by Mike English
IN THE FEBRUARY ISSUE of Transaction World Magazine, we discussed the need for electronic check conversion and described electronic check conversion’s process, benefits and issues to its implementation. These issues lead us to two alternatives to electronic check conversion that are anticipated to be simpler and less costly to implement — SafeCheck and the Visa Check Service Initiative.
The premise behind SafeCheck is simple. Many retailers accept debit cards at the point-of-sale,
effecting debits to customers’ direct deposit accounts (DDA). Why not provide the same connectivity and process for
check services as is provided for online debit and ATM transactions?
New York-based SVPCo, the company that markets SafeCheck, represents 21 of the nation’s largest banks, including Wells Fargo, Bank of America Corp., Chase Manhattan Bank, Citibank, First Union and BB&T.; It’s interesting to note that the banks involved in the system represent about 51% of U.S. bank deposits as of April, totaling more than $2 trillion. Additionally three ATM networks —NYCE, in the Northeast, PULSE, in the Southwest, and STAR, with operations from Florida to California have committed to work with SafeCheck as well.
Here’s how a SafeCheck transaction flows:
As with electronic check conversion, SafeCheck is implemented at the point- of-sale. The
difference between ACH and SafeCheck is SafeCheck’s ability to spot fraudulent accounts or ones with insufficient
funds immediately. Point-of-sale check conversion does not result in “known” funds being credited to the merchant’s
account until two business days later. That’s a lot faster than the paper check clearing process, which can take a
week or more to complete, but not as fast as online debiting which is immediate.
Additionally, SafeCheck may have a pricing advantage over ACH-based check conversion services. In the ACH world both the originating and receiving banks are assessed a transaction fee. While the bank originating a debit may not mind paying a fee on a transaction initiated on behalf of its merchant customer, a check writer’s bank is paying the same fee and losing access to customer funds more quickly than if the check were processed as a paper item. The SafeCheck model evaluates the flow of fees to the check writer’s bank as compensation for making the DDA system available to the service.
As there are issues with electronic check conversion, SafeCheck is no different. Merchants using this system for accepting payment face the risk of a customer not having enough funds in their account at the time of purchase since many people rely on float, especially near payday. Retailers can add verification to their SafeCheck offering, if the retailer views providing a few days float as important to their customer base. Also many banks offer overdraft privileges, which is a line of credit a bank extends to the check writer in the event that there are not enough funds in the account to cover the check. Supermarket industry statistics show that the first re-presentment of NSF checks are successful approximately 80 to 90% of the time. The other reason a verification service may be needed when using SafeCheck is that a check can be presented from a non-member bank of the SafeCheck consortium or in the case that the bank has been acquired and the transit number has changed. The service would not be able to effect the customer’s DDA and would need to be authorized.
If a check is not drawn on a SafeCheck participating bank, the item will flow through EPN, an ACH processing company owned by SVPCo, and the payees’ account will be debited.
Visa, in their commitment to support their member banks, is enhancing their network to convert paper check transactions to electronic checks at the point-of-sale. Member banks will be able to offer bank-branded services in much the same manner as they provide credit card services today. Check services to be offered will include verification, guarantee and conversion. Access to the consumer’s DDA will be available. Visa will use the VisaNet network to provide these services. The service is anticipated to work as follows:
In many respects the Visa Check Service Initiative is similar to Safecheck in that the consumer’s DDA is debited. The difference to the retailer may be the transaction pricing that Visa and its member banks institute. Will transaction pricing fall inline with the interchange for credit and offline debit transactions or will it be similar to charges levied by companies such as TeleCheck or whatever SafeCheck implements? If Visa and its member banks adopt transaction fees similar to those of a credit card or offline check card, then the SafeCheck model may have a price advantage. However, Visa has done very well marketing credit cards and checkcards and one can expect no less regarding this service. Additionally, the number of banks that are part of Visa’s network are much greater that those that belong to the SafeCheck consortium today, making it more likely that a check accepted as part of the Visa Check Service Initiative will stay in network and not need to rely on authorization.
In considering each of these options the question of imaging the check arises. When considering
electronic check conversion, it is a good idea but not because of the MICR reading accuracy. Today’s check readers
provide MICR reading accuracy in the 99%+ range. Imaging is useful when customer contact information is required
in the event of a check written either fraudulently or NSF. In the event of a NSF check, the merchant’s service
should represent the check automatically. It is not until the maximum number of retries is completed that the
merchant sees the check. Representment clears a large percentage of NSF checks. So, the question becomes, of the
total number of checks a merchant accepts on what percentage of checks will the merchant request an image? My
thought is very few. When considering SafeCheck and the Visa Check Service Initiative, both options recommend
imaging for customer contact information in the event of a check written either fraudulently, NSF or is an exception
item. If the customer’s DDA is debited why is there a need for an image? The reason may be that due to the frequent
bank mergers that have occurred during the last few years and that bank customer’s do not always update their checks
to reflect the merger – they have older transit numbers printed on their checks. If there is a DDA issue, the
financial institution receiving the check can use the check image to find the correct transit number. The services
would not be able to effect the customer’s DDA and would need to be researched using the check image.
In part one of this article, I presented an example of the PC industry’s adoption of a graphical
user interface, which simplified usability and encouraged wide spread adoption of PC technology. Clearly, the market
is ready for electronic conversion of checks. Electronic check conversion has open issues and is potentially
confusing to implement and operate. That leaves the industry with approaches that are much simpler and less costly
to implement. However, it is not the industry that will chose, it will be the retailers. Retailers are much more
educated, attend many more payment industry conferences and surprising to many as it may be, are more interested in
cost-efficient payment than ever before.
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