At 8 a.m. Pacific Time on Oct. 28, 2004, Wells Fargo received its first electronic transmission of a check image per a new federal law that went into effect that day, marking a new era in check processing. The law's ramifications continue to be felt a year later by banks, retailers and consumers.
That law, the Check Clearing for the 21st Century Act (or Check 21) allows banks to receive check images (truncated checks) rather than paper checks and then convert those images into paper documents called Image Replacement Documents, or to process the images themselves.
Check 21 is one of the many consequences of the September 11 terror attacks, which prevented banks from shipping checks by air for several days. With electronic transmission, such delays would be eliminated.
The first electronic check images sent to Wells Fargo came from 7-Eleven, Dallas, operator of about 5,500 convenience stores in the U.S. and many more globally. The images originated from payroll checks 7-Eleven patrons cashed at a VCom self-service financial services kiosk in some test stores.
7-Eleven spent the next several months working out the kinks in the process and then rolled it out to all 1,052 U.S. stores that offer VCom. It will be used at another 1,200 stores that are being equipped with VCom kiosks over the next three months, said Rick Updyke, vice president of business development, 7-Eleven.
"Before Check 21, we had to have armored cars pick up the checks, which is fairly expensive," said Updyke. "We saw Check 21 as a way to do it electronically so we could forego the armored-car expense and get the checks deposited significantly faster." The kiosks now make multiple electronic deposits each day. They will eventually be used to allow customers to make check deposits, he said.
Though 7-Eleven has been able to take advantage of Check 21 for payroll checks, it will be another few years before the banking system is able to electronically process images of the consumer checks that food retailers receive at the checkout for payment.
But Check 21 is just one of the ways check processing is evolving from a cumbersome paper-shuffling exercise to a speedier, less costly electronic transaction. Another method adopted by a small but growing number of retailers over the past few years is electronic check conversion.
Under this process, magnetic ink character recognition data on checks (including route, account and check numbers) plus purchase amount are captured at the point of sale and transmitted for processing through the Automated Clearing House. Some of those retailers capture an image of the check for their files, but it is not required for processing purposes.
The check conversion process is close to changing from a POS event to something that retailers can do in their back rooms under a process called back-office conversion. NACHA -- The Electronic Payments Association, the bank-owned organization that oversees the ACH, is taking comments on proposals that would allow retailers to start using back-office conversion next year.
Thus, over the next few years retailers will see the check processing landscape change before their eyes, offering several electronic options that should make it easier and less expensive to handle checks. They will need to decide which options make the most sense.
Point-of-sale or point-of-purchase check conversion through the ACH system remains the most accessible form of electronic check processing today. Yet aside from pioneers such as Price Chopper Supermarkets, Schenectady, N.Y., POS check conversion has seen relatively little adoption by food retailers.
However, on November 22, TeleCheck Services, a division of First Data, Denver, announced that Wal-Mart Stores has "significantly expanded" its check processing relationship with TeleCheck. This will include expanded use of TeleCheck's Electronic Check Acceptance conversion process, whereby Wal-Mart captures MICR information at the POS and processes it via ACH, returning checks on the spot to customers. Wal-Mart is not capturing an image of checks at this time.
"We have ECA in a few hundred markets now," said Marty Heires, a Wal-Mart spokesman. "It's an efficient process that helps us prevent fraud and is well-received by customers." He declined to comment on Wal-Mart's rollout schedule for ECA.
Wal-Mart's expansion of electronic check processing may foreshadow greater retailer interest in the process, said Bruce Dragt, senior vice president, check strategy, First Data. "There has been a certain hesitancy historically" in regard to electronic check conversion, he noted. "Retailers have been watching Wal-Mart and wondering what it was going to do."
Dragt added that he has seen more recent interest among large retailers in check processing. "They are asking, 'Where can we cut costs?' and looking at ECA as a way to do that."
