- "On average, 13 people handle a
single check before it's finally laid to rest. The 50-year-old system comes
at an enormous cost to the banking industry and the government - 75 cents
to $3 to process a check."
-
-
-
- SAN FRANCISCO (Wired) -- Four times each business day, in a secret location
somewhere near San Francisco, a strange ritual takes place. A dozen vans
maneuver into position in a large, well-guarded parking garage. They slowly
back toward each other until their tailgates form a tight circle.
-
- At the appointed hour, the tailgates
fling open. The drivers of the vans begin removing sealed crates from the
back of the vehicles and start tossing them to each other. Each of the
vans belongs to a different bank in the Bay Area. The parking garage belongs
to the California Bankers Clearing House. And the crates being tossed are,
pound-for-pound, among the most valuable packages in the world: They are
full of checks.
-
- Not all of the nation's business is conducted
over the Internet these days. Most of the 65 billion checks written last
year - worth more than $1 trillion - wound their way around the US economy
with a lot of analog elbow grease. Chartered planes, armored cars, trucks,
trains, and lots of labor went into an enormous effort to get checks from
bank to bank.
-
- On average, 13 people handle a single
check before it's finally laid to rest. The 50-year-old system comes at
an enormous cost to the banking industry and the government - 75 cents
to $3 to process a check.
-
- For years now, merchants and bankers
have been trying to replace the paper check with electronic banking, but
they've failed. Everyone still clings to paper checkbooks.
-
- The number of checks written in the United
States has doubled in the past 20 years and is expected to rise by 3 to
5 percent each year until at least 2034. About 34 percent of all consumer
payments are still made by paper check.
-
- That may change in 1999. Several initiatives,
backed by banks and transaction-processing companies, are scheduled to
get underway to test systems that might reduce the flow of paper. If they
succeed, the banking industry and the economy could save billions.
-
- The alchemy of converting paper into
electronic pulses-what bankers call "truncation" - can occur
in three places: with the consumers who write the checks, with the merchants
who accept them, and with the financial institutions that have to pay up
in cash.
-
- So far, the most radical changes have
occurred in the last category. In fact, the wave of acquisitions rippling
through the banking industry in recent years was partly started because
of the need to cut checking costs. It was cheaper for Bank of America to
buy Security Pacific than to keep swapping checks back and forth.
-
- Several companies, including Microsoft,
are getting into the check truncation game at the consumer and merchant
level.
-
- ChequeMARK, a subsidiary of Florida-based
LML Payment Systems (LMLAF), owns the patent for an electronic authorization
system that stops the paper check at the cash register.
-
- Here's how it works: A customer at a
grocery store writes a check. A scanner reads the bank code at the bottom
of the check and calls ChequeMARK for instant authorization. Upon approval,
the transaction is electronically debited to the customer's account within
a few days, just as if the purchase had been done with a debit bankcard
or a Visa.
-
- ChequeMARK has its eye on the nation's
2.2 million retailers, all of which hate paper checks.
-
- "With ChequeMARK, the paper never
enters the system," said LML Payment Systems Chief Executive Patrick
Gaines. "We are able to guarantee payment for merchants and at a lower
cost even than credit-card transactions."
-
- ChequeMARK started rolling out its system
this year with 300 merchants. By March, it hopes to have 1,500 retailers
hooked up, with a goal of 20,000 merchants nationwide by March 2000. ChequeMARK
also hopes to license its technology to Web merchants and credit-card companies.
-
- The best part about the system, the company
says, is that consumers don't have to buy anything, don't have to download
anything, and don't have to learn anything.
-
- "The disappointing results we've
had so far with e-cash and smart cards has shown us that people want to
pay with payment mechanisms they are already familiar with," Gaines
said.
-
- The potential market is huge. About a
quarter of all checks written are point-of-sale transactions at brick-and-mortar
shops. Last year, point-of-sale check transactions totaled $630 billion.
Gaines figures his company can cut the overall cost for processing a point-of-sale
check from about $3 to about 30 cents.
