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Payments Technology FAQ |
FAQs About Checks & Card PaymentsBy Patti Murphy Use your browsers back button to navigate the Checks and Card Payments menu below.
What are the origins of checks?The first known check was written in the late 1650s in Europe. In the United States, checks became a common instrument for exchanging value in the 1850s, when the first inter-bank check clearing houses were formed. The Federal Reserve Act, signed into law in 1913, gave rise to the modern check and a national check collection infrastructure where checks could be exchanged at par (100% of face value). How popular are checks?Checks represent 60% of non-cash payments in America. In raw numbers, there were nearly 43 billion checks written in 2001 representing $39.3 trillion in payments. Consumers write the most checks (51%) by sheer numbers, but businesses write (62%) and receive (56%) the most checks by value, according to the Federal Reserve. Just over one-third of all checks (33.9%) are written by consumers to businesses. Between 20% and 30% of all checks are written at the point of sale. Which financial institutions offer checking accounts?Federally insured banks are the only institutions that actually offer "checking accounts." Other financial services firms (such as credit unions and mutual funds) offer deposit accounts that support financial instruments that look and act like checks. Also, some credit card issuers offer "courtesy checks" which cardholders can use to draw funds against pre-determined lines of credit. These alternatives look and function just like checks, although some may take longer to clear and settle. What are those numbers at the bottom of checks?Those
numbers, printed using a special machine-readable ink, are the MICR line. What are the laws and regulations governing check payments?The primary laws governing checks are contained in: the Federal Reserve Act of 1913, which created a national check collection infrastructure and related rules; the Uniform Commercial Code, which establishes a uniform set of state laws governing commercial transactions; and the Expedited Funds Availability Act of 1987, which, among other things, set limits on the length of time banks can withhold access to funds represented by check deposits. Legislation currently pending in Congress – the Check 21 Act – if enacted, would add another law that effectively sets a legal framework for truncated checks. What is check truncation?Truncation stops the flow of the paper through the check collection system, replacing paper processes with technologies that support electronic exchanges of check information. A check can be truncated at the bank where it is initially deposited or elsewhere throughout the collection cycle. What is electronic check conversion and how does it differ from check truncation?Electronic check conversion is a variation on truncation in which payment data captured from a check (at the point of sale or a remittance processing center, for example) is converted to an automated clearinghouse (ACH) transaction. The original (paper) check is either destroyed (in the case of remittances) or returned to the check writer (in POS check conversion). The payment becomes an electronic transaction governed by ACH rules and Federal Reserve Regulation E, and the paper check is no longer negotiable. (A signed receipt, obtained along with the returned check, serves as the customer’s authorization to convert the check in the POS scenario.) How does check imaging work?Check imaging supports paperless check exchange. Checks can be converted to digitized images at various points along the collection stream, eliminating the need for paper hand-offs in support of clearing and settlement. Imaging was introduced in banking nearly 20 years ago and has slowly gained momentum as a work process improvement tool. Recent initiatives – such as the creation of inter-bank image exchange and archival services – suggest a wholesale conversion to check imaging is now underway. What is the relative cost of checks versus other forms of payment?The average cost of collecting a check – to banks, payees and processors, combined – ranges from $2.78 to $3.09, according to the Federal Reserve. This compares to a cost of between $1.15 and $1.47 to collect a check converted to an electronic ACH transaction. Global Concepts, Inc., a payments consulting firm, estimates that it costs a merchant (on average) $0.22 to accept a cash payment, versus $0.45 for a check, $1.07 for a credit card payment, and $0.29-$0.80 for a debit card payment. How serious a problem is check fraud?Throughout
the U.S. economy, check fraud is believed to be a $10 billion a year problem. What is check verification?Check verification is a merchant’s number one defense against rubber checks. It has been estimated that nearly half a million merchants today use verification services to support check acceptance. Check verification services allow merchants to access negative or positive databases to determine if a consumer has a history of bad check writing or has outstanding bad checks (in the case of negative databases) and/or is writing a check against an active checking account in good standing (in the case of positive databases). Some check verification companies provide value-added services, scoring the relative risk of a merchant’s acceptance of individual check payments in accordance with pre-established parameters in support of an authorization decision. Many large retail chains perform check scoring and authorization in house. What is check guarantee?Check guarantee takes check fraud defenses a step further than verification. Check guarantee is especially useful for high-ticket transactions or when a transaction triggers some other high-risk warning. Merchants pay an upfront fee (typically, less than 1% of the face amount of the check) and the service provider agrees to reimburse the retailer for any check it authorizes for guarantee that is returned by the paying bank for insufficient funds or other reasons. What is transaction authorization and how does it differ from processing and settlement?Authorization, in the context retail payments, involves a communication between the card-issuing bank and the merchant’s bank verifying that the cardholder has available credit or available funds in their DDA to cover the transaction. The card-issuing bank then sets aside the funds, and an authorization code is assigned to the transaction. Settlement refers to the final accounting during which debit and credits are posted to the appropriate accounts at the card issuing and card acquiring banks. Processing is a catchall phrase that refers to the management of transaction flows. Some processing companies handle everything involved with a card transaction, while others merely move transaction data between different parties (e.g.: card acquirers, card issuers and the clearing and settlement systems). What roles do Visa, MasterCard, Discover and American Express play in the credit card market?Visa and MasterCard are independent companies owned by banks that issue transaction cards bearing Visa and MasterCard logos that can be used to access lines of credit or demand deposit accounts (checking and checking-like accounts). Discover and AmEx are non-bank, travel and entertainment card companies. Discover and AmEx issue cards to customers directly; these cards can be used only to access credit lines, only, not DDA accounts. Each company (Visa, MasterCard, Discover, AmEx) is responsible for managing its brand, as well as product development; setting and enforcing rules of access to the clearing and settlement system; establishing systems, standards and procedures for cards and acquirers; registration of services providers; and interchange pricing. What are interchange fees?In
the credit card model, interchange is set by Visa and MasterCard, and
represents the fee paid by the merchant bank to the card issuing bank.
Interchange fees vary by retail sector (grocers typically have the lowest
interchange rates, while Internet transactions are the highest), type
of card (e.g.: consumer versus commercial versus check card), size of
transaction (large commercial versus small consumer purchases), and authorization
procedures. Think of interchange as the wholesale cost; discount then
is what it cost retail; or more accurately is the cost to retailers. AmEx
and Discover do not charge interchange; instead merchants pay these companies
discount fees. What is a charge back?A charge back is a reversal of a sale transaction, typically initiated by the card issuer at the cardholder’s request. Charge backs can occur for any number of reasons, including: customer disputes, potential or actual fraud (on the part of merchants, sales associates and/or customers), processing errors and authorization issues. Charge backs are governed by a complex set of rules and time limits that can be costly to acquirers and their merchant customers if disregarded. |
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