Check It Out

The stunning growth in web-based shopping so far this year—up better than 40% over last year, according to BizRate.com Inc.—would indicate that everyone who wants to shop online is doing so. But the market is still leaving out a significant portion—people without credit cards or who fear putting their credit card numbers online, say advocates of paying for Internet purchases by check.

“We got a number of requests from people who wanted other ways to pay,” recounts Mike Lundeby, CEO of Thunderbolt Promotions, which operates e-commerce sites DoughboyShop.com on behalf of The Pillsbury Co. and TwinkieShop.com for Interstate Bakeries Corp., parent of Hostess. As much as 15% of sales at DoughboyShop.com are paid by check today. “We’re confident it’s brought in people who wouldn’t have been able to shop with us otherwise,” Lundeby says.

In spite of optimistic predictions about the cashless society or paperless commerce, there are still consumers who prefer to pay by check. The Federal Reserve Board reports that 50 billion payments a year are made by check. While that’s down an estimated 30% since 1979—indicating that electronic payments have taken over a significant portion of the payments business—it still represents over 200 checks a year for every adult in the U.S.

Untapped market

Further, although consumers who pay by credit card have much more recourse in a dispute with merchants than do those who pay by check, a majority of consumers believe paying by check online is safer than paying by credit card. The Washington, D.C.-based National Consumers League reports that 59% of consumers surveyed believe it is safer to pay by check or money order online than by credit card.

Merchants are starting to respond to that reality, providers of online check services say. “Online retailers are recognizing that customers want to transact with something other than a card,” says Jerry Mosbacher, senior vice president of TeleCheck International Inc., which provides both online and offline check services, including processing of electronic checks.

And while processors all say retailer’s interest is on the rise, some note there are other processes that take precedence, which are holding back further widespread acceptance of e-checks. “Everybody wants to do it but nobody’s in a big hurry,” says Carl Towner, president of First American Payment Processing Inc., which has been offering its CheckGateway product, which provides back-end processing software to payment companies who sign up merchants, since January 2001. “Internet merchants still have so much other stuff on their plates.”

Only a small portion of online merchants today accept checks and their proportion of check sales may not be as large even as that experienced at DoughboyShop.com, which has a more niche clientele than better known retail sites. “It’s not uncommon for us to get orders from customers in their 60s and 70s who live in rural areas and don’t have credit cards,” Lundeby says. “The same is true for our younger customers in their late teens and don’t have credit cards.”

However, customers at mainstream merchants also are paying by e-check. Dell Computer Corp., for instance, accepts 4,400 e-check payments a month at its web site and four times as many over the phone. Dell’s e-checks are processed by Certegy Inc.’s Check Services group.

Among the benefits that merchants report, in addition to attracting new customers, is a higher rate of closed sales on checks since immediate payment removes some of the obstacles to check payment, including consumers changing their minds and not mailing in payment or simply forgetting to do so.

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BizRate.com, which tracks purchases at 2,000 sites for which it has contracts to monitor customer satisfaction, says 0.3% of all online orders are paid by electronic check or by check mailed post-order. By that measure, the number of check payments for online orders in the first quarter was somewhere south of 275,000 of a total 91.47 million online orders—with a third being electronic checks and the balance paper checks. BizRate says 96% of orders are paid by credit or debit cards. The balance are PayPal, gift certificates, invoice, Internet currency and a wide range of other payments.

Low returns

The number of e-checks is the proverbial drop in the ocean of online retail payments and an equally small drop in the ocean of online checks of all kinds. The National Automated Clearinghouse Association reports 74.6 million Internet-based electronic check payments with a value of $16 billion in 2001, when NACHA instituted a code to track such payments.

While NACHA does not have a bead on the number of one-time retail payments by check online vs. online payment of utility bills or credit card bills, it reports some interesting trends in electronic check payments. For instance, web checks had the lowest rate of return of all electronic check categories at 1.58%. The rate of return for non-sufficient funds also was the lowest of several categories; at 0.86% for the nine and a half months of 2001, it was less than half the 2% NSF rate for checks written at a retail point of sale. Fraudulent checks totaled 0.07% of all e-checks, a mere fraction of online credit card fraud reported by some to be 3% or higher.

In addition, NACHA concludes that consumers understand the bank routing and account numbers that appear on their checks and are capable of reporting them accurately to a payee. The rate of returns for administrative problems was about the same as the rate for administrative returns for checks presented at the point of sale where clerks are trained in how to process checks (0.43% for online checks vs. 0.45% for point of sale checks).

The so-far low acceptance rates of e-checks by consumers has not discouraged payments processors from developing new products in their quest to make check payments more sophisticated and thus more acceptable to consumers and merchants. Certegy, for instance, is adding an artificial intelligence component to its Customer Not Present product. That component gathers customer-provided information at the time of purchase, then runs a series of checks to make sure the data are all consistent, running the date of birth against the Social Security Number, for instance. It can run the customer-supplied data against external information as well.

Rising expectations

The starting point for Certegy’s product is the starting point for most online check payments: Consumers who want to pay by check answer a series of basic questions, such as name, address, date of birth and drivers license number. With some services, customers also establish an account that allows future payments to be made quickly. With others, they are asked a few verifying questions based on information in their credit records, such as name of mortgage holder and range in which their monthly payment falls. Verifying the information and authorizing the transactions takes no longer than authorizing a credit card payment, processors say. The check payment is then settled through the ACH system.

The cost of accepting e-checks is slightly below the discount rates that banks charge for credit cards, ranging from 1% to 2.65%, although the rate can run as low as 10 cents for a simple verification without payment guarantee at Paymentplus, a division of Retail Decisions.

Promotion of online e-checks to consumers has been almost non-existent. Most processors and merchants have relied simply on the pay-by-check option at checkout to bring the service to customers’ attention. Some argue that consumers’ growing awareness of e-checks at the retail point of sale, especially in supermarkets, where the clerk inputs the check information into a terminal then returns the check to the customer, will spill over into the online world as well.

“Many consumers already expect to transact with the check electronically at the grocery stores,” Mosbacher says. “As that spreads to small and medium-sized retailers and consumers become more aware of electronic checks, they will come to expect the same when they check out online.”

kurt@verticalwebmedia.com