Stemming from Check 21 legislation, banks have benefitted from the ability to scan checks and send the resulting digital images for collection. However, point-of-sale merchants have been held back in this regard by Regulation E (the Electronic Fund Transfer Act), which had prevented the efficient conversion of checks to debits through the ACH network. But this is all about to change.
Under the current point-of-purchase (POP) rules, the checkout clerk swipes your check, hands it back to you and makes you sign an authorization slip. "It's confusing for customers, difficult for retailers and then, when you have a return, you have a problem," says Danne Buchanan, CEO of NetDeposit, a subsidiary of Zions Bancorporation (Salt Lake City; $31 billion in assets).
Sign of the Times
The Fed recently amended Regulation E such that if a merchant posts a notice in a "prominent and conspicuous location," a consumer's check can be converted into an ACH debit. Starting in January 2007, the following sign should become a common sight (at least until the notification provision sunsets in 2010): "When you provide a check as payment, you authorize us either to use information from your check to make a one-time electronic fund transfer from your account or to process the payment as a check transaction." In addition, a copy of the same notice must be provided to the consumer either on the receipt in the case of a point-of-sale transaction, or on the billing statement when dealing with accounts-receivable conversions (ARCs).
By simplifying the process at the register, retailers will be able to make the business case for back-office processing. "These retailers haven't been in the game yet, because an IRD [image replacement document] for a local item is not cost effective," observes Buchanan. "Now, the retailer can do it at the end of the day -- take [items] to the back office, convert whatever they want to ACH and convert the rest to IRDs (for example, for large-dollar items or traveler's checks)," he adds.
The Real Opportunity
An even greater opportunity than the ability to handle checks efficiently is the real opportunity for merchants to beat a path to consumers' checking accounts, such as with custom loyalty cards and merchant-sponsored payment options. "If people can actually figure out how to debit checking accounts using the ACH network, they could bypass a lot of the debit and credit networks," says Buchanan.
But banks need to move fast in order to take advantage of this competitive edge. "Banks that get out in front of this and attack it will be very clear winners. Those that sit back and take their time? They'll redefine their franchise as being less than it was before," predicts Buchanan. "The payments landscape is pretty exciting right now."