Why You Need to Accept Checks
Whether paper or electronic, checks still account for a large chunk of transactions today.
Q: Howcan accepting checks help my business? And is there really adifference between paper checks and electronic checks?
A:Over the past decade, the use of credit cards, debit cards and ATMshas exploded across the U.S. retail and financial landscape. Andwith the recent growth of e-commerce, you might assume that plasticis the currency of choice these days.
That's not completely the case. Cash still accounts for thevast majority of all purchases. However, paper checks are a closesecond. Even in an age of electronic banking and online commerce,the paper check accounts for nearly 75 percent of all noncashtransactions in American business today.
However, checks often pose some challenges to merchants. First,paper checks can delay payments to the seller, since the checktypically must be processed through a minimum of two banks beforemonies are received. Second, paper checks require paperwork, whichcan lower productivity. Third, and perhaps most important, checkscan be--and often are--fraudulent. Many retailers have been burnedby bad checks, and many more no longer accept them, or they setstrict 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 toovercome the drawbacks of paper checks by merging them withelectronic payment processes. The result is a concept known aselectronic checks. Both companies and financial institutions findthat electronic checks can be a real boon to productivity andprofits.
Companies such as TeleCheck, the world's leading provider ofpaper and electronic check services, help merchants reduce riskwith proprietary services such as Electronic Check Acceptance(ECA). ECA converts paper checks into electronic transactions andsecurely moves funds from the check writer's account into themerchant's account in the same amount of time as a paper check.And merchants that use ECA eliminate returned checks and returnedcheck fees--returned checks become TeleCheck'sresponsibility.
Typically, the electronic check entails a two- or one-stepprocess. In the two-step method, a retailer transmits acustomer's account and payment information from the check to atransaction processing company or directly to a bank. In turn, theprocessor or bank electronically moves the check informationbetween the depositing and paying banks.
Conversely, in the one-step process, retailers handle the checksthe old-fashioned way--by sending the paperwork to their bank. Thebank then treats the check as an electronic instrument,transmitting the account information between depositing and payinginstitutions.
In either case, all parties benefit once the checks areelectronically transmitted rather than physically presented to thebanks via ground or air transportation. Since the electronicprocess can be completed faster--usually in half the time ofphysical movement--the check-clearing process is greatlyaccelerated. This means not only faster payment to the retailer,but also a safer transaction, since potentially fraudulent checkscan be uncovered more quickly.
Are Electronic Checks Growing in Usage?
Despite the widely reported benefits of electronic checks, thebanking industry as a whole has been relatively slow to adoptstandards that would lead to widespread use of electronic datainterchange for paper checks. The reason for the lag is that checkhandling and processing are major pillars of banking industryprofitability. Many bankers feel transitioning to electronicchecks--what the banks call truncation of paper checks--providesbenefits at the retail point of sale rather than to banksthemselves.
Some bank professionals argue that the increased use oftruncation will spur customers to use debit cards more often, whichcontributes to bank fee income. After all, a debit cardaccomplishes the same thing as a truncated check: It accesses fundsdirectly from the customer's checking account. Moreover, debitcards are more convenient to use. But the transition to wider useof debit cards must be widely promoted, or customers may selectother alternatives.
Whether it is debit cards or electronic checks, change is on theway. The continuing rise in paper check fraud is driving theincreased use of electronic checks. New banking industryregulations have increased the risk of continuing with paper checksalone. A new intrabanking rule reduced the allowed hold period forchecks to two days after the date of deposit, after which the checkmust be paid. As a result, speeding up the review andprocessing of checks is more important than ever. Withoutelectronic check processing, fraud will continue to grow. A recentAmerican Bank Association study estimated that losses from fraudcould be reduced by more than 95 percent through the use ofelectronic checks.
In addition, as electronic check processing grows in popularity,banks must participate just to keep pace. Check Solutions Co. inMemphis, Tennessee, estimates that truncation--electronic checkprocessing--at the point of sale is now growing at a phenomenalrate of 100 to 200 percent per quarter.
Despite the risks of continuing with paper checks, thetransition to the most efficient processing system for electronicchecks requires a high level of consistency from bank to bank,clearinghouse to clearinghouse and state to state. Achieving thisconsistency while managing complexity and risk will be a majorchallenge. But transaction processing companies, working inpartnership with industry groups and government regulatory bodies,are making significant strides in defining the fundamental issues.For example, agreements have been reached on pivotal electroniccheck processing rules such as sending and receiving write-offnotices, cash management thresholds, receipt and responsedeadlines, and the proper codification of checks.
Leading transaction processors are dedicated to providing thesafest possible environment for banks, retailers and consumersalike to participate in the electronic check processing system.They want to help merchants achieve the benefits of checkprocessing at the best possible cost. Leading processors want tohelp their merchants gain competitive advantages by offering new,differentiated services.
The steps to finalizing a nationwide electronic check systemthat is fair, cost-effective and nearly universal should becompleted soon. It's the only way the consumer's preferrednoncash payment method--paper checks--can keep pace with the growthof e-commerce. In fact, wider use of electronic checks will helpmerchants offer their customers more noncash payment options anddrive the continued growth of secure purchasing--in bothtraditional retail and online environments.
Cardservice International Senior Vice President ofSales John Burtzloff is in charge of sales strategy andexecution and thus is responsible for managing all aspects of thecompany's marketing, communications, telesales, checkguarantee, new accounts and sales support activities.
The opinions expressed in this column are thoseof the author, not of Entrepreneur.com. All answers are intended tobe general in nature, without regard to specific geographical areasor circumstances, and should only be relied upon after consultingan appropriate expert, such as an attorney oraccountant.