Posted by Brandes Elitch on Fri, Mar 13, 2020 @ 07:49 AM
When it comes to the question, “Guarantee or Verification?” there is no single right answer. Each merchant has different needs. Both services help businesses increase sales and mitigate risk, but there are fundamental differences.
Verification is basically professional advice that works best for some merchants, but they will need to conduct their own collections if a check fails. Others will opt for check guarantee — the assurance that even if the check bounces, the sale will hold, the merchant will get paid, and the consumer will be given another chance to make good. The merchant is free to choose either one, but normally the choice depends on the amount of the check.
- Check Guarantee in a Nutshell
- A Place for Check Verification
- Behind the Curtain of Check Verification and Check Guarantee
- The Secret Sauce
- The CrossCheck Solution
Check Guarantee in a Nutshell
If it is a high-dollar check, the risk of non-payment would normally call for the merchant to have it guaranteed. This warranty is a classic “laying off risk” position, but it is not the same as buying insurance. If you fail to have a $10,000 check guaranteed, you would have to suffer the loss.
Since, for the most part, a guarantee company is going to charge somewhere around one percent as a discount rate, the tradeoff is paying the fee of $100 to have it guaranteed or not paying $100 and possibly taking a $10,000 loss. This seems like a pretty obvious choice to most people!
A Place for Check Verification
When you have a small-dollar check there is another way to approach it. Let’s say it is a $50 check. The merchant is entitled to not only the $50, but the returned item fee as well, which is typically around $35. The return item fee would be important in collecting a small dollar check, but not so important with a high-dollar check.
As long as an account is open, there is a pretty good chance that at some point, particularly around standard payroll dates, there will be $50 in the account. (This is called strategic re-presentment). The check, having bounced once, can be converted to an ACH debit, which gives two more chances to represent it, plus you can do a separate presentment to collect the bounced check fee.
In reality, though, the cost of running a collection department is so high that it just would not make sense to try to collect on small-dollar checks. This is because in what is called “contingency collections,” the amount the agency gets paid is typically a percentage of what they can actually collect. Sometimes, the contingency fee can be 50 percent of the amount collected. Collecting on a $4,000 check makes sense; collecting on a $50 check would not make the numbers work for an agency.
You can carry this logic over to the question of verification v. collection too. If the guarantee company collects one percent of the face amount of the check, they make fifty cents here, but it is going to cost them at least $10 to initiate a letter series to the debtor.
This is why guarantee companies will offer check verification services to such merchants. Since the merchant wants some degree of protection here for small dollar items, they will opt for check verification.
It turns out that the front-end work for verification and guarantee is pretty similar; the difference is whether a claim will be paid or not.
Behind the Curtain of Check Verification and Check Guarantee
Let’s look at how that front end works. Now for starters, we should recognize that nobody can “sneak a peek” inside the consumers’ checking account to see if the money is going to be there.
Most people are surprised to learn that if you deposit their check today, it will clear the next business day! They still remember the days when it might take two days to clear a check. Today, if the check is drawn on the same bank you are using as your depository bank, it might even clear the same day. There is no more float left in the checking system. A check does not take any longer to clear than an electronic ACH item, almost all of which clear the next banking day, “same-day ACH” notwithstanding.
A check debit will typically hit the next business day, but in the meantime, between when the consumer gives the merchant the check this afternoon, and the time that the image file is received by the bank tonight, someone could walk into the bank branch and present a check across the counter, just before close of business for that banking day. This might wipe out the balance in the account. There is no way to put a hold on the funds either. So the best that a verification company can do is to make an educated guess as to whether the funds will be there when the debit hits. How do they do that?
The Secret Sauce
This is the secret sauce that makes the business work, and explains why there are 4,000 debt collection agencies in the U.S. and a number of verification solutions, but only a handful of guarantee providers.
Each provider will use their own experience and algorithms to predict whether the check is a bad risk or not. Some merchants will have just the right mix of what it takes to make the numbers work for the guarantee company: a high enough volume to cover the operating expenses of the guarantee company and generate a small profit, enough bad checks to justify the guarantee, and enough salvage so that the guarantee company does not end up underwater.
The CrossCheck Solution
There is another point that you should consider: workflow in the office. A merchant who is taking a lot of checks (e.g. an auto dealership) can end up with checks everywhere: in folders, scotch-taped to the desk or the walls, in calendars, etc. Meanwhile, the office manager needs to keep track of where everything is.
Using CrossCheck’s Electronic Check Processing solutions, every single check in the dealership is run through our imagers (loaned for free) and we keep track of when to make the deposits. We provide data back to the dealership the next day for them to do a full reconciliation. They do not have to go to the bank or use an armored courier. The treasurer can even project cash flow for future deposits. Checks do not get lost, stolen, or deposited on the wrong date.
Please think through these points when you are deciding if verification or collection is right for your store. Merchants opting for guarantee using one of our Electronic Check Processing solutions may download our free guide to learn more.