STRATEGIC PARTNERS
For the first time, a paper check used at a point-of-sale transaction was immediately processed and debited from a customer's checking account in real time.
January 31, 2002
Many in the banking industry would like to see paper checks go the way of typewriters and adding machines. When a consumer pays for an item at a retail store with a paper check, it passes through an average of 12 pairs of hands before it is paid at the bank.
That system is expensive, and it invites fraud. Banks have been trying to come up with a way to reduce fraudulent check writing for at least three decades. A new system is being tested that may help make that happen.
"The goal is to eliminate the paper check," said Julie Saville, vice president product development for Star Systems Inc., the nation's largest electronic payments processor.
So when the first transaction involving a paper check was processed electronically in real time last month, it was big news in the industry. The BB&T Corp. customer's account was debited in real time, and the customer was handed his check, stamped void, by the cashier. The transaction was processed just like the customer had used a debit card.
That transaction is a result of work done by a consortium of banking industry titans formed two years ago. Originally composed of a dozen large banks, the Small Value Payments Co. now has 22 financial institutions on its roster, which have been joined by three electronic payment processors. Their goal is, simply, the elimination of the paper check and the costs associated with them.
And the first step is the SafeCheck system, which was introduced in January and successfully used for the first time when a BB&T Corp. customer made a retail purchase.
"We're averaging, unfortunately, just15 transactions a day," said Woody Tyner, senior vice president and payment systems strategist for BB&T. "It's a pilot, and we're only doing it with selected merchants. The transaction volume is low right now, but as more banks and merchants come on that volume will probably do a hockey stick growth pattern."
SafeCheck was created by the Small Value Payments Co. The banks involved account for 35 percent of the nation's demand deposit, or checking account, activity. Three major processing companies, Star Systems, NYCE and Pulse, are also members.
"For 20 or 30 years, we've always thought that eventually we'll get rid of paper checks and people will just use ATM and debit cards," said Saville. "It's never happened, and paper checks have a high level of fraud."
The Check Writers
While many Americans have curtailed their use of checks, the number of checks written at the Point of Sale continues to grow. According to research conducted by Star Systems, more than 18 billion paper checks were written at the point of sale in 1999.
The cost of these paper checks to bankers and retailers is staggering. Whether due to fraud, checks returned for insufficient funds or simply the cost of handling and processing paper checks, banks and retailers pay dearly for paper checks. The Star report claims that check fraud alone costs the industry $2 million to $4 million per year, while the industry spends another $500 million on hardware and software used in paper check processing.
For retailers, SafeCheck will help reduce the $12 billion in losses suffered through the writing of bad checks, according to BB&T's Tyner. Once customers get accustomed to the system, popular logic says they'll be more likely to break away from standard check writing and less hesitant to use debit cards instead of paper checks. At least that's the way members of the Small Value Payments Co. believe it will occur.
Saville said that retailers using the new system will continue to accept payment in the form of a check. But when a customer presents a paper check to a retailer, the check is entered into a system that immediately verifies there is money in the account and instantly debits the account. The retail clerk stamps the check VOID and hands it back to the customer, who keeps it as a record of the transaction.
It sounds simple enough, Saville said, and it doesn't require retailers to purchase new equipment. She said retailers like the system because it reduces fraud, and allows them to more easily accept checks from customers who insist on writing paper checks.
Processors like Star say the system will ultimately bring more customers across the bridge from a paper-based world to an electronic one. And of course banks see it as a way to reduce the cost of processing transactions. Retailers, with the protection provided by the system, may be more willing to accept checks.
Current Systems
Until real-time electronification of checks becomes accepted, use of current systems will continue. Electronic check presentment, or ECP, speeds up the information flow between the collecting bank and the paying bank, but the transaction still isn't complete until the paper check arrives at the paying bank. While this can help eliminate some types of fraud by helping banks anticipate problems, it is not considered a long-term solution.
Another method, electronic conversion to an Automated Clearinghouse (ACH) certainly speeds up the process, but doesn't provide the real-time transfer of funds that participants desire.
While electronification of paper checks seems to make sense for retailers, there are stumbling blocks. For example, pre-payday shoppers, those who write checks the day before payday knowing the check won't clear until money is in the bank, would be rejected with a strict real-time system.
And there are technical hurdles to be cleared as well. But with the first "real-time" paper check processed, the conversion to electronification of paper checks is likely to accelerate.
