When merchants sell something, they expect to get paid in full right away in order to generate more revenue. They don’t expect to have the payment fail for one reason or another, and never get the money. This seems pretty obvious, but every payment system has failure points, except perhaps the Federal Reserve Wire Transfer system (and even this is not immune from fraud).
In this short piece, we will explore the concept of check guarantee, and how check guarantee providers manage their business to meet predictable targets for payment failure, salvage, and write-offs. Not every business is a candidate for check guarantee, but for those that are, such as car dealers and building supply companies, they can’t live without it!
Check Guarantee Is Not Insurance
First, let’s talk about how check guarantee works. Many people think it is some kind of insurance, but it is not insurance. Here at CrossCheck, we never use the “I” word when we explain how our product works. For starters, let’s try to understand what insurance is supposed to provide in the first place.
Obviously, if you have a business, particularly if you are starting a new business, you need to have insurance and you try to generate more revenue. One catastrophe or lawsuit could put you out of business just like that. There are different kinds of insurance, but most business insurance is comprised of these types:
- Professional liability insurance
- Commercial property insurance
- Workers comp insurance
- General and product liability insurance
- Business interruption insurance
- Vehicle insurance
Insurance protects the business from defined risks (remember this term) such as fire, theft, injury, property damage, liability claims, and lawsuits. Today, there is even insurance available for a data breach. You can also get a commercial umbrella insurance policy if you have to pay damages in excess of your primary insurance policies.
Comprehensive insurance is not cheap. Typically, you might spend up to 20% of the gross sales of your business or even more! It seems expensive, but your cash-flow will seem inadequate if you are hit with a loss and do not have the appropriate insurance coverage!
Given the size of the major insurers (e.g. Hartford Insurance has total assets of $225 billion), a great deal of work goes into actuarial underwriting. When it comes to business insurance, the underwriter will likely have a professional designation, called a chartered property casualty underwriter (CPCU). This is a challenging program that takes a few years to complete and, of course, pass the exams.
Predicting whether an individual payment will fail at point of sale is beyond the scope of business insurance. In other words, it is an uninsurable risk because you cannot define it with precision (an “undefinable risk”). This distinction helps explain why check guarantee is not insurance.
Now there are ways to define a credit risk, which is of course what lenders do in a commercial bank for business loans, or consumer loans, or to set credit card limits. This requires an intensive underwriting of the borrower, which would involve pulling credit, reviewing financial statements, verifying employment, etc. Since the financial meltdown of 2008, banks have gotten a lot stricter about this sort of thing. With certain loans, the lender may even require a bond, just to make absolutely sure that they will get paid. A bad loan is not an insurable risk, and banks do not buy insurance to cover bad loans.
How Does Check Guarantee Work?
In the business of check guarantee, there is no time to conduct a credit check of the consumer. When the check is written, data about the check writer is entered into our portal, and the check is scanned. We access third-party databases to verify that the account is real and not closed. We do not underwrite the check writer, nor do they pay any fees themselves. This whole process happens in just a few seconds, which is all we need to run our algorithms and come up with a “Yes” or “No.”
If CrossCheck does not insure the risk, what do we do?
Here is where we are different from an insurer. When an insurer needs to pay a claim, say for a building that burned down, they hire professional contractors to rebuild. They do not do the work themselves. Here is the important difference.
When one of our clients takes a bad check, CrossCheck is solely responsible for collecting the bad debt. We contact the check writer and attempt to collect the debt. The only reason we can do this is because of our secret sauce — we are a licensed, registered, and bonded collection agency in all 50 states. Collecting a bad check is something that a merchant can almost never do, or to be more precise, never do well. It is an inexact science.
The average collection agency, and there are over 4,000 of them out there, will be successful only about 20% of the time when they are collecting! That sounds pretty shocking, but remember that the agency does not typically get the debt until has matured. By then, it could be 30 days old, or it could be 60 days old.
The other ingredient in our secret sauce is that if a check bounces tomorrow, we contact the check-writer the very next business day and ask them how they are going to make this good. That increases our odds of collecting a bad debt.
Now that you know how the check guarantee business works, let’s explain what Plus Sales is all about.
Plus Sales Service
Sometimes we will be contacted by a large merchant who is locked into a term contract with one of our competitors. They are unhappy with the number of declines that they are getting. Remember, a decline is a lost sale, something a merchant never wants to see, particularly someone selling a high ticket item such as a new car. A large car dealer might get 10 declines a month, which is a big hit to their bottom line because it represents 10 lost sales, and is adversely affecting the dealer's ability to generate more revenue.
As a result, we developed the Plus Sales check approval program which says: “Give us all your declines from our competitor and we will approve all of them.” Sounds pretty revolutionary, doesn’t it? Well, it is.
Naturally, we charge a higher rate for this service as it is obviously a lot riskier for us, but in many cases, the merchant’s margin is more than able to cover it.
So if you are using another check guarantee company, and you are unhappy with the declines you are getting, contact us here at CrossCheck and get a quote on Plus Sales. You will need to give us some information about total checks and total dollars approved and declined in a given period, average and maximum check size, etc.
At CrossCheck, we make a sale happen that would not otherwise happen if we were not standing in at point of sale in real time to give an authorization. Plus Sales is just one more way for the merchant to make a sale and generate more revenue for the month, with peace of mind that they will get paid. And that’s a win-win for the merchant and the consumer too!
Download our free guide to learn how Plus Sales helps merchants generate more revenue and mitigate risk while saving time and money.