Changing checks: Drafts go electronic
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
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."
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
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
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.