Q: How can accepting checks help my business? And is there really a difference between paper checks and electronic checks?
A: Over the past decade, the use of credit cards, debit cards and ATMs has exploded across the U.S. retail and financial landscape. And with the recent growth of e-commerce, you might assume that plastic is the currency of choice these days.
That's not completely the case. Cash still accounts for the vast majority of all purchases. However, paper checks are a close second. Even in an age of electronic banking and online commerce, the paper check accounts for nearly 75 percent of all noncash transactions in American business today.
However, checks often pose some challenges to merchants. First, paper checks can delay payments to the seller, since the check typically must be processed through a minimum of two banks before monies are received. Second, paper checks require paperwork, which can lower productivity. Third, and perhaps most important, checks can be--and often are--fraudulent. Many retailers have been burned by bad checks, and many more no longer accept them, or they set strict limits on how much a customer can buy via check. Of course, this increases costs and cuts merchant profits.
However, banks and businesses are now working together to overcome the drawbacks of paper checks by merging them with electronic payment processes. The result is a concept known as electronic checks. Both companies and financial institutions find that electronic checks can be a real boon to productivity and profits.
Companies such as TeleCheck, the world's leading provider of paper and electronic check services, help merchants reduce risk with proprietary services such as Electronic Check Acceptance (ECA). ECA converts paper checks into electronic transactions and securely moves funds from the check writer's account into the merchant's account in the same amount of time as a paper check. And merchants that use ECA eliminate returned checks and returned check fees--returned checks become TeleCheck's responsibility.
Typically, the electronic check entails a two- or one-step process. In the two-step method, a retailer transmits a customer's account and payment information from the check to a transaction processing company or directly to a bank. In turn, the processor or bank electronically moves the check information between the depositing and paying banks.
Conversely, in the one-step process, retailers handle the checks the old-fashioned way--by sending the paperwork to their bank. The bank then treats the check as an electronic instrument, transmitting the account information between depositing and paying institutions.
In either case, all parties benefit once the checks are electronically transmitted rather than physically presented to the banks via ground or air transportation. Since the electronic process can be completed faster--usually in half the time of physical movement--the check-clearing process is greatly accelerated. This means not only faster payment to the retailer, but also a safer transaction, since potentially fraudulent checks can be uncovered more quickly.
Are Electronic Checks Growing in Usage?
Despite the widely reported benefits of electronic checks, the banking industry as a whole has been relatively slow to adopt standards that would lead to widespread use of electronic data interchange for paper checks. The reason for the lag is that check handling and processing are major pillars of banking industry profitability. Many bankers feel transitioning to electronic checks--what the banks call truncation of paper checks--provides benefits at the retail point of sale rather than to banks themselves.
Some bank professionals argue that the increased use of truncation will spur customers to use debit cards more often, which contributes to bank fee income. After all, a debit card accomplishes the same thing as a truncated check: It accesses funds directly from the customer's checking account. Moreover, debit cards are more convenient to use. But the transition to wider use of debit cards must be widely promoted, or customers may select other alternatives.
Whether it is debit cards or electronic checks, change is on the way. The continuing rise in paper check fraud is driving the increased use of electronic checks. New banking industry regulations have increased the risk of continuing with paper checks alone. A new intrabanking rule reduced the allowed hold period for checks to two days after the date of deposit, after which the check must be paid. As a result, speeding up the review and processing of checks is more important than ever. Without electronic check processing, fraud will continue to grow. A recent American Bank Association study estimated that losses from fraud could be reduced by more than 95 percent through the use of electronic checks.
In addition, as electronic check processing grows in popularity, banks must participate just to keep pace. Check Solutions Co. in Memphis, Tennessee, estimates that truncation--electronic check processing--at the point of sale is now growing at a phenomenal rate of 100 to 200 percent per quarter.
Despite the risks of continuing with paper checks, the transition to the most efficient processing system for electronic checks requires a high level of consistency from bank to bank, clearinghouse to clearinghouse and state to state. Achieving this consistency while managing complexity and risk will be a major challenge. But transaction processing companies, working in partnership with industry groups and government regulatory bodies, are making significant strides in defining the fundamental issues. For example, agreements have been reached on pivotal electronic check processing rules such as sending and receiving write-off notices, cash management thresholds, receipt and response deadlines, and the proper codification of checks.
Leading transaction processors are dedicated to providing the safest possible environment for banks, retailers and consumers alike to participate in the electronic check processing system. They want to help merchants achieve the benefits of check processing at the best possible cost. Leading processors want to help their merchants gain competitive advantages by offering new, differentiated services.
The steps to finalizing a nationwide electronic check system that is fair, cost-effective and nearly universal should be completed soon. It's the only way the consumer's preferred noncash payment method--paper checks--can keep pace with the growth of e-commerce. In fact, wider use of electronic checks will help merchants offer their customers more noncash payment options and drive the continued growth of secure purchasing--in both traditional retail and online environments.
Cardservice International Senior Vice President of Sales John Burtzloff is in charge of sales strategy and execution and thus is responsible for managing all aspects of the company's marketing, communications, telesales, check guarantee, new accounts and sales support activities.
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.