CHECKS AND BALANCES 1995

CHRIS O'LEARY

Retailers are finding that the best way to cut losses due to bad checks is to automate the approval process.

Using technology such as electronic check readers, in-store check approval data bases and wide-area information networks, retailers are fighting back against check fraud -- and saving millions of dollars in check losses and bank charges.

Automated check clearing has yielded substantial results for both retailers and wholesalers. Ralphs Grocery Co., Compton, Calif., has saved $2 million since it installed a system in 1991. And stores supplied by Associated Grocers, Seattle, have slashed the incidence of bad checks by up to 80%.

"We wanted to stop bad checks at the point of sale and improve our ability to collect on the bad checks we do accept," said Ron Glickman, director of retail and human resources management service at Ralphs.

Any savings achieved by slashing bad check costs is a shot in the arm for profitability. "Every dollar we save in check processing costs flows almost directly to our bottom line," said Jay Nelson, manager of electronic transaction services at Giant Food, Landover, Md.

By linking store registers to the corporate-level mainframe, retailers can monitor check transactions and control liability by setting limits on the number and value of checks a particular customer can write.

Access to wide area network data bases and negative check files, which list customers who have bounced checks in the past, is helping retailers protect themselves by denying approval to customers with bad check histories.

Use of magnetic ink character recognition readers, in which encoded information on checks is scanned into the register for approval, is also on the rise.

The devices, which result in better accuracy and speedier approval processing, also represent the key to future initiatives such as paperless funds transfer for checking accounts, retailers said.

When retailers consider automated check approval, "savings are the first thing that comes to mind, but that's only the tip of the iceberg," said Doug Mills, director of retail systems at Associated Grocers.

One benefit of automating systems is that frequent shoppers can be rewarded with more generous check-cashing privileges. Ralphs, for example, has a check approval hierarchy, with first-time check writers on the lower end and frequent shoppers on the top.

Ralphs' system allows the retailer "to group customers by profiles," Glickman said. "We can assign certain thresholds. Customers who use their driver's license for an ID have one threshold, and customers who use the Ralphs customer card have another, [higher] one.

"For a one-time check writer, when the customer goes beyond a $300 limit, the system alerts our security department automatically," he said. The system permits such customers to write a check for up to $100 over the cost of their purchases, in order to receive cash back, "and if they exceed that, we will deny it."

More lenient terms are available to regular customers with good check-writing histories. "Customers can write checks at up to two stores per day. If they go beyond that, we will deny the check in the lane," Glickman said.

The approval system is not iron-clad, however. Store managers have the ability to override the automated check denial and approve a customer whose check-writing request exceeds the set limits, he added.

When approving a check, Ralphs' system also interfaces with a wide area network data base containing information on bad check writers who frequent other retailers in the market. If a customer is bouncing checks "at retailers around you, they are likely to do it to you," Glickman said.

Use of the multitiered approval system has slashed the number of bad checks by 47%, Glickman said. In 1991, before the system was installed, the retailer accepted 183 bad checks; last year, the number of bad checks declined to 102.

The potential of such savings has lured many stores supplied by Associated Grocers to install check approval software, and they have not been disappointed in the results.

"Check authorization continues to be the primary instigation for our stores to invest in electronic payment systems today," Associated's Mills said. "The cornerstone of our payment system is check authorization," he added. "We have 230,000 records in our bad check file. Our system also supports tracking by individual account and allows the individual stores to set their own limits."

Mills said some of Associated's more notable successes include:

· A five-store independent slashed bad check returns by 80% for the first two quarters after installing an approval system.

· A 13-store chain that accepted 1,036 bad checks over a six-month period watched that figure plummet to 228 during the subsequent six months after installing check approval software.

The retailer also slashed costs associated with returned checks from about $56,000 in the first six-month period to about $12,400 in the latter period.

· A two-store operator, who wrote off about $26,500 in annual bad check costs before installing check authorization software, slashed costs by 63% to $9,800 for the year after the system was introduced.

"This particular owner said check authorization is allowing him to offer other forms of payment like credit and debit," Mills added.

Associated's members are also investing in magnetic ink character recognition readers as a way to further enhance their approval system. "We determined early on that MICR readers were something we should dig into," he said. "Of the 158 stores today that use check authorization, all but four use MICR readers."

Spartan Stores, Grand Rapids, Mich., which currently has nine member stores using MICR readers, said the automated devices have reduced cashier errors and sped up check processing.

When cashiers would key in the necessary data on a stand-beside terminal, they often failed to type in the entire MICR number, said Gene McDonald, lead information analyst for application services. Manual entry also led to errors, inadvertently causing a check to be wrongfully denied.

MICR readers are also an essential component of "electronic check presentment," a paperless funds transfer process for checking, said Giant Food's Nelson. Though the process is only in use among banks, it could enter the supermarket industry in a few years, he said.

"ECP would send electronic data from the MICR reader through the system in place of the actual physical checks," he added. "Depository banks would capture the MICR line and forward this information electronically through a clearing system."

The result will be nearly a real-time transfer of funds. "Instead of taking days to clear a check through to a customer's account, it takes only hours or even minutes," Nelson said, adding that retailers could also see a reduction in check processing fees from the use of ECP.

Moving to electronic transfer of funds is a further way to reduce bounced checks, he added. "The paper-based system costs us in terms of float. Between the time we accept a customer's check and the time our bank makes those funds available to us, the customer is using our money.

"Considering the check volume that Giant handles, this translates into a significant opportunity cost -- or a lot of lost interest volume.

"It can take days to receive a returned check notification using the existing paper-based system. During that time, the offender may continue to pass bad checks against us, causing our losses to mount," Nelson said. "The sooner we know about a problem customer, the sooner we can take corrective action."