Obsessed with the concept of "consumer check culture," the payment industry has convinced itself that converting checks to electronic debits for processing would be easier and cheaper than massively converting consumers to electronic payment instruments. Instead of charging customers more for using checks and less for electronic payments, the US payment industry has engaged into converting checks to electronic debits. In place of financial incentives and disincentives, the US payment industry has favored a technological approach. So far, the point-of-sale experience can't confirm it has been a wise decision.
Check conversion refers to the processing of check payment instructions over an electronic network. The electronic network might be the automated clearinghouse (ACH), a regional debit card network (Star Systems, NYCE), or a national credit/debit card association network (VisaNet). A check is said to be "converted" when it is turned into an electronic payment instrument and has to adopt the specific regulations attached to it.
Although conversion is available over credit card and PIN-debit networks (Visa POS, SafeCheck), most of the items converted are processed over the ACH today. Check conversion over the ACH accounts for 99.8 percent of all converted items, across all categories. Only 0.2 percent of converted items are processed over VisaNet or PIN-debit networks. Conversion can occur at the point of sale (POS), on the Internet, by phone, or at the lockbox.
From 2002 to 2005, Celent expects the volume of check converted to the ACH to grow annually by 103 percent on the Internet, 111 percent over the telephone, and 367 percent at the lockbox. During the same period, check conversion at the point-of-sale (POS) should grow annually by a mere 15 percent. Why is conversion at the point-of-sale lagging behind?
The total volume of POS checks has not declined in recent years. The share of checks written at the POS is simply declining due to the rapid growth in the use of debit cards. Ten percent of all US merchants currently convert some or all of their checks, which translates into one percent of all POS checks being converted. A merchant's interest in check conversion depends greatly upon the merchant's size and the nature of its business. Small to mid-size retailers have embraced conversion faster than large, multi-lane retailers. Only two percent of large merchant stores do conversion, versus 11 percent for small to mid-size merchants.
Small and mid-size merchants are relatively keen to adopt check conversion. Traditionally very reliant on check authorization providers, they turn to conversion for convenience. The main benefit for merchants is that conversion cuts down on check handling, daily trips to the branch, and bank fees.
Conversion to real-time debit as offered by Visa POS and SafeCheck is certainly appealing to large merchants because it is more reliable than ACH. There are several drawbacks to it, however. First, some large merchants are reluctant to convert to real-time debit because some good customers write checks because they like or need to play the float. Second, Visa POS and SafeCheck are today unable to process 100 percent of consumer checks over debit networks. This is because the bank on which the check is drawn must be hooked up to Visa POS and SafeCheck. Since only a limited number of banks are hooked up today, the majority of consumers' checks can't be converted to real debit, and therefore must be converted over the ACH or simply sent through the check clearing system. Because the benefit of investing in a system only able to convert a fraction of the check volume is questionable, most large retailers have not joined the party yet.
In the next two to three years, we expect small to mid-size merchants' adoption of conversion to grow steadily. Meanwhile, we do not expect large merchants to adopt check conversion in droves. There are too many barriers, and these are too unlikely to be removed, to trigger more than a steady flow of a few initiatives. If large merchants were allowed to convert corporate checks to ACH, it would certainly help. Even so, the volume of checks returned because they can't be processed electronically would have to be kept at a minimum. Unfortunately, the lack of standardization of check data formats, a key factor of return, is unlikely to happen anytime soon. Beyond the ACH, conversion to card networks as offered by Visa POS and SafeCheck is unlikely to induce widespread adoption as well. The main barrier will remain the inability of Visa POS and SafeCheck to tap into 100 percent of consumers' accounts through the card network, thus obliging merchants to keep a dual process.
Although there are signs that the complex alchemy of turning a check into an electronic payment will become mainstream at the lockbox, it is unlikely to happen in the next two to three years at the point-of-sale. This should encourage the industry to think beyond the "conversion" box, and consider other alternatives, such as financial incentives and disincentives.
Gwenn Bezard is a senior analyst in the banking group at Celent Communications, a financial services research and advisory company headquartered in Boston, www.celent.com