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Changing checks: Drafts go electronic

Checks go electronicThe next check you write might be deducted from your account as fast as an ATM withdrawal.

The country's most prominent banks and retailers are ushering in the day when you write a check and it is debited instantly and electronically from your account. In some stores the cashier will hand your check back as a receipt.

Your checks will have as much float as you have in your bathtub. No more blithely writing a bad check the day before payday.

The future of checks as debits recently began at places like Prevatte Auto Parts in Lumberton, N.C., which is participating in a test project with regional banking giant BB&T. If you bank at BB&T, your check to Prevatte Auto Parts is fed through a device that reads your account number at the bottom of the check. The amount is transferred electronically from your account to Prevatte's, just as if you had used a debit card. The cashier hands you back your check, with a cancellation stamp on the back, along with a receipt that you sign and which looks like a credit-card receipt.

In other forms of this new way of checking, the experience looks the same: The clerk hands you your canceled check and a receipt. But what goes on in the background is different, and the money is transferred out of your account a day or two later, using the slower automated clearinghouse system.

Hundreds of retailers are participating in BB&T's pilot project. Prevatte Auto Parts has the distinction of being the first to turn a check into a debit, when a customer wrote a check for $20 at 9:31 a.m. Jan. 24.

Woody Tyner, payment systems strategist for BB&T, calls the check conversion project "the first step in a plan to eliminate the processing of 18 billion checks accepted annually by merchants at point of sale."

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Another test, conducted by electronic funds network Star Systems, is going on with some of the country's biggest retailers. Sometime this spring, when you write a check at Best Buy, CompUSA, Kmart, Office Max, Sears, Talbot's or ToysRUs, the money will be debited from your account, regardless of which bank you use. Right now those stores are testing the Star Chek system to verify accounts, but later they will use it to convert customers' checks into debits.

Fraud and the float
Companies in the payment industry, from retailers to banks and all the businesses in between, welcome the conversion of checks into electronic debits because they expect it to cut costs and fight fraud. Retailers will get their money quicker.

"It's going to accelerate the verification process and lessen losses," says Hank Farrar, chief operating officer of Small Value Payments Co. "Merchants lose billions of dollars to fraud. The fact of the matter is, the consumer pays for those losses in the cost of goods and services."

Other benefits to consumers are less concrete. Stores might more readily accept out-of-town checks, and you might be treated with less suspicion the next time you write a check to buy a huge-screen TV because the retailer will have your money before you wheel the thing out the door and load it into your SUV. Some folks might find record-keeping easier. If you report your checkbook lost or stolen, the missing checks won't be usable.

The main drawback for some people might be the loss of float.

"There's a couple of things going on in the industry that are making float less and less important," Tyner says. He notes that debit cards, which also reduce or eliminate float, are increasingly popular, "and obviously that's not bothering people."

Tyner notes that banks have taken other steps to reduce float. Banks in one city often exchange locally written checks at night to get accounts settled more quickly, and Small Value Payments Co. helps banks transmit check information to one another electronically, so boxloads of checks don't have to be trucked long distances.

Here to stay
Depending on whom you ask, businesses lose between $6 billion and $12 billion a year to bad and fraudulent checks. Retailers could radically reduce those losses if they could dip into customers' bank accounts right at the point of sale.

The large, but largely invisible, payment industry set out to determine whether this could be done. Small Value Payments Co. is owned by a consortium of 22 big banks and speeds the processing of checks electronically. Star Systems routes electronic payments and operates ATMs and point-of-sale terminals -- the card readers that you swipe your debit card through at the checkout stand. International Check Services verifies checking accounts and helps merchants decide whether to accept checks. These companies and more worked with banks, retailers, ATM networks and cash register makers to make it possible to turn a check into an electronic debit.

They figured they had to do it because no one, even Tyner, expects checks to disappear soon. "For the last 20 years they've said paper checks are going away. It's not happening, and it won't happen for a while," says Greg Adelson, executive vice president, Eastern operations, for International Check Services, which has its hand in both the BB&T and Star Systems projects.

Get off the horse
The payment industry has tried for years to streamline the flow of checks and money.

This latest bit of technology -- called check electronification or check conversion -- represents a radical change because it moves checks onto ATM networks. Traditionally, checks have been processed on a parallel network called the automated clearinghouse, or ACH. Transactions over the ATM network take anywhere from a few seconds to a day to clear, while ACH transactions typically take two or three days.

As people in the industry pondered how to switch checks from the slow track to the fast lane, they latched upon the MICR (rhymes with "bicker") line. This is the line of numbers at the bottom of a check that identifies your bank, your account and the check number. They are printed in magnetic ink that allows machines to recognize the characters: MICR stands for magnetic ink character recognition.

Working together, these companies devised a system of software and hardware that reads the MICR line, queries databases to find out whether the checking account is open, whether it has been abused, and whether the account has enough money to cover the check, and then to debit the account and deposit eventually into the retailer's bank.

This last step is the trickiest and was the computer equivalent of jumping off a horse and onto the back of a moving train.

The stuff before the last step -- verifying whether an account is open and whether it has been abused -- is old hat. For retailers that employ these verification services, debiting customers' accounts "is an evolution," says Span of Star Systems. "It's a next step. It's not something totally new and different."

As soon as the BB&T and Star Chek tests prove workable and affordable, everyone in the industry expects retailers to adopt the technology quickly. It might not stop at the cash register. Collection agencies, investment brokers and mortgage lenders have expressed interest, says Farrar of Small Value Payments Co.

-- Posted: Jan. 30, 2001


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See Also
Look before you toss that bank statement (1/24/01)
One day, you might vote at an ATM (12/12/01)
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