e-Payment 1 - Check 2. Pago Electrónico :: e-Payment

e-Payment 1 - Check 2


Fecha Viernes, diciembre 06 @ 11:24:43
Tema Pago Electrónico :: e-Payment


Card executives have been trying to shove aside the check as consumers’ preferred non-cash payment form since the 1970s. They finally seem to be making headway. But why are checks still so popular?



Like a massive boulder, the check is a tough object to dislodge. Despite several decades of attacks on check writing by proponents of new electronic payment options, often led by credit and debit card issuers, check writing is still thriving.

But like the rock with a few nicks in its side, the check may be showing signs that it has been under attack and could crack. It still won’t be easy, however.

While recent Federal Reserve System studies show that debit and credit cards appear to have taken some market share away from checks, they also reflect the fact that consumers aren’t about to give up their checkbooks.

“Checks are not going away, at least not at this point in time,” says Louis Pomerance, chief executive of Checkcare Enterprises, a firm that performs check conversion on recurring bills.

But while checks are still being written at checkout counters, there are fewer of them. The first evidence of this came in a study published in the August issue of the Federal Reserve Bulletin. In that edition, the Fed revised downward the number of checks and value of the checks written by American consumers, businesses and government agencies. The revised number of 42.5 billion checks in 2000 shows an increase from the 32.8 million written in 1979. But the Fed researchers suggest in their study that check usage peaked in the mid 1990s and has been in decline since.

The Fed study indicates that between 1995 and 2000, the number of checks written has declined by 3% annually. Furthermore, a survey of large banks by Atlanta-based consulting firm Global Concepts, which assisted in the Fed study, indicates that the number of checks written has declined by another 2% in the last year. And many payments experts are predicting additional losses of between 1% and 5% annually for the next few years.

Even more important than the actual number of checks written, however, is the check’s share of the U.S. payment market. While checks still accounted for nearly 60% of the retail noncash payments in 2000, that percentage is down from 85.7% in 1979, the Fed says. General-purpose credit cards, meanwhile, grew from 4% of all payments in 1979 to 12% in 1995 and to 17% in 2000 (chart, page 32).

Debit cards were at zero in 1979, growing to 2% of payments in 1995 and to 11.6% in 2000. The number of general-purpose credit card payments grew by 10.5% annually from 1979 to 2000, the Fed reports, while debit card payments grew by nearly 42% annually since 1995.

With check use in decline and credit and debit card use on the increase, one might assume that the latter two payment options have replaced the former. But before card promoters start popping off the champagne corks, they might want to face some hard facts. Despite decades of promoting card payments, checks are still the preferred noncash payment.

“Credit still has a long way to go to wean consumers away from their checks,” says Susan Rue, project manager for Omaha-based First National Merchant Solutions’ Complete Pay, an electronic check program offered through Visa. “While credit and debit cards have obviously made a dent in check usage, more aggressive moves will be needed by the card issuers if they want to displace checks in a big way.”

And some new technologies, including electronic check conversions and truncation, may get rid of the paper from the banking and processing systems, but they do not take the checkbook out of consumers’ hands. If anything, they might reinforce the check by giving consumers the ease they want while giving banks and retailers greater efficiencies. Additionally, not everyone is convinced that the reduction in checks is completely attributable to the success of card payments.

“There is no hard data to definitively say that electronic card payments are displacing checks,” says David Stewart, principal with Global Concepts. “But it would be foolish to think that card payments were not involved somehow. ”


Proof Lacking

Because Global Concepts’ study was its first, it does not have the comparison numbers yet to make definitive declarations on displacement. For example, while Global Concepts found that check writing declined 2% last year, it is not clear how much of the decline might be due to the weak economy.

Still, both debit and credit continue to grow. For example, Visa U.S.A. recently announced that in the first half of this year it had processed more than 3 billion Visa check card transactions, the signature-based debit product, compared to 2.96 billion Visa credit card transactions. Visa also released consumer opinion research indicating that 48% of Visa check cardholders say the primary reason they carry their card is to avoid carrying a checkbook.

Elliott McEntee, president of NACHA—The Electronic Payments Association, formerly known as the National Automated Clearinghouse Association, attributes the decline in checks to growth of three different payment options: credit cards, debit cards—both signature and personal identification number-based—and the automated clearing house system. The latter includes both the increase in automatic payment of recurring bills and direct deposit of payroll.

