Link-up with Visa puts bounce back in check processor's step.

ELECTRONIC Clearing House Inc. has seen some early returns from its strategic bet on electronic checks.

The Agoura Hills-based company's mainstay is still processing credit and debit card transactions for banks and retailers. But it has built up its check-processing operation over the past few years as more credit card-issuing banks commit to electronic processing of checks.

"The sizzle is tied directly to our Visa (point of sale) product. People started looking at who's critical to this program and found that we are," said Chief Executive Jody Barry.

The stock, which traded as low as $1.09 a share on Oct. 10, 2002 hit a 52-week high of $8.72 on Aug. 29.

Using the new electronic check system, customers still write out a paper check to the store, but then the check is put through a scanner that digitizes the bank information and verifies availability of funds. The check is handed back to the customer after the purchase.

Merchants and banks benefit from the system because it shortens the waiting period for verification and saves them the costs of sending the check to banks for approval. If a check bounces, the customer can be notified within days rather than a week or more.

Electronic Clearing House is one of two companies handling the check authorization for Visa's program, called Visa POS Check.

The service allows retailers to immediately authorize paper checks from a handful of participating commercial banks, including Bank of America Corp. and U.S. Bancorp.

The program began in January and has picked up steam, allowing Electronic Clearing House and its competitor, Dallas-based Paymentech LP, to ride the coattails of the giant credit card company.

"Visa has the resources, expertise and the capital to take electronic checks and make it even more secure and robust," said Larry De Palma, director of product management at Paymentech.

In June, clothing retailer Gap Inc. began to roll out the Visa PUS Check system in its stores. More retailers and commercial banks that already do business with Visa for credit and debit card transactions are expected to follow.

Electronic Clearing House's early lead in the growing market has helped it get over the hump to profitability.

After losing more than $2 million last year, the company has strung together three straight quarters in the black (not counting an accounting-related charge in the first quarter ended in December 2002).

Net income for the third quarter ended June 30 was $308,000, compared with a loss of $138,000 for the like period a year earlier. Revenues rose 25.7 percent, to $10.6 million.

Most checks are still processed in paper form. An industry group, the National Automated Clearing House Association, expects the number of electronically processed checks to rise to 215 million this year, from 89 million in 2001.

Using cash generated from its mainstay credit card processing business, Electronic Clearing House invested $10 million from 1999 to 2001 to prepare for its entry into the growing electronic check business.

It acquired two providers of check verification services, along with a database of consumers who have bounced checks to bolster its ability to process checks electronically. The company also acquired a collection agency to deal with bounced checks and spent $2.5 million upgrading its computer system so it could be certified by Visa.

Competitors that have made similar investments also expect to receive a windfall from Visa POS Check. While Electronic Clearing House's direct involvement with Visa gives it a leg up, there is plenty of room for others to enter the market.

"(Visa) will grow their network of banks and merchants. At that point more merchants will buy into electronic check conversions and then the volume goes up for all check processors," De Palma said.

Prior to its involvement with Visa, Electronic Clearing House landed its largest customer in 1993 when it landed a contract to automate the paper-based transaction and reservation system of U-Haul International Inc. The company has processed an average of 1 million transactions per month for U-Haul, providing the cash to invest in the check processing business.

Electronic Clearing House Inc.

Stock Prices

[GRAPHIC OMITTED]

YEARS (Sept. 30)                 2002     2001

Revenue (millions)              $33.3      $30
Total Expenses (millions)          37     29.4
Operating Income (millions)     (3.7)      0.6
Net Income (millions)           (2.4)      0.4
Earnings Per share            ($0.41)    $0.08

Quarterly Net Income (millions)

[GRAPHIC OMITTED]

SUMMARY

Business: Electronic payment processing
Headquarters: Agoura Hills
CEO: Jody Barry
Market Cap: $44.9 million
Dividend Yield: N/A *
Total Liabilities: $6.5 million
P/E Ratio: N/A *
Long-Term Debt: $2.1 million

* Company does not pay a dividend.

** Company is not profitable.