-
- "The potential savings with electronic
checking are just tremendous," said Richard Cowan, president of the
National Electronic Clearing House Association, which entered into a marketing-rights
agreement with ChequeMARK last month.
-
- "Besides saving the 13 steps that
a paper check has to go through, there's a tremendous ecological benefit
as well, from the fuel used to fly the planes and drive the armored cars,
to the paper used for the checks themselves."
-
- Meanwhile, the potential market for check
truncation at the consumer level, consisting mainly of monthly bills, is
just as huge. TransPoint, a joint venture between Microsoft (MSFT) and
First Data Corp. (FDC), is one of the fledgling industry's biggest players.
-
- Early next year, the Englewood, Colorado,
company plans to introduce the nation's first end-to-end system for Internet
bill delivery and payment. Customers will be able to access and pay their
bills through the Web sites of their own banks. Participating banks include
Wells Fargo and First Union, the sixth-largest bank holding company in
the country.
-
- The TransPoint systems aims to completely
eliminate snailmail from the monthly billing process, said TransPoint vice
president Jessica Ostrow.
-
- "We saw that there are 15 billion
bills paid yearly by consumers. Most of these are recurring, monthly bills,"
she said. "That's a lot of paper moving around."
-
- TransPoint works by giving billers, a
utility for example, the means to create detailed electronic bills. It
then connects the billers with financial institutions that present the
bills to their customers through their Web sites. Payments are made electronically
from a customer's bank account directly to the billers.
-
- As with the credit-card industry, the
key for the electronic-checking industry is universal acceptance. The more
billers and bankers TransPoint can sign up, the more attractive electronic
checking becomes for consumers. Bill presentment can cost a company anywhere
from 50 cents to $2 a bill, so TransPoint is trying to make it a no-brainer
to switch by charging only 32 cents.
-
- TransPoint isn't the only company interested
in the e-bill market. Online brokers and Internet companies such as Yahoo
and America Online are expanding their own payment systems. Some billers,
such as New York utility Consolidated Edison, offer their own Web-based
e-bills, cutting out the middleman completely.
-
- Despite all this bustling, a Web-based
electronic-checking industry has been slow to emerge, a tortoise by Internet
standards. Why?
-
- Issues of privacy and security have played
a role in keeping consumers from embracing electronic checks. But even
with consumer confidence in Internet security on the rise, nothing has
stemmed the flood of paper issuing from America's checkbooks.
-
- "I think at the beginning, everybody
thought this would be an easy fix," said TransPoint's Jessica Ostrow.
"But what we've realized is that it is a complex problem, and it's
going to take a whole new industry to solve it. We're not even in the first
inning of the ballgame."
-
- The key, according to Ostrow, is the
banks. They have the most to gain, after all, since they are typically
the ones who must sort and store all those checks, or pay someone else
to do it. Consumer trust is the key to Internet commerce, and consumers
already trust their banks.
-
- "The relationship is already there,"
she said. "The banks play an absolutely critical role."
-
- Despite obvious incentives, however,
the banks haven't responded well to the challenge of electronic checking.
More than half of the nation's 35 largest banks don't offer electronic
bill payment of any sort. Others like Wells Fargo charge $3 to $6 a month
to bank online-shooting themselves in the foot by not encouraging their
customers to give up paper.
-
- Gerard Milano, executive director of
the California Bankers Clearing House Association, said smaller banks and
other financial institutions will have to lead the way into an electronic
future. After all, with mergers giving large banks a competitive edge in
the costs of check-clearing, smaller institutions will have to find some
way to even the playing field. Technology could provide the great equalizer.
-
- But even if it all comes to pass in 1999,
dont expect the paper check to disappear anytime soon, Milano said.
-
- "Every type of payment system ever
invented is still around in some form," he said. "People still
use cash. They still barter. And they'll still write checks.
-
- "People's habits and the way they
deal with bills are kind of intimate, individual things. Changing their
behavior patterns takes generations. You can only change them one bill
at a time."
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