Check writing is on the decline, but with billions of checks still being written by American consumers each year, retailers and others on the receiving end are looking more closely at electronic alternatives to traditional check clearing.

One of those companies is H&R Block. With 8,500 storefronts providing tax preparation and other financial services to consumers nationwide, the Kansas City-based firm began converting customer check payments to ACH transactions in 2003.

Today, 95 percent of checks taken in at H&R Block’s retail locations are converted to ACH payments on the spot; the paper checks are voided and returned to customers along with transaction receipts.

The decision to convert checks to ACH payments had backing from the tax preparers’ treasury management department, which saw it as a way to trim costs and improve cash concentration. It achieved those goals and more.

In the first year of implementation, check losses declined 60 percent and “we instantly saw a reduction in expenses in terms of the cost of processing transactions,” says Ken Hicks, director of field financial operations at H&R Block. Return check losses are now about 10 percent of what they would have been without check conversion (taking into account an overall decline in check volume), he says.

H&R Block is running an ACH transaction called POP (point-of-purchase check conversion), one of the earliest such transaction formats. While other ACH check conversion formats like ARC (accounts receivables transactions) swiftly garnered popularity, POP had languished until just recently.

According to NACHA – the Electronic Payments Association, more than 123 million consumer checks were converted to POP transactions during the third quarter of 2007, a 52.3 percent increase over Q3 2006. Nearly 22 percent of consumers surveyed by Financial Insights in early 2007 said they had a check converted at POS during the previous three months.

Industry observers point to several factors for POP’s new-found popularity, including improved risk-management solutions and Wal-Mart’s decision to implement POP throughout the chain.

Wal-Mart’s initiative is supported by TeleCheck Services, the check services unit of First Data and an early pioneer of POP. The service builds on an existing POS configuration that included MICR reading devices for check authorizations. There’s no check imaging required: “We don’t need imaging terminals at the point of sale to give merchants the benefit of electronics,” says TeleCheck general manager Mark Wallin.

Natural fit for retailers
ECA, TeleCheck’s POP-based check conversion product, is in place at approximately 180,000 merchant locations – more than half of the retail locations served by TeleCheck. Wallin describes POP as “a natural fit” for retailers. “A huge part of the value proposition is cost efficiencies,” he says. “With this, once you hand the check back at the point of sale, you’re out of the check game.”

MagTek and other leading terminal manufacturers offer countertop devices that capture check images as well as MICR line information and integrate with major POS systems.

Although the number of checks accepted at company storefronts is declining every year while credit and signature debit card payments grow, H&R Block isn’t inclined to discourage customer check usage. “The interchange we pay on credit and debit cards is much higher than the cost of processing [electronic] checks,” Hicks says.

A recent report by the Federal Reserve reveals that Americans wrote 33 billion checks in 2006; about three billion of those checks were converted to ACH payments, and a significant number were cleared via electronic check exchanges. Overall check usage has been falling by an average of 6.4 percent annually since 2003, according to the Fed.

Eliminate most paper
Nancy Atkinson, a senior analyst with Boston-based Aite Group, expects ACH check conversion, along with image check-clearing initiatives, to drive most of the paper out of check clearing by 2012, when just one-quarter of an estimated 25 billion checks will clear as paper documents.

Heartland Payment Systems last year introduced a service that combines ACH check conversion with electronic check clearing to provide a “bank neutral” approach to remote check deposits. “We can collect and give merchants their money just as fast as a local bank,” says Tony Capucille, director of check services for Heartland. “It works just like the card model.”

Several other merchant and check services companies have similarly positioned services, including Nova Information Services, Certegy Check Services and CrossCheck. Bob Meara, a senior analyst at Celent, believes others will follow suit. “We expect that growth in electronic checks as a percentage of POS transactions will continue in a meaningful way, as we see more adoption among large and mid-sized retailers,” he says.

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