TECHNOLOGY TRANSFORMS CHECK PROCESSING

Liza Casabona

When it comes to paying for their groceries, consumers still like to whip out their checkbooks. According to a study released by the Food Marketing Institute, Washington, in 2000, checks made up 33% of transactions and 51% of dollar volume in supermarkets. That's good news for retailers because, according to FMI, checks represent the highest average transaction size, $47.78, compared to $39.87 for credit/off-line debit cards, the second-highest. Moreover, checks cost an average of 36 cents per transaction to process, half that of credit/off-line debit.

While gladly accepting consumers' checks, retailers still face several challenges with this form of payment: fraud, insufficient funds and handling costs. Fortunately, technology has evolved to help retailers meet these challenges. For example, electronic check conversion is enabling retailers to process checks electronically at the checkout, returning the paper check to the consumer on the spot. Retailers are also able to run instant reports on check writers to prevent fraud and returned checks.

Perhaps the most exciting new technology being applied to check processing is biometrics, which reads shoppers' fingerprints to prevent fraud and expedite throughput. According to SN's Ninth Annual State of the Industry Supermarket Technology Report (SN, Feb. 10, 2003), 17% of respondents said they were testing or launching a biometric initiative in 2003.

Pioneering the use of biometrics in check processing is Santoni's Supermarket, a single store operator in Baltimore, Md., which next month will become the first retailer to employ the bCheck system from BioPay, Herndon, Va. The system uses a combination of a consumer's fingerprint and a PIN to initiate an electronic check transaction, replacing paper checks altogether.

Rob Santoni, chief financial officer for the store, said that any chance to move away from paper checks is exciting from a cost- and labor-efficiency perspective. He estimates that 20% of his store's business is done through checks. He said the bCheck system simplifies check processing, noting, "There's no approval and no identification, but you're still a preferred check writer at the store." In addition, Santoni's intends to use the bCheck system instead of cards to support a loyalty program.

Customers can enroll in the bCheck system by simply presenting a check at the register. The cashier scans the check through a reader connected to the register terminal, and prompts the customer to imprint a fingerprint on the biometric reader and pick a PIN. The check is voided and returned to the consumer.

After that initial process, customers, using a fingerprint and PIN, can pay for purchases via their checking account without using their checkbook, according to Santoni. The transaction is processed exactly as if a paper check had been accepted, with a batch settlement done once a day that offers the same average float time of a paper check.

The bCheck hardware will be integrated into Santoni's existing systems with a software installation, and bCheck payment terminals will be installed in all lanes. Santoni already uses BioPay's Paycheck Secure, a biometric payroll cashing service, at the courtesy counter.

Cost and return on investment figures aren't available, Santoni said, but since fees for the bCheck service are paid on a per-transaction basis, he said he does not foresee the cost being "a tremendous hurdle."

Santoni anticipates that the bCheck installation will make the ROI attractive as the system decreases the time customers spend at the register, reduces his losses on fraudulent checks and deadbeat accounts, and decreases labor costs.

"If you think about it, how many people pay with credit or debit because they don't want to be hassled with ID to write a check?" he noted. "How many of those people will say, 'Why pay with my debit card if it's going to [capture] those funds right now, when I can pay with my fingerprint and still get my float?"' It is far less expensive for his store to process a check transaction than a debit or credit sale, he added, particularly when the threat of a fraud loss is lessened.

Art Powell, director business development, food and drug for Fujitsu Transaction Solutions, Frisco, Texas, and a former executive with Albertsons, sees biometrics as the wave of the future for all electronic payment transactions. "Where you'll see the largest trend moving forward will be in biometrics for identification in payments."

Powell predicts biometrics will start rolling out on a widespread basis in the next couple of years. He pointed to retailers like Kroger in Houston and Thriftway in Seattle as examples of leading-edge retailers that have been conducting tests of biometric systems in their stores.

Check Imaging

Taking a different, but still sophisticated, approach to check conversion is Golub Corp., Schenectady, N.Y., which operates Price Chopper supermarkets. Rather than use biometrics to identify shoppers, Price Chopper is employing a receipt printer from Epson that takes an image of a check, which can be used in the event of a returned check.

The chain uses the Epson printer/check imager in conjunction with processing services from Certegy, Alpharetta, Ga. Consumers present the cashier with a signed blank check at the point of sale. The cashier indexes the total of the customer's sale, plus any cash back, through the register and puts the check through the printer/imager.

The printer speeds up the transaction by filling out the check for the customer, voiding it and processing it electronically. The cashier hands the check back to the customer with the register receipt and Certegy clears the transaction through the Automated Clearing House, just like any other electronic check transaction. Golub also does an internal evaluation of check writers before finalizing transactions.

Golub began a rollout last June of the printer/imager that will be complete by the end of May, according to Larry Friedman, former vice president of financial services for Golub and now principal, Easy Check, a consultancy in Clifton Park, N.Y.

For Friedman, the Epson device provides insurance for the electronic transactions by storing an image of the filled-out check in an in-store database. "When we finally got our check returns in, 80% of them required an image for recovery," he said. "That is a huge number. If I hadn't had that image I would have had to write those checks off, and my losses would have exceeded the benefits [of electronic check conversion]."

Friedman believes the security offered in image retention outweighs that offered by biometrics, which he said is largely unproven and produces very large data files. He sees imaging as a less invasive, simpler loss-prevention tactic.

Taking a third approach to check processing is John Mowery, director of loss prevention for Strack & Van Til, Highland, Ind., who echoed the fraud and processing concerns of the other two retailers. Without check imaging, he has implemented an electronic check conversion service, from TeleCheck, a subsidiary of First Data, Denver, in three of the operator's Ultra Food stores in the Chicago area. They are high-volume stores, with checks accounting for 20% to 25% of sales, he said.

"[Checks] added significantly to our labor costs, with returned checks, counterfeit checks, closed accounts and computer printers allowing people to make their own checks," he said. "Collecting money in that market was harder for us."

Strack & Van Til began using Telecheck's Electronic Check Acceptance service about a year and a half ago, Mowery said. Telecheck's all-in-one Eclipse payment terminals were installed in each store. In addition to processing mag-stripe credit and debit cards, the Eclipse terminals have the capability to read the MICR number on a check and transmit an electronic transmission to TeleCheck for a risk analysis. Payments are insured by TeleCheck once they have been approved.

After an account is approved or denied, which takes approximately six seconds at the point of sale, payment is processed through the ACH and the customer gets the paper check back. The transaction has a two-day float period.

The service cuts labor costs for handling and deposits, and gets funds faster and more accurately for the stores, Mowery said. "We realized almost instant savings from the service," he added.