Check Imaging and the Check Conversion Process

Transcription

1 Check Imaging White Paper Check Imaging and the Check Conversion Process Sophisticated check imaging promises to accelerate the conversion of paper checks into electronic documents.

2 Contents 3 The remarkable resilience of paper checks 5 Why checks have proven so difficult to write off 6 The flip side of checkwriting 6 Check authorization addresses problems 8 Electronic check conversion with imaging supports check authorization services 8 How check conversion works 9 NACHA oversees electronic payments 10 Benefits of check conversion with imaging 11 Taking a closer look at check imaging requirements 12 An innovative, next-generation check and document imager 12 Elegant imaging approach 13 Flexible connectivity options 13 Point-and-click device configuration 13 Additional capabilities 14 The image of success Check Imaging White Paper Rev B

3 Introduction The remarkable resilience of paper checks Long after its predicted demise, the paper check remains at the heart of the U.S. payment system. As early as the 1970s, the Federal Reserve Bank predicted that paper checks would be soon be replaced by electronic funds transfers. Industry pundits and publications joined with the Fed in talking about a check-less society that was expected to emerge in the United States. But, to borrow a line from Mark Twain, the reports of the paper check s demise turned out to be greatly exaggerated. Today, more than 68 billion checks are written each year in the U.S. This accounts for roughly 75 percent of all non-cash transactions, an impressive figure that persists despite the enormous popularity of plastic forms of payment. Further, although the growth of checkwriting has slowed in recent years, the number of paper checks written annually is actually growing by an estimated 1 to 2 percent annually. While businesses and the government account for a little less than half of the checks written annually in the U.S., consumers write 37 billion checks each year. More important, approximately 13 billion of these checks are written by consumers at the point of sale (POS) to pay for purchases at retail locations ranging from food and drug stores to department stores and specialty merchants. While all parties retailers, financial institutions and consumers have a number of reasons to remain enthusiastic supporters of paper checks, merchants and banks are well aware of the inefficiencies, high costs and risks inherent with paper checks. These include: Check fraud and uncollected funds, a growing problem that costs retailers more than $5.9 billion annually Extensive handling by retailers and banks, with the average check touched from 6 to 12 times, resulting in inefficient operations and increased risk High processing costs for financial institutions as checks move step-by-step through the payment system. Electronic check conversion which transforms paper checks into electronic files at the POS was designed to allow consumers to continue to enjoy the benefits of writing checks, while offering numerous advantages for merchants and banks. Today, the advent of sophisticated check imaging solutions is injecting new life into electronic check conversion making the process significantly more efficient and cost-effective for merchants and banks. Check Imaging White Paper Rev B

4 This paper will examine check conversion and the impact that check imaging is having on the conversion process. Additionally, the paper will detail the broad range of benefits that check conversion with imaging is delivering to retailers and financial institutions alike. Check Imaging White Paper Rev B

5 Consumer Payment Environment Why checks have proven so difficult to write off Paper checks have been around for centuries. According to industry expert Paul H. Green, the earliest known check on record was written in 1659 as payment to a London goldsmith. In the United States, checks were regularly used as a commercial form of payment by the late 18th century. Then, in the early 1900s, household checking accounts began to rapidly increase in popularity. Eventually, this surge in consumer checking accounts contributed to the demise of paper currency denominations above $500. In survey after survey, U.S. consumers have professed their continuing allegiance to paper checks. In a February 1999 research study conducted by Green for his publication the Green Sheet Quarterly, checks were preferred as a payment method over credit cards and debit cards by 37 percent to 13 percent and 11 percent, respectively. Almost nine in ten consumers have a checking account, whereas only 76 percent have a credit card and 42 percent less than half of all adult consumers 18 and older have a debit card. Approximately 72 percent of those surveyed expected their checkwriting to increase or stay the same over the next 12 months, while only about 17 percent felt their use of checks would actually decrease. There are several reasons for the continuing popularity of checks. Consumers see checks as a convenient, secure and widely accepted form of payment. The process of using checks to pay for purchases is dependable, logically structured and easy for all parties to understand, with transaction fees that most consumers consider reasonable and affordable. Returned checks and well-maintained check registers also provide handy recordkeeping and money management aids for many consumers. Further, consumers have always enjoyed the float that checks provide at no additional charge. Most individuals know that they can write a check for a purchase on a given day, and cover that amount with funds deposited to their account up to several days later. While this float has decreased over the past several years, it remains an obstacle in the path of any payment mechanism such as debit cards and electronic check conversion that might eventually eliminate it. Check Imaging White Paper Rev B

