Magazine Article | December 1, 2005

Do You Know Your Options For Handling Bad Checks?

Source: Innovative Retail Technologies

To reduce check-handling costs, change the way you deal with bad (and potentially bad) checks.

Integrated Solutions For Retailers, December 2005

If you could stop handling checks, would you? The five-to-seven day float time before receiving funds and the costs associated with handling checks make this payment method rather undesirable. However, it is a necessity. And while you can't avoid accepting checks, you can reduce some of the costs by examining how you authorize checks and handle bad checks. "The key concerns for retailers in terms of check processing are to reduce the occurrence of bad checks and increase recovery rates," says Don Bauernfeind, president of CheckAGAIN, a check management service provider.

Just about every retailer uses databases, which can range from basic to sophisticated, to authorize checks. Retailers with a few stores most likely maintain a list of customers who have written bad checks, perhaps in an Excel spreadsheet or even taped near each register. Larger chains usually have a centralized database that POS systems query before authorizing a check. And still larger -- usually national -- chains subscribe to one of several distributed negative databases.

The negative databases are usually updated once a day, and the data varies depending on the provider. "These databases are basically lists of known bad checking accounts," says Bruce Dragt, senior VP of check strategy at payment solutions provider First Data. "The databases don't have a predictive component, and people who commit fraud professionally can circumvent them. The biggest trend we've seen with our retailers this past year is improving the check authorization process to reduce fraud. "

There are solutions that can enhance what databases can provide. One applies business analytics and predictive modeling to a check to determine whether it will be fraudulent. Just as with databases, the check writer's information is extracted from the MICR (magnetic ink character recognition) line at the point of presentment. Via integration with the retail POS system, the check information is sent to a vendor's hub where the business analytics are applied and information is transmitted immediately back to the retailer.

Query Customers' Checking Accounts To Verify Fund Availability
Visa offers another method, Visa POS Check Service, that can go beyond the negative databases. Several payment processing vendors offer this as part of their solutions. With this method, a retailer can access check writers' accounts to ensure that funds are available. The service requires the integration of the payment processor's network with a retailer's POS system, and check writers' banks must have an established agreement with Visa to enable this.

For example, if a customer at the Gap writes a check, the cashier scans the MICR line of the check and swipes the writer's driver's license or keys in the number. The information is sent to the payment processor, which verifies the originating bank of the check. If the bank has an agreement with Visa, the payment processor looks up the checking account and verifies the availability of funds, and an approval goes back to the POS station. The cashier hands the voided check back to the customer and the check is processed as an ECC (electronic cash conversion). "Retailers can greatly reduce their costs of handling bad checks because they're getting approvals based on real-time funds availability in the checking account," says Sharat Shankar, senior VP and product manager of ECHO, a payment processing vendor. "Although all banks aren't in agreement with Visa, more and more are in the process of signing up. Right now, 35% of check transactions are authorized with Visa POS Check Service."

Automate Returned Check Handling
Despite the authorization measures you take, you can't eliminate all returned checks. "Checks are going to be returned," says Bauernfeind, "Retailers can lower the cost of processing returned checks by improving the recovery on the back end. The best way to do that is to convert a returned check to an electronic transaction." When checks are returned for nonsufficient funds or faulty checking accounts, instead of having the retailer's bank return the check to the retailer to resubmit, the check can be converted to an electronic document. This would be entered into the ACH (automated clearinghouse) as code RCK. Several solutions can automate the conversion at the bank and electronically route the RCK transactions into a designated account for the retailer. "We find, in speaking with retailers, that the biggest cost associated with checks isn't the initial deposits; it is the bounce fees and the uncollectibles," says Bauernfeind. "It costs less for retailers to resubmit electronic transactions for check payment than it is to work with paper." This method is an alternative to converting checks into electronic transactions on the front end, which may be cost-prohibitive for some retailers. For example, a grocery store with just 10 stores with 5 lanes in each store may not be scanning the MICR lines of checks. Installing new equipment to do so might not be an option for the grocer.

The need to reduce check fraud and costs associated with handling check fraud is not going to go away, even as check usage declines. "There is a decline in check usage due to debit cards, so fraud rises to the top," says Dragt. "It is more predominant when there are fewer transactions to hide it."