Should You Accept
Checks over the Internet?
Web Commerce Today, Issue 12, July 15, 1998
A widely quoted 1992 non-Internet study of unknown origin found that 48% of consumers prefer to pay by check, 32% prefer to pay with cash, and 18% prefer to pay using a credit card. Even if the figure for checks were inflated, this indicates a strong interest in using checks. Seventy million Americans don't have a credit card, and many already have their credit cards charged to the limit. Smaller businesses always have a checking account, but may not have a company credit card, so this makes business-to-business sales easier for them. In general, the more ways you allow people to pay, the more money you'll receive in orders, so the ability to accept checks could substantially increase your bottom line. Some merchants report 10% to 15% of their sales come through checks over the Internet. Let's see at how it works, and examine the pros and cons of Internet checks.
How It Works
The merchant sets up an HTML form to collect from shoppers all the information that would normally be printed on a check, including the routing number and bank account number at the bottom of the check. By clicking the "submit" button they acknowledge that they authorize payment by check from their account.
Ideally, you collect this information in a database, and then input it into a mail merge type program which prints out a paper check (using blank safety paper) on your printer. You deposit this check at your bank after mailing a confirming copy of the transaction to the customer.
While it's best to use magnetic toner in your laser printer (MICR stands for Magnetic Ink Character Recognition, in case you need to know), most banks are using OCR (Optical Character Recognition) these days, so magnetic toner may not be necessary. Many merchants print their checks on regular inkjet printers without objection. However, smaller banks and credit unions may not have switched to optical scanners. If you bank is hesitant, you might offer to pay 15 cents per check for them to manually key in the account number, if necessary.
Technically, such checks are called demand drafts, and have been used for years by larger companies, such as insurance and utility companies, to deduct payments from checking accounts.
Here is a sample copy of such a draft using Virtual Check Solution for Word from SoftwareSolutions.Net (http://softwaresolutions.net/vcheck/). 52K GIF image (http://www.wilsonweb.com/wct1/images/vcheck-scan.gif). This format shows the actual demand draft at the top of the page, the copy mailed to the customer in the middle, and a file copy at the bottom of an 8-1/2" x 11" page.
If you don't want to go through the hassle of doing this in-house, several service bureaus will print out the check and deposit it for you, all for a small set-up fee and perhaps a percentage of the check or a per-check service charge. (One such service bureau charges $150 set-up and 99 cents per check, plus 1.95% to 2.5% of the check amount.) Some services also screen checking accounts for Not Sufficient Funds and guarantee payment of accepted checks to the merchant for an additional charge.
Doesn't this leave the consumer and merchant exposed?
When you think about this, online checks can be somewhat scary for both the consumer and the merchant.
If someone stole the consumer's checking account numbers, they could generate thousands of dollars in demand draft sales before the consumer was aware of it. While US consumers are protected by a $50 maximum in the case of credit card fraud, there is no such maximum for checking account fraud. Jodie Bernstein, director of the FTC's Bureau of Consumer Protection, acknowledges the problem, but notes that in the context of a telemarketing transaction (under which most Internet transactions fall), the FTC's Telemarketing Sales Rule shifts the onus of proving that a demand draft is authorized from the consumer to the merchant submitting the demand draft. Therefore, a consumer can insist that his or her bank request that the merchant produce the consumer's verifiable authorization. http://www.ftc.gov/speeches/other/ddraft.htm
Merchants may feel a little uncomfortable, too. What if the customer downloads purchased information or a software program, and then denies that he authorized the demand draft? What is to keep unscrupulous customers from defrauding merchants?
Face it! Merchants are exposed when accepting credit cards, too. A credit card customer can request an original signature, and most banks will reverse the charge. What Internet transaction has a document with an "original signature" anyway? On the other hand, with some care and checking, the ability to accept checks creates another means of exchange, which, while not perfect, still promises to increase the number of transactions over accepting credit cards alone.
Legalities
While you understand that we are not offering legal advice, and that you should consult your business attorney, it seems that most banks accept draft demands quite willingly once they know the merchant. The FTC's Telemarketing Sales Rule indicates Internet merchants would typically be required to send confirmation of the transaction to the customer by mail before depositing the draft demand (http://www.ftc.gov/bcp/conline/pubs/buspubs/tsr/howdoes.htm). You can read the text of the laws, regulations, and guidelines in our sidebar on the "US Laws and Regulations Governing Demand Drafts"
Merchant Cautions
Here are some common-sense practices that will protect merchants from most problems:
- As with credit cards, don't accept orders from customers with free e-mail addresses such as shopper@yahoo.com or shopper@hotmail.com. Such addresses are practically untraceable.
- Record the customer's IP address so you can trace the user in case of fraud.
- Do not accept online checks from non-US customers for now . Most of the existing online check software doesn't generate checks for foreign banks (though ChecksNet Pro can create checks for Canada, England, Australia and some other countries). The laws that affect demand drafts may also differ from country to country.
- Do not use online checks for instant information, entertainment, or software download . Instead, call the customer's bank for verification before issuing a password. TJ Walker of AntiFraud.com (http://www.antifraud.com) says: "We receive a great number of orders via online virtual checks. While this has greatly increased our sales ... having been burnt a few times, we now call the account holder's bank and verify the account number, account holder's name and current funds to clear the check before processing the order."
I believe it is time for merchants to look very seriously at accepting online checks. Though merchants face some risks that must be approached with caution, they also have the prospect of substantially increased sales.
Some Resources about Online Checks
Accepting Online Checks "shelf" of our Electronic Commerce Research Room /search/cat.php?page=1&querytype=category&subcat=cc_Checks
