[I am in Las Vegas for the TAWPI Payments in Transition conference – these are my notes from one of the sessions. An index of all of the sessions and links to the rest of my notes is here. – EMc]
[program blurb] A new report from Celent, “Back Office Conversion: Too Little Too Late?,” includes results of a survey of 300 retail treasury staff conducted by Celent in July 2007. The survey revealed surprising interest in retail check conversion, given POP’s seven-year history of lackluster transaction volume. This session will review details of the survey findings.
BOC was developed to address failure of POP: no impact to POS workflow, no impact to consumer, no POS hardware or system integration. Yet compared to ARC and RDC, BOC has achieved only lack-luster adoption one year along. Why?
BOC is RDC – can be back office at retailer (as it was designed) where check conversion is primary, can be part of larger RDC or image cash letter solution (one of many capture points).
Retailers expect banks to provide solutions, yet Cash Management banks have a broad portfolio of products and bank solutions address only a small portion of check acceptance costs. Other parties are better positioned to address the problem: mostly 3rd party providers. Banks ill equipped to serve multi-locations, whereas other providers have many years experience servicing retail POS locations.
Solution providers and their various approaches. 5 big banks are offering BOC, plus lots of other providers. 3 approaches: 1) capture, correct, balance at back office 2) capture and have 3rd party correct and balance 3) deferred capture at 3rd party location, utilize MICR line capture at POS coupled with balancing and correction later. By a 2 to 1 margin Treasurers prefer store level balancing – perceive that if store level personnel balance it will be less work for corporate later. But store operations are resistant to taking on more work. Thus, the importance of a consensus approach with treasury, retail operations, IT [music to my ears as a change leadership consultant] – often retail store ops will veto any changes to POS process and technology. What about vault capture? Most retailers do not use couriers (or at least not at every store location). Mostly store personnel used to make deposits.
Two thirds of retailers check verification/guarantee services. Mostly TeleCheck and Certegy. Already have MICR capture devices at POS and have integrated software. Or ISO model… ISO sells solution. ISO or 3rd party serves as aggregator and partners with a presentment bank. Send ACH rather than cash letters to multiple banks. Not requiring retailer to change banking relationship.
Declining check usage at POS is large factor in lack-luster BOC adoption. Checks less than 10% of POS transactions (15-20% CAGR rate of decline depending on retail segment). Vs. 1999 when POP was introduced, or 2004 when RDC was introduced:
Why invest? Small segment of payments – more logical to outsource. Favorably impacting BOC adoption utilizing the 3rd party model.
POP Renaissance – why now? Retailers have what they need to implement BOC (MICR capture, POS printing capability), customer fear is less of an issue, but how do I handle returns??? If using POP bundled with check verification/guarantee services, the process looks better. ACH is ideal for returns, additional presentment, already using lower cost method and increase collection rate. With checks volume continuing to decline, retailers increasingly consider check processing an annoyance, and desire to outsource all together. And you can’t underestimate the Wal-Mart effect – if they are doing it, it merits a second look. BOC actually prompted treasurers to re-evaluate POP. Nearly 2/3 of retailers surveyed were actually comparing POP and BOC in competing pilots.
BOC at Financial Institutions. ARC and BOC for intelligent routing. Decision gateway. Most FI not ready for these solutions. Still working on day 2 image workflows. Need to fully leverage Check 21 before attempting more elaborate solutions. But it’s the way things are headed.
ACH returns going up, increasing costs. Check feeds going down. Most RDC clients are low check volume, don’t care about marginal settlement improvement. But what about Image Cash Letter? Mostly using ARC already in conjunction with tools they have in house to manage availability.
BOC at FI is not compelling. But 3rd party processors wanting to aggregate large volumes of items (where pennies count) are interested in BOC. Ultimately this will lead to modest trx volume, but it will take a long time.
Retail check conversion will peak in 2009-2010:
Light gray bars – checks as a % of POS
Dark gray bars – % POS items converted
Yellow line # retail checks converted