Check Services
Check Verification Companies Do Battle

on a Big Front
by Louis Pomerance

   Why spend $400 on a new driver to improve your golf game when the local police can help you get one for free? Brazen check writers do it all the time. The scheme involves making a high-end purchase, then stopping payment on the check. An affidavit is then filed with the police claiming the perpetrator's checkbook was stolen and the check written by someone else. In many cases, the police never discover the ruse, the merchant is left empty-handed and the con artist shaves a few strokes off his golf game. Such deception represents the lower-middle class in the caste system of check writers.
   According to The Nilson Report, Americans write 1.2 million bad checks every day, translating into $55.8 million in lost revenue every 24 hours. On the top rung are hard-core criminals who go to extreme measures to commit fraud. They're not satisfied with simply passing bad checks. Instead, they use highly sophisticated copying equipment to duplicate company payroll checks. A notch below are those individuals who don't make a living from fraud, but still can't pass up a good opportunity. It is these individuals who steal the box of checks from your mailbox.
   At the simplest level are those who knowingly write checks on closed accounts. Thrown into the mix are individuals who write a bad check unintentionally or who misjudge a check's "float," but make restitution immediately. Despite such chicanery, bad checks remain the most collectible of all debt.
   The success rate for recovering debt such as medical billings can range as low as 20 percent, while the average for checks is closer to 50 percent and as high as 75 percent to 80 percent where the circumstances involve only non-sufficient funds. Since its introduction, electronic check verification has altered the marketplace in the last 10 years. It immediately alerts merchants to check writers who have past or current check-related debt. This is accomplished by accessing local or national databases of bad check writers. A common misconception is that verification services tap into a customer's bank account to verify whether funds are available. They do not. Such systems are designed to stop would-be thieves before they do much damage. Not only do they target bad check writers, but verification systems can be tailored to a merchant's particular needs. By using check velocity options, merchants can limit the number of checks written or set dollar limits for particular individuals.
   Despite such strong safeguards to combat chronic abusers, the lion's share of bad checks written in the United States today are by people who are not doing so intentionally. They are "everyday Joes" who are not particularly good money managers. They are not out to commit fraud and not willing to go to jail for it. With that in mind, today's merchants and retailers are simply in search of cost-effective solutions to combat check fraud.
   Despite increases in the use of credit and debit cards, check writing remains a prevalent method of payment. In 2001, consumer checks written at the point-of-sale to pay for the purchase of goods and services amounted to 18 percent of total point-of-sale payments. Further, Nilson estimates that while 50 percent of retailers use check verification services today, that figure is expected to increase to 80 percent by 2020.
   Some merchants, of course, choose not to use verification services, reasoning that their losses are less than what they would pay in subscription fees. In most cases, it's unwise thinking. It's analogous to a homeowner waiting for his house to burn down before buying insurance. With strong safeguards in place for the policing of bad check writers, check verification companies are taking advantage of new technology to expand their product offerings. One example is electronic check conversion, in which paper checks are converted into electronic transactions, allowing merchants to alleviate bank fees and better facilitate processing, saving some millions of dollars in the process. Another growth area is the use of pre-paid check cards, which limit transactions to the amount of money in one's account. Thirteen percent of Americans are unbanked, meaning they don't have checking accounts. Their numbers included teen-agers and many with low incomes. Check cards allow these individuals greater ease in making purchases, while reducing risk for merchants. The last area of growth involves the use of private-label check cards, or preferred loyalty cards. Instead of relying on standard credit cards, which involve significant transaction fees, merchants can build customer loyalty by tailoring reward programs to the use of their private-label card while maintaining higher profit margins because of the lower fees associated with such cards.
   Merchants sent $563.38 billion in checks through check verification and guarantee services in 2000, according to Nilson. Likewise, the number of checks written each year since 1990 hasn't fluctuated more than 3 percent. The check verification industry is a healthy one, and buoyed by technological advancements, one to stay that way for years to come.