Putting the choke on bad checks.
DESPITE THE HERALDING OF THE CASHLESS SOCIETY, many consumers still prefer to pay with cash or personal checks. Bad check costs, however, are escalating at an annual rate of 25 percent or more at some companies and can account for as much as 1 percent of a business's sales.
Some firms are able to control these costs. If, for example, a firm's bad check losses are less than .05 of 1 percent of the sales revenues paid with a check (a $500 loss for every $1 million in checks accepted), there is probably no need to read further. Chances are bad check losses won't be reduced and the results won't be worth the effort.
But, if a firm's bad check losses are higher, here are a few recommendations that can curtail losses:
* Verify all checks electronically before accepting or guaranteeing them if verification can be cost justified.
* Don't drive away good customers with policies, actions, and attitudes that are intended for the bad check writers.
* Formalize and enforce check and ID acceptance policies at all locations.
* Provide prompt feedback to individual cashiers on uncollectible checks they accepted.
* Follow up with managers who approved checks that should not have been accepted.
* File all uncollected checks for criminal prosecution.
* Don't automatically redeposit returned checks without testing to determine how many checks clear on redeposit.
* Assign responsibility to one person at each store for ensuring that administrative functions for bad checks are performed by those responsible.
* Adopt the procedural safeguards necessary to prevent employee theft of customer payments for bad checks.
* Electronically verify merchandise returned for cash refund.
* Compare in-house costs for verifying and collecting checks with the cost of using a reputable outside service.
* Use customer data compiled from check verification for a positive data base and for merchandising purposes as well.
If a firm can afford the cost of guaranteeing checks - and this is the cheapest alternative for reducing bad check costs - it should do so. Most firms, however, cannot afford a 1 percent guarantee fee, particularly if bad check losses are only .3 of 1 percent. This would result in a guarantee fee of $10,000 to avoid a $3,000 loss for every $1 million in checks accepted.
On the other hand, if a business can eliminate 50 percent of its bad check losses by guaranteeing only 10 percent of the total dollar volume of checks - perhaps guaranteeing only those checks over $100 - guaranteeing checks may be the way to go. The dollar value of most firms' uncollectible checks varies, however, and if companies guarantee only 10 percent of the check volume, they will usually avoid only 10 percent of the losses.
By requiring clients to verify each check guaranteed against their data base, check guarantee companies usually will have a lower loss experience on the checks guaranteed than a company would have. A guarantee company, however, cannot charge less for its service than it absorbs in check losses for a firm. Their fees will be adjusted if a company "cherry picks" the checks it wants guaranteed.
A check can be verified in several ways - through an on-line point of sale (POS) system, a dial-up POS terminal, an in-store PC, or a printed list of check offenders. Each can be a satisfactory alternative, depending on a firm's cost and verification efficiency requirements. Most verification companies offer all four alternatives.
Checking against a negative file of known check offenders often is not enough. As much as half of most firms' bad check losses result from multiple checks written by the same person within a short time at one or more of the firm's stores (before the first bad check comes back from the bank). To avoid such losses, a verification system must have the ability to keep track of the number and dollar amount of checks cashed by customers during a given period.
CONTRARY TO POPULAR BELIEF, A firm's bad check costs will not be reduced solely by installing check verification equipment. Reducing bad check costs requires a team effort, and a verification system is just another management tool for making informed decisions. A verification system is not a substitute for managerial judgment or for the company's check acceptance policies that were followed before the verification system was installed.
If a firm's check losses are only .3 of 1 percent of check sales, and payment by check accounts for half the total sales, only one out of every 600 customers will write an uncollectible check (and three fourths of these people will pay for their check if a good verification system is used). This leaves only one out of every 2,400 customers who may be ripping off the firm by deliberately writing an uncollectible check.
The point is, companies must be careful not to adopt or encourage policies, actions, or - worse - employee attitudes that offend 2,400 good customers in an attempt to discourage one bad customer. As obvious as it may seem, store signs designed to threaten bad check offenders sometimes cost much more in customer goodwill than is gained from reduced check losses. Store signs can be customer friendly but still effective. In the final analysis, a good verification system is the best deterrent because only those customers with bad checks or who are attempting to write a bad checks at a firm are exposed to deterrent actions.
Often only a handful of cashiers is responsible for accepting the majority of a firm's uncollectible checks. These cashiers lackadaisically accept invalid addresses, disconnected phone numbers, stolen or forged checks, etc. Some cashiers never ask if the address on the check is current, never compare the driver's license photo with the person standing in front of them, and never compare the driver's license address with the check address.
If cashiers never receive feedback on their oversights, problems will never be corrected. Cashiers cannot be held accountable for bad checks accepted in compliance with established check acceptance policies, but when the same cashiers keep accepting most of the firm's uncollectible checks week after week, prompt, ongoing feedback usually corrects the problem.
How many times has a store manager or office person asked "Why did we accept this check?" when a highly questionable check for a large amount of money is returned by the bank? The manager who approved the check should be asked this same question. If a check is suspect but meets the firm's check acceptance guidelines, the check writer's bank should be called or, better yet, the home phone number listed on the check can be called. Nine times out of 10, the phone number will be invalid if the customer's check is bad.
Bad check writers usually avoid firms that file bad checks for criminal prosecution. Filing unpaid checks also deters employee theft of customer check payments. An employee will be less likely to keep the payment for a check or service charge if he or she knows all unpaid checks are filed.
IT USUALLY TAKES A REDEPOSITED check twice as long to clear the banking system as a first deposit cash item does. If fewer than one third of a firm's checks clear on redeposit, it is usually to the company's advantage not to redeposit returned checks. Not redepositing enables verification and collection efforts to be initiated as much as 10 to 12 days sooner. It also will discourage customers from using a company as a source of interest-free loans.
It makes no difference if stolen merchandise returned for cash was shoplifted or stolen with a bad check. A good check verification system enables a firm to monitor the returned merchandise activity of individual customers. When offenders realize they can no longer get cash for merchandise stolen, bad check expenses will decline.
When looking at an outside service for providing check verification and collection processing functions, compare in-house costs with the costs proposed by the outside service. The bottom line, of course, is a net reduction in all costs. It is important to include all in-house costs incurred - bad check losses, postage for certified mail and other mailed notices, long-distance collection calls, the cost of accepting and processing individual check writer payments at the store, and employee and management costs to perform these functions.
A check verification system should do much more than curtail bad check costs. By downloading the data base of all state-issued driver's licenses into an in-store PC, the verification system can respond with the name of the individual to whom the entered driver's license number was issued by the state - a certainty to stop forgeries.
In addition, the verification system selected should provide a history of the check cashing activity of customers, enabling cashiers to know when the customer has a long-standing history of writing good checks at the firm. And, downloading state driver's license information into the system yields significant merchandising information - the name, address, sex, age, shopping frequency, and purchase history of check writing customers.
A good outside service also will be able to provide the administrative systems needed to curtail a firm's bad check losses. About the Author . . . Switzer Deason is president of Central Processing Agency, a company specializing in check verification and collection processing services for multistore retail firms.
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|Date:||Oct 1, 1989|
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