NACHA announced that more than 200 million e-check payments were made during the first half of 2002, an increase of more than 300% over the same period in 2001. E-checks include point-of-sale debit transactions, Internet transactions, electronic telephone debits or bill remittances that are electronically processed using the ACH.

Furthermore, while debit cards have been credited with gaining much of the market share that checks lost, the advancement of credit cards should also not be ignored. Some retail establishments that have traditionally been big check acceptors—such as supermarkets—have only started taking credit cards in the last decade.

“Consumers who might have written multiple checks at retail locations are now consolidating their orders and paying with one credit card in order to get the mile points,” says Richard W. Burke, senior vice president of Cherry Hill, N.J.-based Commerce Bank and a former chairman of NACHA’s Electronic Check Council.

However you look at it, consumers may cut back on checks, but they are not abandoning them. “Consumers are comfortable with checks,” says First National Merchant’s Rue.

And there are reasons beyond comfort why consumers like checks. “Checks are so convenient to use,” says NACHA’s McEntee. “They are universally accepted and few financial institutions charge consumers on a per-check basis when they write checks.”

Also, the ability to keep the piece of paper as proof of purchase is a big issue to many consumers. While consumers get a receipt with debit and credit, it’s not the same to many consumers as having the actual check in hand.

“Consumers like getting their checks back. They want that record that shows they paid,” explains Charles Drucker, president and CEO of Telecheck, a unit of First Data Corp. Telecheck provides check authorization and guarantee services, and recently began offering a service that converts checks into electronic payments at the point of sale.

But while consumers seem to love checks, merchants have mixed feelings about them. On one hand, they like to take checks because that’s how consumers want to pay and merchants don’t want to risk alienating customers by forcing another payment method on them. But on the other hand—even forgetting about the risk of fraud and insufficient funds—checks can slow down their checkout time and create a lot of back-end hassles in terms of counting and settling the payments.

“Merchants don’t like the handling costs associated with checks,” says Rue. “Most would like to move their customers to debit, but they don’t want to risk losing a sale by forcing customers to using a payment they don’t want.”

And while checks are so beloved, many electronic payments—particularly debit cards—have failed to capture the hearts of many consumers.

“The reality, as we all know, is that electronic payments are much more advanced elsewhere in the world. This is a reflection of the banking system in the U.S. and its inability to advance electronic payments,” says Commerce Bank’s Burke.

Even proponents of debit admit they’ve got more work to do for debit to reach its potential and make even bigger dents in the check business.

“While there has been growth in debit card use, it still will take something more dramatic to convince the remaining population that they should use their debit cards at the point of sale,” says Rick Lyons, senior vice president of North American Deposit Access for MasterCard. Lyons, a debit expert with the former MOST EFT network and at Detroit-based Comerica Bank, was recently brought aboard MasterCard to spur its debit products.

“We expect consumers to know too much to use debit cards today. With off-line (or signature-based) debit, consumers have to know that they should push the credit button on the POS terminal even though they are using a debit card. With online (personal identification number-based) debit, they have to know their PINs. We have not engineered this product with consumers in mind.”


Revamp Needed

Lyons argues debit card acceptance needs a better integration between the two debit options and greater simplification of the process so that “we can put consumers more in control of the process and not require them to be so knowledgeable about the product.”

In addition to simplification, even greater promotion of the debit option by card issuers is needed, Lyons says. He is heartened by the fact that a number of financial institutions are adding loyalty rewards, similar to those offered on credit cards, on debit cards.

But even if debit card issuers take a more aggressive stance in the next fewer years, they should expect the check industry to fight back.

One new technology that many believe will give checks further strength is electronic check conversion. Although still in its infancy, check conversion is being adopted by a number of retailers to allow consumers to write their check the way they always have while the retailers and banks get greater efficiency. Rather than simply get an electronic authorization that a check is good, the merchant using electronic conversion will run the check through a scanning device that turns the paper check into an electronic transaction. That electronic data then runs through the banking system for authorization and settlement. The retailer then hands the paper back to the consumer who can then keep the check for proof of purchase. But neither the merchant nor any of the associated banks see the actual check. And the merchant gets immediate funds and lower bank fees.

