Checks Check Out

With online bill payment and processing, use of paper checks is headed for a steep decline

A funny thing happens when you write a check at some Wal-Marts: It gets handed right back to you. Hoping to speed payments, reduce costs, and cut fraud, the world's largest retailer now scans paper checks for pertinent information such as the bank and account number -- and then gives them back to customers in the checkout line.

Remember the old saw, the check's in the mail? Drop it. Digital processing technologies such as those used by Wal-Mart Stores Inc. (WMT ) and the skyrocketing adoption of online bill payment are reshaping the $30 billion business of printing, transporting, and processing checks. Driving the transformation are banks, credit-card companies, and merchants eager to simplify an antiquated system that involves as many as 28 middlemen. They have plenty of motivation: Handling an online payment costs only 10 cents, roughly one-third that of processing a paper check, according to Atlanta consultant Global Concepts. The result: The number of checks written annually should decline by about one quarter by 2007, to 30 billion, estimates researcher Celent Communications LLC. "This is a transformational moment," says Jonathan Wilk, senior vice-president at Bank of America Corp. (BAC ).

The age-old practice of printing checks and shuttling them around the country in armored cars is in upheaval. No. 1 check printer Deluxe Corp. (DLX ) is closing three of its 13 printing plants and fighting for its margins by pushing higher-priced check designs and fraud-prevention services. One of the Web's unlikeliest victims is AirNet Systems Inc. (ANS ), in Columbus, Ohio, which gets nearly 70% of its $140 million in revenues from flying checks between cities on Learjets. AirNet is shifting its focus to passenger charters and express shipments of donor organs. "We've seen this bogeyman coming," says Wynn D. Peterson, AirNet's vice-president for corporate development.

Fostering Loyalty

And he's coming fast. This year, 65 million U.S. consumers are paying some of their bills online, almost twice as many as last year, according to Gartner (IT ). And that's expected to jump to 73 million in four years. This growth is a boon for companies such as Wells Fargo (WFC ), American Express (AXP ), and Sprint (FON ), which work with online bill payment pioneers CheckFree Corp. (CKFR ), edocs Inc., and others. Gartner figures that the average company with 1.9 million customers can cut $26 million in costs per year by persuading customers to receive and pay their bills over the Web.

Cost savings are just the start. Customers are more likely to stay with a bank if they pay bills online there. At Wells Fargo & Co., customers who pay bills online are 75% less likely to leave the bank than other customers. "No doubt, the benefits far outweigh the expenses," says Jim Smith, executive vice-president for consumer Internet products at Wells Fargo.

Even when payments are not made online, paper checks are going digital. Behind this modernization is the Check Clearing for the 21st Century Act, known as Check 21. This law, which goes into effect in October, is expected to kick off a mass adoption of check imaging by putting electronic images of checks on equal legal footing with paper originals for the first time. Even banks that aren't equipped to handle digital checks have to accept printouts of them, known as "substitute checks," as payment. During the past three years, startups Viewpointe Archive Services, Endpoint Exchange, and NetDeposit have rolled out software and services that convert checks into digital files so they can be stored and swapped electronically. Banks could reap big savings. The cost of upgrading to digital check handling will reach $1.9 billion next year, but the industry could save $2.1 billion annually from the shift, estimates Celent.

The changes will allow the banking behemoths to compete more fiercely with community banks. The corner florist and local Wal-Mart typically do business with a nearby bank because they want to get credit for their daily deposits as quickly as possible. With digital check processing, proximity no longer matters. Merchants can choose banks that offer quick and secure processing for the lowest price -- wherever they happen to be located.

Shuttered printing plants. Grounded Learjets. Struggling community banks. They're all signs of how the business of checks is changing in the Digital Age.

By Andrew Park, with Ben Elgin and Timothy J. Mullaney

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