We get calls from merchants who want to know the difference between check verification and check guarantee. The typical scenario is that the merchant takes a bad check, tries to collect on it themselves, and discovers how difficult it is to do that. Other times, a check is missing from a bank deposit, or the merchant is just tired of taking an hour off to go to the bank every day. They have heard about check service companies and now they want to know how they can benefit from using one.

Article Summary

• Check Verification Versus Check Guarantee
• Basic Check Guarantee
• Electronic Check Processing
• Some Merchants Prefer Checks
• How Check Guarantee Helps Protect Merchants
• How Check Guarantee Helps Consumers
• Additional Protection for Merchants

There are two time-tested ways to deal with this. They are check verification and check guarantee.

Check Verification Versus Check Guarantee

Verification is advice, not a guarantee. The provider gives the merchant a thumbs-up or thumbs-down. It is a recommendation, but of course, the merchant still makes the final decision on whether to take the check or not.

The verification provider is giving advice, but if they advise yes and the check goes bad, everything falls back on the merchant who will suffer a loss unless they can collect it.

On the contrary, when a check is guaranteed, the guarantee provider will pay a claim and keep the merchant whole in accordance with the authorization requirements of their agreement.

Why would a merchant choose one or the other? To answer that, we have to pull back the curtain and see how these work.

Basic Check Guarantee

Let’s start with guarantee. The provider needs some information up front before making a decision. This typically includes the following, found on the check:

• Preprinted check-writer name, physical address, and telephone number.
• Customer driver license number and state of issuance (telephone number if business check).
• The merchant’s store number (as designated by the provider).

The merchant can provide this information in a number of ways. Some merchants choose to phone the vendor and get an authorization number which they will write on the check. Other merchants opt to use the keypad on their credit card terminal.

Either way, the merchant will have to take the check to the bank themselves for deposit. If the check bounces, their bank will mail it back to them. Then they will mail it to the provider as a claim and wait for reimbursement which could take a few weeks. (CrossCheck calls this Standard Guarantee.)

Electronic Check Processing

Since the advent of Check 21, most merchants use a check imager to process checks. They pull up the provider’s authorization screen on their PC, fill in some basic information, and once they get an approval, run the check(s) through a desktop check scanner (CrossCheck provides free loaner equipment).

Then, they void the paper check(s) and give them back to the check writer with a receipt. The provider does the banking for the merchant and the money appears in their account a few days later.

If the item bounces, the provider finds out about it quickly (the next business day if the vendor is CrossCheck). It settles in the guarantee provider’s account who will try to recover it. The provider keeps the merchant whole, so the merchant never sees a return item. It’s magic!

This example is called Remote Deposit Capture. You can see that it is just about as easy as taking a credit card payment. If you are the merchant, you never want to tell a customer that you won’t accept their payment — it creates a bad customer experience, and you can be sure that the consumer will not be coming back anytime soon. (Remote Deposit Capture is also the name of CrossCheck's most efficient form of Electronic Check Processing.)

Some Merchants Prefer Checks

There are some cases where the merchant will proactively ask for a check. This goes beyond the standard sign you see that says, “Ten percent discount if you pay in cash or by check.” This happens when the merchant is taking a high-dollar payment and does not want to pay a 3% fee to take a credit card. This fee is called “Interchange” and goes back to the bank that issued the card to the consumer.

If you are a car dealer, auto aftermarket merchant, or have a furniture store, building supply company, veterinary practice, or funeral home, you will not want to pay hundreds of dollars just to accept a credit card payment and make the issuing bank rich!

As an aside, consider this: a bank in the normal business of banking (taking deposits and making loans) will earn a Return on Assets (RoA) of somewhere around one percent or slightly more. A recent study by Value Penguin shows that the ten largest credit card issuing banks hold fully 89% of total revolving credit in the U.S., and earn an RoA of over four percent! This shows you how profitable it is to issue credit cards, and of course the merchant is paying the "freight" for this.

How Check Guarantee Helps Protect Merchants

If you are a new car dealer taking a $4,000 check for a down payment, for example, you do not want to take a chance that the check will bounce and you will have to unwind the deal. You also do not want to run an in-house collection department. More importantly, you do not want to have an unhappy customer who will broadcast their experience on social media. You want to provide a good consumer experience, but you have to watch your expenses and make a decent return too.

How Check Guarantee Helps Consumers

Going back to the previous point about consumers living paycheck to paycheck, you want to help your customer if they are a little strapped for cash right now.

CrossCheck offers a Multiple Check program, which gives the consumer a little breathing room, typically 30 days to pay the bill using up to four check (at the dates chosen by the consumer without paying interest). Now this creates a positive customer experience!

You cannot really do this with a credit card because there is no assurance that there will be an “open-to-buy” tomorrow or the day after tomorrow — same with an ACH debit.

Additional Protection for Merchants

This is a good time to point out that checks are governed by the Uniform Commercial Code and state banking law. These laws typically protect the merchant when they get a bad check. Not so for ACH or credit card transactions.

ACH is governed by the NACHA Rules and Regs and Reg. E, a consumer protection statute that favors the consumer. Credit card rules typically favor the consumer in a dispute, particularly for card-not-present payments.

The bottom line: If you are a merchant, you get the most protection when you take a check. If you are taking high-dollar checks at your business, check out what CrossCheck can do for you.

Download our free guide to learn more about Check Guarantee and Electronic Check Processing.