6 The flip side of checkwriting While checks remain highly popular due to their perceived convenience and safety, there are major issues that concern merchants and financial institutions. First, paper checks are extremely labor-intensive and open to risk. A large retailer might accept 10 million or more checks a month. Clerks and back-office employees often handle each check five to six times before it ever reaches a bank. Then, the various financial institutions and processors that are involved in processing, settling and clearing each payment can double the number of touches. The result is 100 to 120 million instances of employees handling paper checks for a typical retail chain wasting hours of employee time, slowing down back-room processing and raising critical security questions. An even bigger issue, especially for merchants, is bad checks. More than $169 million worth of checks bounce daily in the United States, rejected by banks due to insufficient funds, closed accounts or stop payment orders. The number of bad checks has surpassed 250 million annually, with a value of nearly $19 billion. Almost one-fourth of all bounced checks are never turned over for collection because the dollar value of the check is too low to justify the collection expense. Of the $5.9 billion that the National Retail Federation estimates that retailers lose to bad checks annually, 70 percent are for insufficient funds (NSF) and 30 percent are from fraud. To address the problem of bad checks, more than 470,000 merchants currently utilize some form of check authorization, with that number expected to climb to more than 1,000,000 over the next few years Check authorization addresses problems Check authorization addresses the problems that are inherent in checkwriting and handling. For example, check verification services allow merchants to access negative or positive files in order to determine if a consumer has a history of writing bad checks, before accepting a check for a purchase. Many merchants that have a high check volume and may operate at lower profit margins rely on check verification in their business. These merchants pay from 2 to 20 cents per check, or sometimes a flat monthly fee, for the service. Some merchants receive check verification services free of extra charge in exchange for handing over any returned checks to the service provider immediately after they bounce. Because more than half of all checks that are returned NSF clear when they are re-deposited, verification firms that receive checks right away have a much better chance of collecting the average $15 to $20 fee assessed for NSF checks. Check Imaging White Paper Rev B

7 Another type of check authorization service is check guarantee. This service is generally viewed as a premium option and as a result, is primarily used by merchants that sell big-ticket, high profit-margin products. Merchants using a check guarantee service are reimbursed for bounced checks much faster up to 15 to 20 days sooner than if checks were sent to an agency for collection. When a guaranteed check is returned for insufficient funds or fraud, guarantee firms pay the merchant the full amount of the check, then become responsible for collecting that amount plus service fees from the check writer. Some retailers rely on check verification for most items, but opt for check guarantee services when presented with a check that has an unusually high dollar amount, a low sequence number, is from an out-of-town party, or has some other known indicator of higher risk. Merchants pay guarantee firms a minimum of.04 percent of a check s value. Especially high-risk retailers may pay as much as 5 percent or more for check guarantee services, and even then receive only partial reimbursement if a check is returned. Check Imaging White Paper Rev B