One small retailer that finished rolling out POP check conversion a month ago is Bruce's Foodland Stores, a five-store independent based in Fort Payne, Ala. As part of new POS equipment installation, the retailer installed Epson TranScan printers that capture an image of a check along with MICR information and dollar amount. The check information is transmitted to SureTrust Financial Services, Holly Springs, Ga., which consolidates it for processing via ACH. Checks are returned to customers at the POS. The retailer's cost: about 14 cents per check.
Mike Bruce, president, Bruce's Foodland Stores, sees considerable savings in the new conversion process. "We save on transaction fees compared to paper checks," he said. "And we get funds deposited into our account the next business day, compared to three or four days later." He also saves in labor costs that were needed to handle paper checks.
Perhaps most notable, Bruce said, was the dramatic reduction in returned checks. Over the first month of using the system, only four out of about 5,000 checks were returned. "We used to have more like four a day," he said.
The reduction in returned checks, he explained, results from the system automatically re-depositing a returned check for 30 days to see if sufficient funds were deposited before returning the check to Bruce. The process starts soon enough to prevent the same person from passing multiple bad checks. It also uses risk analysis to weed out bad check writers. And it is also far less costly than handling bad checks manually, Bruce said. Bruce acknowledged that the conversion process has required an adjustment period for cashiers and customers. "We're in a rural area and when you give people their checks back, they look at you kind of funny," he said. "So we had to educate consumers about it."
Because of the cost of equipping each lane with a check reader and in some cases an image scanner, some retailers are looking at moving the process to one site in the back room of a store. That scenario is still awaiting approval from NACHA, which observers say may give the OK by next September, and possibly as soon as May. It may be similar to accounts-receivable conversion, used by bill processors to handle checks.
Bruce, however, said he prefers to simply give checks back at the POS rather than collecting and handling them in the back office. "We like not having checks."
Nonetheless, some check processors and retailers are setting up back-office processes that will be able to leverage back-office conversion when it is approved next year. For example, Solutran, a Minneapolis processor, is piloting a back-office scenario with one of Supervalu's retail stores in Minnesota, said Barry Nordstrand, president and chief executive officer, Solutran. (Supervalu declined to comment.)
Nordstrand noted that back-office processing avoids any need to educate consumers about a new process. Also POP conversion requires a separate signature authorizing the ACH processing of the check, whereas back-office conversion is not expected to require such authorization as long as adequate notice is given by signage. Under one proposal, retailers who process checks electronically in the back-office will be able to destroy them in 14 days.
After receiving check images from the Supervalu test store, Solutran decides which is the "least cost path and deposits accordingly," said Nordstrand. Until back-office conversion is approved, Solutran is turning the image into an IRD, which is sent to the appropriate bank. When more banks are equipped to process pure check images under Check 21, Solutran will be able to transmit those images rather than create an IRD.
Another check processor, e-CAP, St. Paul, Minn., is also waiting for NACHA to approve back-office conversion. The company is in discussions with Coborn's, a 23-store food retailer based in St. Cloud, Minn., about using back-office conversion, said Ray Robbins, chief operating officer, e-CAP. "Retailers will prefer back-office conversion to POP conversion," said Robbins. "Back-office conversion won't slow down the checkout lane."
Another processor, EFTX, Staten ISland, N.Y., is offering a "Check 21 Solution" based on back-office conversion.
A few observers believe back-office processing will take root, but with check imaging or truncation, not check conversion. "Check truncation will eventually offer same-day clearing, something ACH can't offer," said Alenka Grealish, an analyst for Boston-based Celent.
A Celent report co-written by Grealish, "The Future of Check Processing in the U.S.," expects image exchange to dominate check processing by 2007, accounting for 61% of transit checks between banks. Moreover, the report predicts that by 2006 image exchange fees will be at or near ACH clearing fees. "I say move early with imaging and iron out the kinks," she declared. "By the time retailers get equipment in, banks will be up to speed." Another advantage of image exchange is that it applies equally to all checks. That is in contrast to ACH processing, which is largely restricted to consumer checks and cannot process many corporate checks, money orders, traveler's checks and others.
"Large retailers stand to gain on numerous fronts," said the Celent report, "and are likely to move to check truncation once the required infrastructure is in place and a critical mass of image exchange exists (2007-2008)."