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Putting a stop to bad checks.

There's no question that bad checks are a major problem for the supermarket industry, but getting rid of the problem isn't easy. "I think we all know that bad checks are on the rise," says Tom Burnside, national manager, supermarket industries, Telecheck. "The way to address it is, number one, stop the bad guys at the front end, and number two, increase collections on the back end. Doing those two things directly affects write-offs, and that's what it's all about--maintaining high customer service, reducing fraud and becoming more efficient in check collection."

Burnside says supermarkets may understand the scope of their bad check problem, but they often don't have a full understanding of the cost of bad checks to their total system. "In a typical environment, I can walk into a supermarket and I'd probably find that the cost of their [check] collection department, including the letter series, the cost of benefits and salary, the telephone expenses and the brick and mortar, would exceed what they believe they're collecting in fees," he says. "The misconception that many supermarkets have is that those costs are covered by the consumer fee. In every example I've seen so far, their fees are always--always--less than their costs."

Burnside explains that supermarket check losses represent "an average write-off of about half a percent of their check business. We have a lot of people sitting out there with write-offs of 0.7% or 0.8% before you figure in the consumer fees. But typically that does not include the cost of operating the collection department."

Regardless of cost, collecting on bad checks isn't necessarily the supermarket industry's long suit. "When you're looking at a typical collection situation, you're running about 45% to 48% [of check face value] without fees being added in, and between 58% and 60% if you add the fees back on top," says Burnside. "Say they are at 60% [of the face value plus the consumer fees]--after you add in the cost of the average collection department, the net recovery is more in the vicinity of 40% to 42%."

Burnside points out that some chains assign collections to the store manager, "who already has too much to do, so in that case recoveries can drop to as low as 20% because most of those checks just end up sitting in a vault somewhere in the manager's office."

There are two basic ways to maintain check files: a positive file, which lists those customers who routinely cash good checks; and a negative file, which isolates known bad check risks. Many supermarkets operate a positive file, generally in conjunction with a check-cashing card or frequent-shopper program. But times are changing, and so is the supermarket's approach to the check problem.

"The problem is getting worse," Burnside says. "Almost everybody will tell you that once they began using a negative file, inbounds [bad checks] go down. For the first time you have supermarkets going outside to create negative files."

Building or accessing an outside database allows retailers to begin protecting themselves from professional bad check artists. Of course, nothing in the checking world is as easy as it seems. "The technology is really staying ahead of everybody," Burnside says. "Number one, it's getting easier and easier to produce a fraudulent check, like a phony payroll check, thanks to laser printers and full-color copiers."

Another problem, he says, is that IDs are fairly easy to duplicate. "The other thing is it's still pretty easy for an individual to open up multiple checking accounts," says Burnside. "If I have 10 bank accounts, I can literally be 10 different people. Now, in most places you can still open a checking account with $100. So if I start with $1,000, I can write $2,000 or $3,000 in checks, draw down the account to $10 or so and literally double or triple my money before most people will have time to catch me."

Burnside points out that catching bad check artists isn't easy. "The person who really puts it to you--the person you can't collect--is generally the person who writes a bunch of bad checks in 10 days and is never seen again," he says.

A lot of supermarkets, including Food Lion, Kroger, Safeway and Lucky Stores, and building positive databases. "But remember," says Burnside, "the person you don't know is the person who's going to hit you the hardest."

The problem of check losses is clouded by other issues, "such as trying to figure out how I as an operator can scrutinize my check policy without affecting my customer service profile," he says.

There's an additional element for supermarket operators to consider. "That is how to get more information, risk management if you will, that let's me assemble a negative database outside my normal globe," says Burnside. "In other words, how can I put a system in place that makes me feel comfortable in opening a checking relationship with a new customer?"

Burnside says new technology can help solve this problem. Telecheck, for example, will download a negative file and can process for real-time authorization or cross-reference a check against a number of criteria. These functions are conducted by an in-store processor and can build both positive and negative databases.

What are the main concerns for grocers? "There are two issues," he says. "One is the speed of the transaction and the other is the cost."

Burnside points out that the in-store processor operates via a data circuit vs. an analog circuit, which cuts down the transaction time from between 10 to 12 seconds to two to three seconds. "Time is money in a supermarket," he says.

The in-store processor maintains positive and negative files, tracks activity count and facilitates a courtesy cash program (verifying payroll and benefit-check authorizations). "You can use any of these products in combination," says Burnside. "That is really the core of our authorization system, but authorizations are a very small piece of what we do, measured in terms of revenues."

It's clear that a number of alternative financial instruments may one day make checking a thing of the past. Asked what the acceptance of credit and debit cards had done to the checking business, Burnside says, "The lowest incidence of check usage [measured against total transactions] I've seen is about 40%," he says. "But I've also seen places like Atlanta where checks account for 71% of the payment mix. Today there are still too many different networks and too many people that want a piece of those transactions. The estimate right now is that around the year 2005 there will be a marked decline in check usage."

Burnside believes that some form of smart cards will emerge. "But for the present there are still too many people living on the float for checking to disappear," he says. "You know that contrary to popular belief, most people are still not that affluent. Most people are still living paycheck to paycheck and that float means a lot to them."
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Title Annotation:A Progressive Grocer Sector Report
Author:Mathews, Ryan
Publication:Progressive Grocer
Date:Apr 1, 1996
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