8 Electronic Check Conversion Electronic check conversion with imaging supports check authorization services Electronic check conversion at the POS is designed to stop paper checks as soon as possible after they enter the payment system, converting them into electronic transactions. For consumers, electronically converted checks still require at least a full day to clear; offering consumers a continued degree of desired float. For retailers and banks, electronic check conversion with imaging at the POS delivers the greatest savings on handling and processing checks trimming costs by an average of approximately ten cents per check compared to traditional methods. How check conversion works Until recently, retailers and their automated clearinghouse (ACH) providers handled electronic check conversion using check readers that relied on standard Magnetic Information Character Recognition (MICR) technology. A consumer would hand the sales clerk a completed check for a purchase and the clerk would run the check through the check reader. The information captured was then sent in batch or real time to an ACH provider to be converted into an electronic payment. The sales clerk gives the check back to the customer immediately after passing it through the check reader. The customer is also required to sign a receipt acknowledging that payment is being made electronically, and it is this signed receipt that becomes the legally binding document. Because of this, customers need not complete or even sign their checks before handing them to the sales clerk. Each consumer leaves the checkout counter with his or her signed EFT receipt and a voided blank check. When the customer walks out the door, his or her personal information goes as well. This has created the necessity of implementing check imaging as an integral part of the check conversion process. Benefits of check conversion with imaging There are a wide variety of benefits for merchants using electronic check conversion with imaging as part of the check authorization process. First, check conversion dramatically reduces in-store labor costs and improves access to funds, resulting in better cash flow. Small to medium-sized Check Imaging White Paper Rev B

9 retailers get their funds sooner and, because checks have been converted to ACH transactions, eliminate time-consuming trips to the bank to deposit paper checks throughout the day as well as bulk deposits fees of up to $25 each, on top of standard per-check deposit fees. Larger retailers also receive funds sooner and have the ability to consolidate the number of depository relationships that they currently maintain to improve efficiency. In addition, retailers appreciate the way that check conversion with imaging helps to control fraud and can reduce service fees of $3 to $28 for NSF checks. Further, because collection efforts can be handled electronically, success rates are improved. For both retailers and financial institutions, there are also significant savings in processing costs compared to manual forms of payment. The total cost of processing each paper check to depository institutions, payees and processors ranges from $2.78 to $3.09 per check, according to a U.S. Federal Reserve Study. This compares to an average cost of from $1.15 to $1.47 per check for electronic transactions processed through the ACH. This represents billions of dollars in potential savings when multiplied by the number of paper checks presented today at the POS. A 1998 study by the Food Marketing Institute focused on the cost savings for merchants in handling checks. Taking into account tender time, deposit prep time, bank charges, and other direct costs, the study found that the average cost of an unverified check is $.583, whereas the same check handled using electronic check conversion would cost $.375. Again, that savings adds up rapidly for a large retailer that handles 10 million or more checks each month. Check Imaging White Paper Rev B

10 Taking a closer look at check imaging requirements To facilitate electronic check conversion with imaging, it is important to understand the key requirements for effective imaging: Tender time Check imaging must be fast, requiring only a handful of seconds, so there is virtually no impact on customers at checkout. Typical file size Image files can be quite large. To provide for the fastest file transmission and uploading times as well as to minimize storage costs, merchants will want to choose a check imaging solution that employs industry-standard compression techniques. This results in smaller files that are easier to store, transmit and warehouse. File management Like storage, file management must be logical and easyto-understand, allowing for quick access to check images when needed. Flexible connectivity options A check imaging solution should provide ample connectivity options so that a device can be easily integrated with any POS system. Simplified configuration and management It is important to make it as simple as possible to configure a solution to a retailer s precise requirements, without needing to write customized applications. Compact design Finally, a merchant should look for an imaging device that is relatively compact with a small footprint, to minimize the impact on precious counter space at the POS. Check Imaging White Paper Rev B

