Friday, April 19, 2024

The Changing Face Of Payment Processing

Since the introduction of magnetic ink character recognition (MICR) technology in the mid-1950s, businesses and consumers alike increasingly have chosen to pay bills by check. In 1999, 70 billion checks were written in the United States, accounting for 73 percent of all non-cash transactions. Of the total, 56 percent, or 39.2 billion, were written by consumers. Businesses wrote 28.7 billion, or 41 percent and government, 2.1 billion, or three percent. The United States Postal service earned 25 percent of its year’s revenues from the delivery of checks. (Hence, the phrase: “The check is in the mail.”) Banks generated $60 billion in revenues from checking accounts, according to the Check Payment Systems Association.

Of the business checks, half went to pay other businesses and 25 percent to employees, with the balance falling into a loose category called “other” that could include anything from investments to philanthropy to claims checks, to petty cash and beyond. The point is, simply, paying the bills is big business, and checks have for a half-century been the best way to accomplish it.

Technology, of course, is what it’s all about, and as office technology became more powerful and accessible during the past couple of decades, it brought with it threats to the burgeoning check culture: where once most check fraud was a matter of simple forgery, check fraud artists began to employ sophisticated office technology to wreak ever-greater havoc within the financial industry. Check fraud is now estimated to be a $15-$20 billion annual problem for businesses and financial institutions.

One of the key problems has been that companies typically have printed their checks on preprinted multipart check stock that must be securely stored and accounted for. Nevertheless, checks do get misplaced, stolen and lost, and with available electronic and chemical technology, such checks can be filled out and/or altered, duplicated, and passed with relative ease.

MICR technology initially was developed to streamline the banking industry’s sorting process, which began bogging down under the accelerating acceptance of checking accounts by consumers following World War II. With the advent of laser printers, innovative companies were able to adapt the technology to combat check fraud attempts by generating complete signed checks, including company logos, graphics, company and bank location information, MICR lines, check numbers and payee information on blank check stock, in a single pass through a MICR-enhanced laser printer.

Instead of preprinted check forms, blank check templates comprising all of the necessary information for the check face are created and stored in the payment processing software. When checks are required, data from the financial management database merges with the stored template and the file spools out to the designated MICR laser printer. Check stock is security enhanced with an assortment of paper treatments, watermarks and so on, so that attempts to alter checks are foiled in the doing. And of course, you can’t produce or duplicate a bad check from a blank piece of paper.

In developing the new payment processing technique, the innovators also were able to effect significant efficiencies and economies in the process. For example, where the conventional methodology – still used in some 80 percent of companies! — requires an extensive chain of post-processing activity, such as bursting, sorting, decollating and signing, MICR laser check printing requires none of these, since the entire sequence occurs with a single sheet of paper in a single pass through the printer. Post-processing equipment and its maintenance costs disappear, and personnel formerly performing the drudge work are reassigned to more productive tasks.

The end result of MICR-laser check printing is a much more secure corporate and banking financial environment, along with reductions in cost-per-check of up to 80 percent when all costs associated with the process are factored in. Technology marches on, and the payment technology companies have marched hand-in-hand with businesses and bankers to make the technology more efficient, more effective and more economical. In 1972, for example, the Calwestern Automated Clearing House Association (CACHA) was established, one of several ACH associations created in the early 70s. The National Automated Clearing House Association (NACHA) was formed in 1974 to coordinate ACH movement.

ACH is a banking industry financial communications network through which account-holders can make payments electronically. Many businesses now perform such activities as payroll and accounts payable by direct deposit, under arrangements with eligible employees and vendors. It’s convenient, fast, and eliminates the long-time problem (or benefit, depending on who’s making the payment) of “float.” Direct deposit transactions are initiated by the paying account-holder, who instructs his bank to transfer funds to the payment recipient’s bank and onward to the payee’s account. One problem for businesses has been that ACH payments normally have not eliminated the need to generate paper, since payroll also requires a stub that indicates deductions and accounts payable, a remittance advice form that shows which invoices are covered by the check. ACH transactions do not provide for transmitting this data unless addenda records are utilized, a process which is difficult for most companies to implement. Thus, multiple activities have been required to effect electronic payments where ideally, one solution should enable the entire process.

A solution recently became available that does exactly that. The solution is scalable from a single workstation implementation up to networked client-server solution with no practical limit on the number of seats that can be attached. In its basic configuration, it performs standard MICR laser check production, with modules available to build out to any user requirement.

This functional scalability is key to the solution’s performance, since it enables users to employ every type of payment from a single platform: MICR laser checks, direct deposit using the banking industry’s ACH network, and Financial EDI (F-EDI), which enables the sending of remittance information concurrently with funds over the ACH network, whose basic data structure accommodates only the actual payment data.

Thus, in direct deposit applications such as payroll and accounts payable, remittance advice can be delivered as paper copies and/or electronically by fax, e-mail, and F-EDI – all within the payment (versus “check”) run. The choices are user-selectable and once specified, they perform automatically, with electronic delivery directly from the computer.

The company marketing the solution maintains that this total solution is the answer to business’ current and long-term needs. Checks will not disappear, its management says, but more and more companies will adopt electronic payments for portions of their payment process. The true need, the company avers, is for flexibility. Rather than having their business processes circumscribed by limited-capability systems, businesses should be able to configure their environments and practices for optimum security, efficiency, effectiveness and control, with all delivery options available.

Today’s article is an in depth investigation by Murdok’s very own Peter Thiruselvam. We’re proud of his latest work, and think it will be useful to our Internet community.

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