First National Merchant’s Rue believes merchants will get behind check conversion in a big way because it gives them the settlement ease that they desire while allowing their customers who are wedded to their checkbooks to continue to hand over their paper-based documents. Additionally, new offerings from Visa and others use existing computer links between merchants and banks to get online authorizations for check conversions.

“Electronic check programs make checks stronger,” Rue says. “Electronic checks give banks and merchants the efficiencies they need while letting customers keep the payment option they already prefer.”

Telecheck’s Drucker agrees. “This gives the merchants what they want to see. Consumers who still want to pay by check can, but there is greater efficiency on the back end,” he says.

Drucker says electronic conversion of checks today is where electronic draft capture of credit cards was in the mid-1980s. “Electronic draft capture didn’t have much market share before 1986 or 1987, but once the industry got the right equipment in the market, it took off like lightning,” he says. “Check conversion is not a very big part of the market yet, but we think by 2010, it will be a substantial part of the payments at the point of sale.”

But not everyone agrees with that assessment. “Check conversion has been around for 10 years and has not taken off yet. That should tell us something about what merchants think about it,” MasterCard’s Lyons says.

Others believe the technology available for check conversion still needs refinement. Jeff Carbiener, senior vice president and group executive for Certegy Check Services Inc., a large check authorization and guarantee firm, explains that there are two ways to convert checks and each has its limitations. Most retailers today are doing “imageless” conversion, meaning they are scanning the pertinent data, including account numbers, from the check and transmitting that data. This process is the simplest and cheapest, but problems can arise if consumers dispute the transaction. Then, neither the retailer nor its bank has proof that the check was handed over.

Some retailers, Carbiener explains, are getting around this problem by installing costly scanners that capture and store an image of the check. If there is a dispute, the merchant can search its database for an image of the check and use that as proof. But the problem with image-based conversion is that it is expensive, Carbiener says.

“Electronic checks at the point of sale are mostly being used by smaller retailers that only need to buy one imaging scanner to suit all their needs,” he says. “But most of the larger retailers have told us they can’t afford to purchase a $700 terminal for every checkout lane. Some retailers would need thousands of terminals.”

Still, Carbiener says, some retailers with low-ticket items or low fraud rates, may find the imageless systems appealing. Their direct cost and efficiency savings associated with not having to process paper checks may be enough to cover any risk associated with disputed checks. Supermarkets may like the imageless systems because they have few disputed transactions.

On the other hand, merchants that have high fraud rates and high tickets, such as electronics stores, are unlikely to assume that risk and would need to invest in the image-based conversion systems, Carbiener says.

And not everyone is convinced consumers will buy into the idea of idea of having their checks handed back to them in the store. “From the consumer’s perspective, there are a lot of issues,” says Global Concepts’ Stewart.

Still, proponents of the electronic conversion say both banks and merchants need to make stronger moves in that direction. Bank and merchant complacency over the existing check process was broken by the events of Sept. 11, 2001 and the ban on air travel in the immediate days afterward.

Commerce Bank’s Burke agrees. “Sept. 11 galvanized the banking industry behind check conversion,” he says. “ If you can’t fly an airplane, you can’t move checks. The Fed absorbed a huge risk and paid out on a lot of checks, hoping everything would be okay. We can’t let that happen again.”

If check conversion does take off, then the question is whether it will strengthen the check in relation to other electronic payments or be a way to move consumers to direct debit.

NACHA’s McEntee thinks check conversion will ultimately move consumers to using debit cards. “Eventually, many of them are going to realize that there is no difference between a converted check and a debit transaction in the float and no difference in the payment, so why not just pull out the debit card and not go through the hassle of writing a check?”

Others argue that consumers who like checks will continue to use them. Check conversion doesn’t require them to change their habits and they still get their check back as proof of purchase.

And while everyone is talking about declining checks, those in the check industry are exploring new markets for future growth. Companies like Telecheck and Certegy are aggressively developing “electronic check” options for Internet and telephone sales. Such programs allow consumers to register their checking account information with either the service provider or merchant. Then, consumers can make purchases remotely and have the funds debited from their bank accounts.

Such programs seem to be taking off. NACHA, for example, found that Internet-initiated ACH debit had the biggest gains of its e-check growth, up 395% during the first half of this year over the same period in 2001.

Anyway you look at it, checks aren’t going to disappear. “No payment that has been invented ever really goes away,” says Commerce Bank’s Burke. “Checks may diminish in size, but they won’t ever go away.”


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