Let’s face it. When you ask senior bank managers what aspect of the business is the most darn fun, checks and item processing don’t get mentioned in the first breath. In fact, the check processing group is usually sent across the highway to the low-rent district, told to keep costs and losses down, left there to toil, and basically ignored until there’s a problem. Oh sure, you’ll say hello to them at the annual employee meeting, and they get to play on the bank softball team (they’re the best athletes, after all), but they’re otherwise treated like the child who looks a little too much like the mailman – you love them, but you really don’t want to think too much about the whole topic.
Well, guess what? Things are happening in your world of checks, and there’s no shortage of people out there interested in doing something with them. What’s more, the technology to let them do it is now available. The whole issue of checks, and the bigger issue of settlement, is going to start moving to center stage in 2003 planning.
First, some background. At this point, U.S. consumers transact business in these volumes annually:
Checks, while not increasing in volume (finally!), still represent the largest single payment method. And several initiatives signify big changes in how they are written, presented, and viewed.
The Check Truncation Act will allow for significant float improvement via faster presentment and credit. Both merchant and retail customers will be looking at banks to pass on the benefits, in terms of either better float or reduced hold periods. There is no mandate to participate in truncation, however. Banks will need to determine how they, or their outsourcers, will approach the opportunities this act presents.
Viewpointe (for large banks) and the Fed (for smaller banks) are creating large image storage centers banks can use to store and exchange images of checks. Viewpointe already claims to be imaging about 50% of all checks written nationally, largely via participation of B of A and other top 50 banks. With the hope that standards will allow these two entities to share data (they claim they are “working together”) and with it being unclear what kind of access and storage charges might be faced in the long term, it can be said that imaged checks will be a mainstream service within two years.
But the initiative that may bear the most watching is the Visa POS Check Service initiative. According to a recent Nilson Report/BAI study, roughly 19 billion checks are written at the point of sale, and the Visa effort is aimed at converting them into debit card transactions.
The process is this:
In this system, the merchant can retain transaction risk or effectively sell the receivable to a guarantor for a fee and have no risk.
So how many of those 19 billion checks could Visa theoretically convert? Well, it can incent the merchant to install MICR-ready equipment via some fee concession or other method. There are already more than 250 million debit cards in circulation, so the customers are ready. Banks and acquirers wouldn’t need to make any significant investments. Now, the customer who writes a check on Friday night because he or she knows the deposit to cover it will go in on Saturday (I’ve never actually done this myself, but the other Cornerstone employees told me about it) will never want the merchant to convert the item – and I’m assuming the customer would have that choice. But aside from such things as this, it looks like there could be a huge conversion, and income, opportunity for Visa.
On the surface of it, this looks like a win/win/win proposition. Merchants have less cost on checks, especially in losses. Banks get debit card fees and don’t have to process checks. Customers still get detailed descriptions on their statements. Visa and the acquirer both get transaction fees for themselves. So everybody’s happy, right?
Well, there’s a song in the old musical Porgy and Bess, “It Ain’t Necessarily So.” Let’s say Visa could get a 10% – 20% conversion rate. The drawee bank may be better off in debit income, but what is the effect on NSF fees? Does this system reduce them? What about the merchant’s bank? What happens to account fees and compensating balances? How does this affect float? Will banks really get more net income in the long run? And, more fundamentally, what does this and other efforts like it mean to the bank’s relationship with its business customers?
Now, Bobby McFerrin has a song called, “Don’t Worry, Be Happy.” And these concerns might prove to be unwarranted, but the truth is that Visa, MasterCard, and several other groups are working hard toward the goal of controlling a bigger and bigger share of payment systems. Is this OK with everybody out there? Banks – which have already seen deposits, consumer lending, mortgages, and several other businesses get commoditized and attacked by non-industry competitors in the last decade – need to decide what, if anything, they are going to do about it. Bank trade groups should be pointed squarely at this issue with the goal of representing the banks’ interests.
Banks entering their planning sessions for 2003 need to recognize that imaged checks and statements are an initiative that should be put at or near the top of the list. Some recommended action items:
And hey – pay a visit sometime to the Item Processing folks across the tracks, and give them some kind words before softball season starts in June and you need some big bats in the middle of the lineup, huh?