Electronic Check Conversion (ECC) Defined
ECC stands for Electronic Check Conversion, and describes checks that are read and imaged at the point of purchase (POP) in a brick and mortar store for conversion into an electronic item. The resulting electronic draft is processed through the ACH Network for clearing and settlement.
Electronic Check Conversion (ECC) Process & Requirements
This process requires a Terminal and Check Imager/Reader that is set up for ECC, and can only be legally done at the cash register (or point of purchase) of a regular brick and mortar type store. The legal requirement is that the check writer and the merchant be in a face to face situation.
1) A customer at an ECC merchant presents the clerk or merchant with a check as payment for goods and/or services.
2) The clerk activates the ECC function on their point of sale terminal and keys in the dollar amount.
3) He/she runs the check through their Check Imager/Reader, which a) reads the magnetic MICR line at the bottom of the check, and b) scans an image of the check for record keeping purposes.
4) If the ECC provider has set up their system to run a check verification on the ECC transaction (most do), then the terminal will connect to a large checkwriter negative data base and verify that this checkwriter has not bounced checks and is not known to have a closed account. Some verification systems will also identify banks that are not participants in electronic drafting; these particular checks must be presented in paper form only, or they will be returned.
5) The clerk receives the verification response on their Terminal. The transaction may be declined, it may be “non-ACH” (must remain paper), or it may be approved for ECC. If an item is declined at this stage, it is called a Verification Reject.
6) The Terminal will generate a receipt for Approved ECC transactions, and the checkwriter is required to sign it, thereby authorizing the merchant to convert this item into an electronic draft.
7) Each party keeps a copy of the receipt, and the transaction is complete at the point of sale.
8) At the end of the day, the merchant uploads their batch of check transactions and images. This is usually called a “Close” or “Batching Out”.
9) The ACH Processor then receives the batch of transactions and prepares them for submission to the ACH Network.
10) New transactions are now checked against the Thompson Data Base of all US Banks to verify that all routing numbers are correct and valid. Some items are corrected and/or updated. Other items may not pass this step, and these are called ACH Rejects.
11) The ACH Processor reports any ACH Rejects back to the merchant. Some processors will mail, fax, or email these reports to the merchant, and sometimes these reports are only generated once a week. Other processors provide Online Reporting and provide this data about 24 hours after the time of the transaction.
Note on ACH Rejects: Typically there are very few ACH Rejects. In cases where an ACH Reject has occurred, the original image will be retrieved and used to either correct the electronic item, print a new paper item, or support traditional collections.
12) Once the incoming ECC transactions have been cleansed and formatted for ACH Presentment, the ACH Processor generates additional ACH Transactions to settle funds to the merchant. Settlement can be immediate, with some solutions the funds will be available to the merchant in two to three business days. Settlement may be delayed to allow time for any bad items to be returned; the merchant would be paid only after 5 business-days have passed without these items being returned. Other ECC programs, like Cross-Check’s, may be tied into a check guarantee program; in these cases, the merchant is usually paid with no delay and any returned items are the responsibility of the guarantor. (Guarantee programs charge a discount rate of 1.8% or more, where-as straight ECC with Verification will start at around $0.25 cents a transaction for very large merchants, but shouldn’t exceed $0.50 for the average merchant.)
13) Returned items will usually be Re-Presented by the sophisticated ACH Engines, when possible. Failed transactions are usually charged back to the merchant. A returned item may be “floated” to the merchant (not charged back) under some programs; if the item can be represented, the service will attempt to collect again without taking the funds back from the merchant. Other services will immediately charge back the merchant, and then pay only after the items have been represented and cleared. Some services will charge a fee on each returned item, while others will not charge anything for returned items. Guarantee based ECC services will cover most returned items, but any that have failed to meet the guarantor’s requirements will not be paid, and will be charged back.
- ECC requires that an Image of the converted checks is captured and stored for possible future retrieval.
Image Retrieval Costs vs. Image Upload Costs:
- Some ECC services will charge you for each uploaded image that they store, and allow free access to the stored images.
- Other ECC services do not charge for the upload and storage, but charge for each Image retrieval processed
Online Image Retrieval:
Imaging services typically provide an Online Image Retrieval service, allowing merchants to use the web to access their stored images.
Guarantee ECC vs. Straight ECC
Guarantee programs charge a discount rate of 1.8% or more, where-as straight ECC with Verification will start at around $0.25 cents a transaction for very large merchants, but shouldn’t exceed $0.50 for the average merchant.
By using a verification service, the number of potentially bad checks that you accept will be greatly reduced.
Guarantee services always use a verification system to reduce their exposure to bad check losses. Guarantee services also cover their costs by charging checkwriters a returned check collection fee.
If you are already using a check verification service, then you can easily determine if a guarantee program will save or cost you money; Just add up your yearly check volume, and divide by your total returned check volume for the same period. If your annual returned check volume exceeds the Guarantee Discount Rate, then you will save money by using a guarantee service. If you have been able to collect on some percentage of you bad checks, then you should take this into account in your equation. If you haven’t used a verification service in the past, you should count on seeing your returned items decrease substantially.
The largest merchants, multi lane grocery stores, typically NEVER use a guarantee service. They know that by using a verification service and attempting to collect on returned checks, they will reduce their bad check losses to below 1% of check volume. This is why you are better off using a non-guaranteed ECC service that provides both verification and electronic re-presentment collections.
Advantages of ECC to Merchants
- Merchants typically get paid one day sooner.
- Settlement can be centralized in one bank account for chains of stores.
- Reduces paper check handling costs, such as “going to the bank”.
- Returned checks are reported sooner, increasing likely hood that collections will succeed.
- Returned items are collected on automatically without merchant intervention.
- Returned check charges may be eliminated.
- Verification stage reduces acceptance of potentially bad checks.
- Reduces risk to merchant due to loss or theft of paper checks.
- Services with Online Reporting increase the merchant’s efficiency; reporting and tracking can be done much more accurately when check information is captured and stored in a database accessible to the merchant 24 hours-a-day, seven days-a-week.
- With electronic check conversion, consumer payment behavior patterns are not affected: the only change is in how the items are processed.
- Customer response to electronic check conversion has been neutral or positive.
- The total cost to process paper checks through the traditional system is around $3.50 per check, which is much higher than with electronic check conversion.
More reading: Returned Check Collections (RCK)