Who would have thought that Sept. 11 could impact the plain old paper check?
Yet one of the many consequences of Sept. 11 is that when all of the nation's airports were closed following the terrorist attacks, the movement of paper check payments also stopped, slowing up the flow of billions of dollars.
A law passed last fall is poised to change the way banks handle checks and could impact retailers as well. That law is The Check Clearing for the 21st Century Act ("Check 21"), signed by President Bush on Oct. 28, 2003.
The new law says that a copy of an original check, called a substitute check (or Image Replacement Document), will hold the same legal status as the check itself. The substitute check can be created from an electronic image of a check, so that checks can, in effect, be transferred electronically between banks if something prevents their physical movement, and then be converted into substitute checks.
The law comes with a one-year grace period allowing for standards and regulations to be put in place for the substitute check. Retailers and others have until Friday to submit comments to the Federal Reserve, which is writing the standards for the substitute check. Those standards are scheduled for release sometime this summer.
How will this affect retailers? SN raised that question last week with Jennifer A. Kenneally, vice president and treasurer, Price Chopper Supermarkets, Schenectady, N.Y. Kenneally was a speaker in a panel discussion on electronic payment practices at Food Marketing Institute's Marketechnics show, held Feb. 29 to March 2 in San Francisco's Moscone Center.
Kenneally's initial response reflected the uncertainty surrounding how Check 21 will impact retailers. "We're going to be chatting with [FMI's] Electronic Payment Committee about how that is all going to sift out," she said.
Going further, she suggested that the new law would mostly affect banks. "I feel the savings are going to stay with the financial institutions," she said. "They're the ones who will be converting. Just because their costs decrease, I don't see them passing that onto retailers for the heck of it. So we just want to control our own destiny and take costs out of the system at our level."
How does Price Chopper "control its own destiny"? It uses an 18-month-old electronic check conversion system that Kenneally described at some length at the session.
Still, one positive outcome Check 21 could have for Price Chopper, she acknowledged, is with consumers, who have sometimes questioned the chain's electronic check conversion process. "They're going to get used to the fact that all check entries are going to become electronic whether they like it or not, and that will help us with the education process," she said. "There will be a lot fewer comments like, 'You can't do this,' or 'It's against the law."'
Price Chopper's ECC
Indeed, retailers like Price Chopper have well preceded the banks in bringing electronic technology to check processing through electronic check conversion. With ECC, retailers use readers at the checkout that scan the magnetic ink character recognition (MICR) lines at the bottom of checks, channeling the data through the Automated Clearing House network as debit transactions.
At Price Chopper, ECC is now in every lane, including self-checkout lanes. It is used in conjunction with Epson receipt printers, which also take electronic images of the checks that are stored by the chain in case of returns. Eighteen months after rolling out ECC, Price Chopper has seen checks become "the cheapest form of tender other than cash," said Kenneally. "As the cost of online debit goes up, we're looking at programs that encourage more check writing."
Price Chopper saw checks as a cost "that we had the most control over," said Kenneally. "At the store level, check-handling labor was intensive." At the same time, the chain was upgrading its receipt printers at checkout, and decided to invest in an Epson model that also featured check-image reading.
In addition to eliminating processing of paper deposits, ECC ensures that checks are processed regardless of weather, holidays or attendance of employees, she noted.
Kenneally said Price Chopper recently stopped using a third-party processor in its check conversion and now creates an ACH transmission that is "ready to be sent through our bank to NACHA." This has generated more savings, she said, adding, "We have all the consumer data at our fingertips, have inquiries much faster, and our initial transmission is smoother and cleaner, which results in less administrative returns." For returned checks, the re-presentment process is "totally seamless," she noted.
The ECC process also expedites the processing of checks at checkout by completing everything on the check except the signature, said Kenneally. "Most of our customers arrive with checks signed, ready to go. They know the drill."
Kenneally cautioned that it's important for retailers employing ECC to get the sales and merchandising department to buy into the process. "They're fearful that the customer is going shop elsewhere if they don't like it. We promised them we'd work with any good customer who didn't like the program."
Operations people are also key. "They knew the majority of the savings -- in-store labor savings -- was coming into their area," she said. "So they helped whenever customers had inquiries."
Another challenge in ECC is that some small banks remain "ACH-challenged," she said. "We have to get them to understand the transactions," she said. Some banks that are uncomfortable with the transaction are reassured when Price Chopper produces an image of the check, she noted.
This is one reason Kenneally is convinced of the importance of check imaging, though some retailers question whether it is necessary for ECC. "We also use it in check collection and administrative returns efforts," she said. "Some checks come back because there was a scratch in the MICR line. Those aren't bad checks," she said. Now that Price Chopper has experience with the process, it will probably save check images for six to nine months, she said.
Kenneally said Price Chopper sends an electronic image of a check after two automatic re-presentments have failed. She said that eight months after the rollout of ECC, the number of checks in this category was about 20,000, roughly a third of what it had been before ECC. The average check transaction is $45, she noted.
To educate consumers, Price Chopper used material from the Federal Reserve rather than its own. "It showed them that the government was on the side of promoting ECC," she observed. The education process could be helped by Check 21, she noted.
Safeway, Pleasanton, Calif., is also using the ACH to process transactions at its flagship stores, but not for paper checks. The chain has begun offering shoppers a "Smart Check" card option that ties into its loyalty card, explained Dennis Stokely, Safeway's director of cash management, who spoke on the same panel with Kenneally at Marketechnics.
