End Of The Line

Electronic check conversion provides both retailers and bankers with a less time consuming and more operationally efficient payment system

As more retailers offer electronic check conversion, or ECC, the payments industry is anticipating a windfall of savings, including reduced check handling fees, more efficient collections and reduced check losses.

Cash is still the most common form of retail payment, accounting for 39 percent of retail transactions, followed by checks at 33 percent. For retailers, though, check processing is a labor-intensive experience. Cashiers place customer checks into the point-of-sale (POS) printer/reader which reads the check's encoded MICR. This data is transmitted to an electronic file where it's checked against a negative list.

At the end of the day, cashier drawers are emptied out, and cash, checks and deposit slips are bundled and sent off to the bank, which then sends them to a central processing center, where deposits are verified and credited to the retailer's account. Checks are then unbundled, manually encoded and digitally imaged, then rebundled and sent to the Federal Reserve, where they're screened, sorted, and transported.

This tortuous process, which spans between five and seven days, costs retailers 56 cents per check on average, experts say. For a moderately sized retailer, total check handling costs can exceed $5,000 a month.

The ACH network provides an alternative whereby paper checks are converted into electronic items. Once checks have been converted to electronic payments, transmitted and posted, the ACH can speed processing and settlement. The ACH has even developed a separate data format for this type of transaction: point-of-purchase or POP.

POP transaction volume grew 8.5 percent during 2002. Still, POP transactions represent less than 2 percent of total ACH volume (6.5 billion transactions in 2002).

"We want to see ACH and banks promote ECC because it fosters a large proposition to banks and retailers, and the collections process can become more efficient," said Susan Robertson, assistant vice president, retail payments office, at the Federal Reserve Bank of Atlanta. The Fed is the largest provider of check and ACH services to banks. Robertson spoke at the MarkeTechnics convention, sponsored by FMI.

POS transactions accounted for 19 percent of total check volume and 9 percent of total check value. Of the 22 billion checks written by consumers, 6.2 billion, or 28 percent, are POS payments. These checks are all potential POP transactions.

ECC transforms in-store check cashing from a paper process to an electronic one. The customer's blank check is inserted into a dedicated printer/reader that electronically readies and transmits all necessary data into the payment collection stream. The voided check is handed back to the customer with a receipt, and the once-paper-based process is converted or truncated, into an ACH debit entry.

At the same time, a digital image of the check is created. All digital images and data are then transferred to electronic files and archived. If the check is returned for insufficient funds, the retailer can retrieve all pertinent information electronically.

For banks, a POP transaction costs two- or three-tenths of a cent-only a fraction of the cost of a paper check transaction. "Banks experience a lower cost structure by using ACH," Robertson said.

In addition, banks gain a value-added opportunity with ECC that's missing with paper checks. "The electronic process provides the bank a revenue opportunity," said Robertson.

Price Chopper Supermarkets, a 10-store chain based in Schenectady, N.Y., believes so strongly in ECC that it's implementing it throughout its chain.

"This brings the process full circle, as we can pull any check image, verify the customer, his/her address and the check amount," said Larry Friedman, a retired Price Chopper vice president who spearheaded the ECC project and continues to lecture the supermarket industry on the value of ECC.

Spiraling check handling costs led Price Chopper to embrace ECC. "Price Chopper needed a way to control these costs. We knew labor associated with processing checks was a controllable factor," Friedman said.

Price Chopper introduced ECC and imaging in six stores last June, and plans to roll out to its entire chain by this summer. Price Chopper reports labor savings, reduced bank fees and bad checks, and increased funds availability, Friedman added.

Yet the technology is not without hitches. For example, if the reader is unable to decipher the MICR line, retailers lose the value of the check and are left with a mere string of numbers.

"This is where imaging becomes a valuable component," Friedman explained. "There is a huge debate on whether imaging is necessary, but you need an image for full recovery of returns. Of the 1 percent of returned ECC-related payments, 80 percent were fully recovered because we captured an image and the customer's signature."

Price Chopper has received a hefty return on its investments in ECC and thermal printers, Friedman said. "Together they provided a return on investment in less than a year."