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ISOs: The Difference Between Check Verification and Guarantee

Posted by Travis Powers | Tue, Nov 26, 2013 @ 01:44 PM

CheckVerificationCheck verification and guarantee companies get calls almost every day from merchants who say that they want verification, but they’re unclear about the difference between verification and guarantee. Here’s a short definition of each.

Verification: A merchant needs to verify that the check writer has a valid checking account and does not appear on a negative database that shows a history of failed payments. Verification is advice: The check verification company will either recommend you take the check or recommend you don’t take it. If it still bounces, the merchant takes the loss.

Guarantee: A merchant wants a third party to pay a claim if the check writer bounces a check for non-sufficient or uncollected funds. Merchants are willing to pay a premium for this coverage because the risk of loss is unacceptable. An example of this may include a $2,000 down payment check at a car dealership. When an organization guarantees a properly-authorized check, the right to payment is assigned to that organization if it bounces, which then pays a claim for the full face value. 

There are no hard and fast rules for when to use verification or guarantee. Just keep a few things in mind:

  • A guaranteed service wants to do the right thing for the merchant.
  • Some merchants may not know the extent of their current bad debt problems, or alternatively, don’t want to share this information with you.
  • If the amount of a transaction is below $100, it will almost always be a verification account. If the payments are more than $100, it will usually be a guaranteed account.
  • If a consumer needs to use a multiple check product (paying with 4 checks to be deposited over the next 60 days), it will be a guaranteed account.
  • If a merchant is working on a low sales margin, it will be a verification account (for example, grocery stores work on a one percent margin, so they cannot afford to spend more than a few cents on verification).

Now, here’s what you need to ask so that you can help the merchant:

  • What is your current loss experience – how many checks are bouncing every month, and how much money does this represent?
  • How much bad debt do they have as a percentage of sales? Normally, less than one percent of checks will bounce, but some merchants have much higher rates of loss, in some cases, as high at ten percent.
  • How much bad debt are you writing off every month? The merchant may try to collect the bounced items in-house. What are the losses after trying to collect bad debt themselves?
  • What is the cost of the in-house collection effort? Keep in mind that if merchants decide to add in-house staff to perform collection efforts, they’ll need to tack on about 30% extra on top of workers' salaries, to cover their benefits. The cost of doing this in-house may not be worth the effort.

Here's the clincher. A verification/guarantee company such as CrossCheck can do two things that your merchants cannot do:

  • Access a wide variety of databases and algorithms to score consumers at the point of sale and help determine whether they represent some risk.
  • Harness years of experience in the verification industry. Established companies are going to be better at collecting bad debt than merchants because that is the companies' core competency.

Keep these things in mind and you will find it easier to determine whether verification or guarantee is best for your merchant. Feel free to share this free insider's guide on check verification with merchants who have questions, and be sure to download a copy for yourself, too!

 

Check Verification Insider's Guide

Topics: Independent Sales Organization (ISO), Check Guarantee, Check Verification

Written by Travis Powers