Five banks are testing Visa U.S.A.'s electronic check clearing service, which enables financial institutions to confirm a consumer's fund availability to retailers in real-time. Called POS Check Service, the application is expected to reduce costs associated with processing paper checks accepted at the point-of-sale.
The five banks-Provident Bank, U.S. Bank, First of Omaha Merchant Processing, First Citizens Bank and BB&T-hope to benefit from lower processing costs and to share the savings with retailers.
During checkout, a customer's paper check is placed into a terminal, read, and handed back to the customer. The terminal converts the transaction into an electronic file that's transmitted to Visa's electronic check file network.
If a check is drawn on a bank that participates in the Visa POS program, funds are verified immediately, and are deducted from the customer's checking account within 24 hours. If a check is not drawn on a Visa POS participating bank, the transaction is routed to a third-party processor for verification or guarantee.
One third-party processor, Electronic Clearing House (ECHO), has built a gateway linking retailers to its national negative database-a repository storing millions of fraudulent accounts. If a customer's name is not found in the database, the check is approved, handed back to the consumer, and converted to an ACH transaction. Participating banks can access a password-protected Web site to view all activity. ECHO also transmits electronic reports to participating banks and merchants.
ECHO declined to reveal the cost for banks to participate, but said banks and retailers can expect a return on investment within 12 months.
Cincinnati-based Provident Bank has chosen ECHO as its third-party processor for the Visa POS service. "Over time check conversion will become more of a real-time transaction at a lower cost to merchants," said Jerry Meyer, senior vice president at $15.1 billion Provident.
"The processing fee for check conversion is already lower than processing a paper transaction, and the program eliminates the need for retailers to manually add up paper checks for their nightly proof," he continued. "As Visa's program expands, electronic check clearing will have even lower processing fees."
Although Visa charges less than 20 cents per check, that's still higher than an ACH transaction.
"This is the result of a limited amount of banks participating in the program," Meyer explained. "Over time, we expect the Visa transaction fees to be lower than an ACH transaction."
Provident added its Visa interface in July, and the ECHO integration was completed in August. Although Provident is encouraging merchants to sign up for the benefits of electronic check clearing, they have been slow to respond. One unnamed retailer was connecting to the Visa interface in August, and was expected to be processing electronic check clearing by October, according to Jack Wilson, vice president of Agoura Hills, Calif.-based ECHO.
Still, Provident expects between 100 and 150 retailers to be connected within a year.
"We expect to convert item volume as high as up to seven figures a month" Meyer said. Within two years, he predicted, 50% of consumer accounts will be processed through the program.
The Visa POS service differs from traditional check conversion programs, which rely on ACH, a secure payment transfer system that connects all U.S. financial institutions and acts as the central clearing facility for all electronic fund transfer (EFT) transactions nationwide. Similar to an airline holding pattern, payments are batched in the ACH network while awaiting clearance for their final banking destination. Under the Visa system, payments aren't batched but instead are paid in near real-time.
Participating banks have modified their checking account systems to accept transactions over the Visa network. Retailers also have to do some retrofitting, including installing new terminals at each lane that read and process a check's MICR (magnetic ink character recognition) data. The terminals, which cost between $200 and $300 per lane, could be eliminated if retailers use electronic point-of-sale systems that automatically process checking information.