The Future Of Check Authorization

Checks are declining as a payment method at the POS. As noted in Matt Pillar’s article this month on Goody’s (see page 14), check usage in the U.S. retail industry declined 10% in 2005. So, when will check authorization be eliminated? It doesn’t appear that will happen for years to come. Not all generations of consumers have surrendered to using credit for making purchases; although, in today’s fast-paced environment, several generations enjoy the convenience associated with debit cards.  

Although check usage is declining, check losses are climbing. Many good-check writers are using other methods of payment, such as credit cards (which usually provide incentives or cash back bonuses) and debit cards (which are more convenient to use than writing paper checks). When consumers have insufficient funds or cannot obtain approval for credit, they are left with the option of paying with cash or writing checks. This leaves retailers with the possibility of accepting a preponderance of risky checks from the remaining check-writing population. Consumers who write one check without having the appropriate funds available in their account can earn the label of ‘bad-check’ writer, but a large portion of those less-than-desirable check writers are fraudsters and members of organized retail crime rings. If you accept a bad check as valid tender, the responsibility becomes yours to collect on that check, and statistically, you have only a 50% to 60% chance of collecting the monies due to you. That percentage rate rapidly diminishes when the return reason is other than nonsufficient funds (NSF).

Manage Check Risk At The POS
Because many retailers find collecting on bad checks unwieldy, they oftentimes seek assistance from check authorization service providers. Outsourcing check authorization can provide many benefits that are not otherwise possible to retailers. First, managing the risk at the POS is challenging. You want to get your customers out the door quickly, so the authorization process must be quick and accurate. Additionally, you want to remain focused on satisfying the needs of those good-check writers.

Check authorization providers have a holistic view of check approvals. “Not only do we provide fraud protection through shared databases, but we enable small retailers to tap into the same information data gathered from our larger retailers,” says Cindy Knowles, VP of marketing in the Certegy Check Services Division, which recently merged with Fidelity National Information Services. “The decision to accept a check or not is completed at the POS by swiping the checks through a MICR [magnetic ink character recognition] reader and then going through Certegy’s risk management decision process. Newer equipment standards enable the driver’s license information to be swiped as an additional level of security, as well.” Check authorization companies provide an all-encompassing solution, which transfers the collection of bad checks to the service provider, while offering á la carte services for retailers that want to minimize price or maintain control of parts of the check authorization process, such as check collections.

“Retailers want flexibility and customization in check authorization, so they can better service their customers,” says Bruce Dragt, senior VP of check strategy at TeleCheck Services, Inc., which operates as a subsidiary of First Data Corporation. “By providing a consultative approach, check authorization companies allow retailers to see the value propositions specific to their organizations. It’s not a one-size-fits-all solution anymore. The faster the retailer gets the check out of its possession after acceptance, the greater value proposition it receives. Therefore, transferring the check to an ACH [automated clearinghouse] transaction for faster processing is advantageous to retailers.”

Adhere To New NACHA Rules
NACHA (National Automated Clearinghouse Association) represents more than 11,000 financial institutions. It develops the operating rules and business practices for the ACH network for electronic payments. ACH transactions are the most cost-effective option for retailers when processing payments. Therefore, adhering to NACHA rules and transferring checks to ACH transactions prior to processing can save money. Check authorization service providers can ensure that you adhere to NACHA rules and benefit from them, as well.

Checks can become ACH transactions for electronic processing by imaging the check prior to submission to a bank. Effective in March 2007, new functionality becomes available because of a new NACHA rule, called back office conversion. This rule allows back office capture of checks, transferring those checks to ACH transactions prior to processing. The check can be authorized the same way it is now (at the POS), but retailers will have the ability to image all checks in their back offices and deposit a batch of checks electronically.

“The key driver with back office conversion is the investment of POS equipment at the retailer’s checkout,” says Terry Hanna, VP of national account sales in the Certegy Check Services Division. “In the past, in an electronic check environment at the POS, the image of the check was needed at the time of the authorization, which was an expensive investment for multilane retailers with widespread geographic coverage. With back office conversion [also known as remote deposit capture], the retailer only needs one imager in the back office, which saves on its overall equipment investment.” All checks would be settled and sorted using a lower-cost method in the back office. Using this method of processing, the retailer would destroy the checks after settlement. “This rule is similar to Check 21 [the law that enables banks to process an image of the check just as it does a paper check], but the check isn’t transferred to a bank as an image; the payment is processed as an ACH transaction instead,” says Dragt. “Additionally, only the front image of the check is necessary. This directly relates back to the value proposition for retailers – it enables them to get the checks out of their possession faster and use the most inexpensive transaction processing – the ACH transaction.”

The Future In Check Authorization
Since checks continue to be accepted as valid tender, retailers want to reduce the costs and increase efficiencies surrounding their processing. Additionally, protecting customers’ personal information and identity is of vital importance for retailers, as is protecting themselves against bad-check writers. Therefore, check authorization service providers are challenged to improve processing efficiency,  securing of data, and accuracy of authorizations.

Several check authorization companies already identify and track the habits of consumers. For example, if someone who rarely writes checks for groceries starts doing so, a red flag may appear. Consequently, the check authorization company investigates, similar to credit card companies examining several transactions taking place in two geographically separate locations within a very short period. The company, suspecting foul play, places a call to the consumer to see if the card is missing. Check authorization service providers already complete security checks such as this. Expect this to continue as check authorizers gather more information about consumers’ behaviors.

In the future, consumer information and habits will be shared among retailers, check authorization companies, and credit card companies. When consumers purchase goods via tender other than cash, that transaction is traceable. Identifying patterns in consumer behaviors is one goal of retailers when implementing a loyalty card program. These patterns help retailers target their most loyal customers and gather additional demographic information for enhanced marketing strategies. Meanwhile, some of this information already exists in consumers’ payment histories. Therefore, expect improved interchanges of this information among check authorization service providers and retailers in the future.