11 VeriFone CR 1000i An innovative, next-generation check and document imager The VeriFone CR 1000i offers intelligent check imaging, flexible connectivity and point-and-click configuration capabilities in a compact, stylish and surprisingly affordable POS device. Elegant imaging approach The CR 1000i features an elegant approach to check imaging that efficiently and cost-effectively captures needed information, while keeping file sizes small and workable. To accomplish this, VeriFone relies on contact image sensor (CSI) technology that has been optimized to essentially work with reflections of carbon-based ink off the surface of the check much like a facsimile machine as opposed to devices that employ a camera/optical approach. The CR1000i can be programmed to read the MICR line once or twice, for improved accuracy in a single step. At the same time as a check is being scanned, the CR 1000i applies dynamic, hardware-based thresholding to remove extraneous elements from the check image. Sophisticated algorithms target key quadrants of the check and eliminate graphic designs or photo-realistic backgrounds from scenic checks. VeriFone s solution allows this to be executed in parallel with the scanning process. The result is that the CR 1000i can create and compress an image, so it is ready for transmission and the electronic cash register (ECR)-generated authorization slip is ready to be printed, in an average of 4 seconds. Other devices may take up to 9 seconds or longer. Instead of creating separate files for various elements to be transmitted, the CR 1000i compresses the check image, receipt template and signature into a single image and data file, for faster transmission and uploading. In addition, the device allows users to append up to ten tag fields to the Adobe based image of the check. These tag fields are small files containing ASCII data that a clerk may wish to transmit with a transaction, such as the date and time of the purchase, store lane number, clerk ID, driver s license number, scanned list of purchases, and more. In the end, the VeriFone solution produces a single, compressed TIF file that may be half the size of a file created by another check imaging device, Check Imaging White Paper Rev B

12 cutting transmission time and substantially reducing storage and warehousing costs. The device itself is capable of storing up to 400 checks in memory before transmission to a bank or clearing organization. Flexible connectivity options The CR 1000i is available in several models with single or dual back-channel options to easily connect with leading ECRs or multi-lane payment terminals for a complete check conversion solution. The device s optional dual interface is designed to connect to an ECR and to your store s Ethernet network simultaneously, for efficient back-end processing. This allows retailers to use the CR 1000i as a drop-in replacement for an existing MICR-only check reader in a legacy POS environment with less cost and complexity than other electronic check conversion alternatives. The CR 1000i also available in a model that contains an internal 56Kbps modem for integration with existing payment terminals. Transferring images to the host archive is fast, and the device can be set to automatically transmit images at a prescribed time each day. The stand-alone model does not come equipped with USB or Ethernet connectivity. Point-and-click device configuration VeriFone has simplified the configuration process for the CR 1000i by creating configurable parameters using a Windows based graphical user interface. Configurable files can be downloaded during deployment or can be accessed dynamically via a host at the user s site; no programming is required. In addition, the CR 1000i provides remote device management, diagnostics and support over TCP/IP Ethernet connections. This includes the choice of using an SNMP Agent or TELNET for LAN/WAN command-level transfers and for the quick configuration of the CR 1000i as a drop-in replacement for existing MICR readers. The device also incorporates Flash memory and batterybacked RAM to easily handle remote downloads of firmware updates. Additional capabilities Once the CR 1000i has captured an image of a check, an optical character reader (OCR) device can be used to convert the customer s name, address or other information into ASCII text that can ultimately be used for collection or secondary marketing programs utilizing sophisticated data-mining techniques. Compatible OCR devices are available from a number of third-party vendors. Check Imaging White Paper Rev B

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14 Summary The image of success. In today s highly competitive retail environment, success has never been more challenging. Increasing consumer demands and formidable new competitors have led to razor-thin profit margins. Survival depends on finding new efficiencies in every area of operations. Electronic check conversion reduces the handling and processing costs for merchants and banks, minimizes risk and improves collections. VeriFone s CR 1000i helps deliver these key benefits through its intelligent, flexible and economical design VeriFone, Inc. All rights reserved. VeriFone, the VeriFone logo and CR 1000i are either trademarks or registered trademarks of VeriFone in the United States and/or other countries. All features and specifications are subject to change without notice. 09/02 Rev B VeriFone Check Imaging White Paper Rev B