick-and-mortar environment or your Web site. Make certain your customers are aware they will be charged a penalty if they bounce a check. Establish a policy that fits your company, and make certain your employees understand and implement it. Each state has specific laws about fines and fees for returned checks. Merchants should verify and post these laws where customers can see them.

Check acceptance boosts sales; safe check acceptance is a matter of being careful. Investing in a check guarantee service is a business strategy that you must evaluate for your needs. But even if you don't select one of these services, be cautious on the front end: When your customer issues you a check, be sure to confirm his or her identification, telephone numbers, addresses, the MICR code numbers and the signature on the check. This may save you from financial loss.

- 2001 Cardservice International Inc.

Tim Miller is COO of Cardservice International and has more than 15 years of experience in the credit card processing industry.


The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.

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