EC2 = ¬IP?
Where have I seen this formula? Was it from Einstein? Maybe it was in my college statistics course? Hmmm, maybe not. OK, OK, I wrote it. I thought this was an interesting question to pose in mathematical form. Here is my English language version of the formula:
Does electronic check conversion equal the death of item processing?
(pretty clever, eh?)
Unlike the rest of the modern world, the United States continues in its love affair with the paper check. Last year more than 55 billion paper checks were written and processed by the banking industry. Never mind that the banking industry has tried every thing it could think of to slow the onslaught of billions of checks – truncation, imaging, ACH, PayPal, the new Check 21, and myriad other electronic methods of transferring funds from one account to another.
Well, hip hip hooray Gonzo brethren, electronic check conversion, the technology that converts a paper check to an electronic item at the point of sale, may be the technology that finally breaks the back of paper checks. With ECC, paper never enters the collection system. (That roar you hear in the background is the spontaneous exuberance from the multitude of bank back office personnel who nightly dream of a real solution to processing all that paper.)
This is how ECC works:
You buy a $2.15 pound of nails at your neighborhood hardware store and write a check for the purchase – same as it ever was.
But here’s when change steps in. The clerk, after verifying that you are willing to have the check electronically converted for payment, places your check into a combination optical/MICR reader. This device creates an image of the check, reads the MICR line for routing transit and account numbers, and optically reads the amount for verification.
Voila! The merchant is paid and you, less liquid by $2.15, are off to finish the deck and save your marriage.
OK, so I left out some details to add a Jetsonian element to the story. For all you sticklers out there, how the transaction is actually processed depends on a host of factors, including the processing company and what arrangements the consumer’s bank has with the network. These variables affect whether the transaction is passed into the system as a real-time debit or an ACH item. Regardless, payment is effected through the existing automated debit or ACH payment channels, the check is stamped paid by the clerk and returned to the customer.
No paper enters the payment system. I like the sound of that so much I think I’ll say it again. NO PAPER ENTERS THE PAYMENT SYSTEM.
Does this equate to an all-around win? Let’s look at what each of the parties in the transaction gains and loses.
|Customer||Enhanced security/privacy because the merchant does not have that paper printed with name, address and account number||May not get to play the float game if the item is converted to a real time debitThe annoyance factor for card-carrying customers is in no way diminished||No real change in the process, can still feel that nice piece of paper|
|Merchant||Reduced risk because the item will be validated at least against a negative file and possibly a positive file; at best, it will be a real time transaction with verified immediate paymentReduced bank charges because the item is not deposited
||Increased processor fees (perhaps Visa or First Data) due to the charge for the service||The check-out process performed by the clerk is essentially the same|
|Bank||No paper to process so item processing expense will decline||Fee income will decrease|
|Processor||New source of income|
|Hardware & Software Vendors||Revenue generated by replacing existing credit card/debit card readers or by adding scanner/readers to existing equipment and supplying additional software to support the new application and equipment|
As you can see, everyone at least gains something, though in some cases the gain may be offset by a loss. Most importantly, the behavior of the customer (that’s you and me) need not change.
Real excitement and fervent drum beating has been generated by the processors, such as Visa, who will gain millions in new revenue. Success of ECC will not be forced on the consumer top down, the groundswell of support must come from the consumer. Based on comprehensive consumer research by myself (I talked to some of my fellow GonzoBanker writers and readers), consumers don’t know squat about ECC. We’re looking at a potential widespread freakage when store clerks start handing checks back to customers.
True GonzoBankers will realize the benefits to be had from ECC – for their customers and for themselves – and make sure appropriate education is provided in advance of the technical rollout. Their objective will be to get their customers to ask the store clerks if they use ECC.
GonzoBankers, let’s get that ball rolling to get rid of the paper in the back office – once and for all.