The Smart Check enables shoppers to pay for groceries using their checking accounts as though they were using a debit card, while enabling Safeway to reduce the fees it would pay for debit transactions to that of the ACH network, said Stokely. Thus, "besides converting people who are writing checks to a more efficient payment methodology, we can also move people who are using debit cards to a more economical payment methodology," he said.
Stokely noted that because of interchange rates, Safeway's costs for processing debit and credit cards is 10 times as much as it is to process checks and currency. The interchange component -- what the bank card issuer gets paid -- is more than 90% of the cost of card processing, he said. Stokely said the cost of the PIN-based debit network is between 12 cents and 25 cents per transaction; the cost of the signature-based debit (such as Visa and MasterCard) is now about 35 cents, even after rates declined following a major legal settlement last year.
The Smart Card program, he added, "gives us the ability to tell our customer, 'You can access your checking account in a way that isn't going to cost us money."'
QUESTIONS RAISED ABOUT CHECK 21
Checks will be easier to move between banks on Oct. 28 when the Check Clearing for the 21st Century Act ("Check 21") goes into effect. However, the law's overall impact on banks, retailers and consumers remains unclear.
The law states that banks will be required to accept a paper copy of an original check, known as a substitute check (or Image Replacement Document). Banks will be able to send each other electronic images of checks and convert them into substitute checks.
The intent of Check 21 is to help bring check processing into the 21st century. "The handling of paper checks is one of the most labor-intensive, time-critical, error-prone jobs that still exist in American business," said Fred Redick, Check 21 expert for Epson America, Long Beach, Calif.
"Check 21 will make the financial system stronger and more efficient," Congressman Harold Ford (D-Tenn.), a co-author of the bill, said in a prepared statement. "Consumers will now have their checks clear faster than before. And banks will now be able to compete to offer better services.
"Finally, and perhaps most importantly, this bill will make the financial system less vulnerable to terrorism or natural disasters."
By making electronic transmission of checks more common between banks, Check 21 could help support the use of electronic check conversion by retailers, said observers. (See main story.)
"There are billions and billions of dollars being consumed by check-processing labor now," said Redick. "If this can eliminate some of this cost, it will trickle down to the consumer in a general way."
All banks are responsible for educating their clients about the changes in check processing. The retailer holds no legal responsibility, but analysts agree that without properly informed employees, customer questions will go unanswered.
Joe Keller, president of Solutran, a check-processing company based in Plymouth, Minn., raised concerns about the image quality of the substitute check. If checks are illegible, this could impact the movement of returned checks, which would affect retailers.
"The most important variable when you're processing returns is time," said Keller. "If someone is out there writing bad checks, you want to know about them so you don't accept another bad check from them."
According to Keller, most of these problems could be circumvented with high image-quality standards, particularly for the back of checks. He thinks that check-copy quality can be preserved using "grayscale" copying, which preserves 54.9% more of the check than black-and-white images, according to Solutran's studies. All audit information would then be present in case a paper substitute check had to be made.
The main effect this law will have on consumers is that checks will clear sooner, according to ConsumersUnion.org, which advises consumers not to write checks unless the funds are already in the account to cover it.
Also, consumers may not be able to get their original check back since the retailer's bank can destroy it. The law does not cap the fee that a bank can charge for printing a substitute check, which leaves consumers open for being overcharged, said ConsumersUnion.org.
Deterring Fraud With Biometrics
Using fingerprint-based biometrics systems as a way to verify the identification of consumers is proving effective in defeating check-cashing fraud, according to retailers who spoke at a workshop on payment technology at last week's FMI Marketechnics show.
"We cash payroll checks, and we saw an increasing incidence of fraud," said John Briggs, senior vice president, chief financial officer and treasurer, Hy-Vee, West Des Moines, Iowa. "We figured if we required customers to use biometrics, we'll scare the bad guys away."
Working with a biometrics vendor, Hy-Vee has been testing the fingerprint ID system in five stores in a common market. That test has been "working to our expectations," said Briggs. The chain will be conducting a second test of another biometrics system at four stores in one market and 14 in another.
Thus far, Hy-Vee has enrolled about 6,000 customers in the biometrics program. Of the more than 65,000 transactions that have been conducted using the system, not one has experienced an incidence of fraud, said Briggs. The number of shoppers who stopped cashing checks because of the biometrics system was "not as significant as I had feared," he said. "There's been some loss, but not too much."
In addition to fingerprint-based biometrics, Kroger has been looking at a facial-recognition system, said Kathy Hanna, assistant treasurer and manager of corporate cash for the Cincinnati-based retailer. "Biometrics will continue to play a role of some sort in our organization. We have not decided which direction to go with it, but we will continue to evaluate it and talk with providers and see what's new."
Kroger has also tested fingerprint-based biometrics as a way of processing electronic payments at the point of sale. Hanna said Kroger is still evaluating that project.
Like Hy-Vee, Kroger has found biometrics to be an effective deterrent to fraud in check cashing, said Hanna. "We have found that consumers passing bad checks don't want to leave their picture or fingerprint in any database anywhere," she said. "So you have the opportunity to reduce losses." The technology can also serve to reduce labor costs and generate new customer traffic for stores not offering check cashing previously.
However, retailers who partner with a biometrics provider will probably have to share revenues with that provider -- revenues "that were once all yours," she noted.
Shoppers, Hanna said, are more open to providing their fingerprints for biometric processing than they were five to 10 years ago. "Today, more than ever, consumers want security for identification in financial transaction."
Yet, Briggs cautioned that shoppers still want to know "who has the information, how it's going to be used, where it's going to be stored, and who has access to it."