July 29, 2004, 12:00 AM

Checking It Out

Why education—for merchants, processors and consumers—is keyto the spread of e-checks.

It’s been a long, slow climb for e-check proponents. Despite at least three years of drumming up a market for online payments via e-check, online consumers remain wedded to their credit cards. Even though e-check payments for online retail purchases last year grew threefold from the year before, they still totaled only $401 million, reports NACHA, the Electronic Payments Association.

That’s a literal drop in the ocean of online retailing, amounting to slightly more than 0.5% of online sales of about $70 billion last year. In the first quarter of this year, e-checks accounted for $103 million of online consumer purchases, double the $51.6 million in the same period last year, NACHA says.

While merchants that accept e-checks are enthusiastic about the payment option, the failure of the market to grow any larger may simply be a matter of education, consultants say. “A lot of customers are not familiar with this option,” says Gwenn Bezard, senior analyst with consultants and researchers Celent Communications.

An educational matter

In fact, education is needed across the board, participants say, with merchants and processor staff needing it as much as consumers. “E-checks are the type of payment option that requires a lot of education,” says Larry De Palma, director of product management for Dallas-based payments processor Paymentech LP, which markets the ECheckSelect product to online retailers. Two years ago, Paymentech started a full-day ECheck University that teaches sales and account reps, project managers, tech support and even programmers about e-checks. “E-checks are very different from credit cards,” De Palma says. “A lot of people haven’t had the chance to touch e-checks, yet e-check regulations are very different from credit cards, which have become routine.”

Then, beyond internal education, Paymentech also undertakes merchant education, in the form of newsletters and information at its web site. “Education is paramount,” De Palma says.

In spite of the slow build and still small numbers, retailers who accept e-checks say they have reaped benefits. “It has brought us more business,” asserts Kip Garrett, president of ActNowDomains.com, a re-seller of Internet domain names from GoDaddy.com and seller of web software and support services. Her company accepts both credit cards and checks. Nine months into e-check acceptance, 3-5% of sales are via e-checks, Garrett reports. “It has allowed us to get customers that we would not have gotten if we were accepting just credit cards,” she says.

Distinct users

E-check acceptance serves a number of distinct users, participants say: individuals who don’t have a credit card or whose credit limits are maxed out; those who are afraid to put their credit card information online; small businesses that don’t have a corporate card; and individuals or businesses who vary the payment methods they use as a way to manage their cash flow. “I have a corporate banking background, and it’s interesting to see that what we did in corporate banking vis-à-vis cash flow, consumers are doing today,” De Palma says.

Whatever the reason consumers use e-checks, most e-commerce merchants say e-checks represent growth. In fact, Michael Zimmerman, chief financial officer of GoDaddy.com, which also sells web software and support services in addition to domain names, says the entire 3% of volume represented by e-checks is incremental business. “E-checks have increased our business,” Zimmerman says.

E-check pricing is usually structured so that either the merchant or the processor takes the risk. EDiets.com, which has 230,000 subscribers who pay $2.99 to $4.99 for a weekly diet plan and can buy diet-related merchandise at eDiets.com, takes the risk. It bills on a quarterly basis and expects to pay $1 to $2 less for an e-check than for a credit card, says Dan Leichtenschlag, chief technology officer.

With a subscription, the biggest risk is allowing the customer access to the diet plans before payment is verified. It’s easy enough for eDiets to cut off that access if the e-check bounces. With merchandise purchases, the company is likely not to ship the product until payment clears. “The biggest difference between e-checks and credit cards is that you don’t get instant feedback with e-checks,” Leichtenschlag says. “All you get is a message that the bank numbers are valid or not valid. But that doesn’t mean the check will clear.”

Some real money

EDiets.com will begin accepting e-checks this summer. “If we can convert a few hundred thousand of those transactions to e-checks, we’ll save some real money,” Leichtenschlag says.

The upfront costs may be less, observers says, but there are other costs when the merchant takes the risk. For one, the retailer must develop a way of feeding returned check information into the order management system so such orders don’t get fulfilled. In addition, the retailer incurs a cost in contacting the customer to obtain an alternative form of payment.

The cost of e-checks goes up when the processor takes the risk, leaving the merchant with a clean transaction. GoDaddy pays 50 to 100 basis points (0.5 to 1 percentage point) more for e-checks than credit cards to get a guaranteed transaction, but the cost is worth it, Zimmerman says. “There’s not as much work at the back end with chargebacks or fraud review,” he says.

Some observers note, however, that while some retailers can manage costs by the payment options they offer and promote, that expense is a cost of doing business. “It’s good for merchants if the cost of payment acceptance is reduced, but the main goal is to drive sales,” says Celent’s Bezard. “Merchants have to accommodate whatever payment methods people want to use.”

E-check acceptance is easy to implement, retailers say. Generally, retailers need only install the code that allows the check option to appear on the payment page. However, federal banking regulations make processing e-checks different from processing credit cards. The main issue, participants say, is that the retailer or its processor must authenticate the identity of the user. Authentication services are available from vendors and are usually packaged with the e-check offering. Paymentech, for instance, partners with Certegy Check Services Inc. and eFunds Corp. for systems to authenticate the user’s identity. Certegy also offers an e-check option directly to merchants.

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