Spring 2001
Take the “Bounce” out of Bad Checks

With electronic transactions growing like the tentacles of an octopus around today’s business world, a paper-based predicament such as checks may seem like a throwback to the age of eye shades and fedoras. But it isn’t: 15 to 18 billion checks pass over store counters each year, according to the National Automated Clearinghouse Association (NACHA) of Herndon, VA. “Most merchants are in the business of letting consumers choose their forms of payment,” says Michael Herd, director of public affairs. “And many consumers still want to pay with their checkbooks.” The security risk is serious: two percent of checks bounce every year, according to Telecheck, the check clearinghouse based in Houston.

You might think the problem will subside, as more people abandon checks for credit and debit cards. And while it’s true that checks are declining as a percentage of total transactions, according to Equifax Check Solutions (St. Petersburg, FL), this trend is overshadowed by two others. First, the actual number of checks written is on the increase, in keeping with an expanding economy. Second, people with better risk profiles are the ones shifting their payments to plastic. “From the security standpoint, there is a bigger percentage of fraud in the remaining check-writing base,” says Jeff Carbiener, senior vice president and general manager of Equifax.

Developing strategies to protect profits may be a critical part of store management. But retailers need to understand that check-related crime prevention is more art than science. “Bad checks happen in plain sight, and no one is any the wiser until later,” says Robert A. Gardner, a security management consultant in Ventura, CA. “So you need to be proactive and have some check acceptance program in place.” In other words, protect your store.

To help create a protection program and refine your check acceptance policies, consider the following advice from security consultants.

1. Require good identification.

“Requiring the right identification is the first line of defense against bad checks,” says Howard Levinson, president of Howard Services, a security consulting firm (Norton, MA). The best ID is a driver’s license with photo and signature, which is designed to be difficult to counterfeit. Other acceptable IDs are auto registration, a passport, or a photo ID from a recognized place of business in your community. Many retailers require two forms of ID. This is smart, because a thief may have only one fake ID. Customers often pass a MasterCard or Visa over the counter with their driver’s license. Are credit cards good IDs? Yes. Like driver’s licenses, they’re difficult to counterfeit. And they do contain a signature that you can match with the one on the license. However, for the customer’s protection, many states prohibit retailers from writing credit card numbers on the backs of checks. A check passes through many hands on the way to its final rest in a shoe box. Some of those hands might collect credit card numbers for theft.

The fact is, a credit card number wouldn’t help you even if you were allowed to write it down. “When a check is discovered to be bad, about all the credit card numbers [would] do is prove that the bad check passer also stole a credit card,” says Read Hayes, president of Loss Prevention Specialists (Winter Park, FL). Even if that’s not the case, those numbers still won’t do you any good. That’s because no credit card company will reimburse you for that cardholder’s bounced check.

2. Get information about the customer.

While a good ID is vital, it’s not enough. Write the following information on the back of the check: Home address, home and business phones, employer’s name and address. You’ll need this information to contact the customer after a check bounces, or for formal collection procedures. And many states require such information for prosecution. Finally, if you use a check authorization service, it will require you to write down such information. If you don’t, they won’t reimburse you for the bounced check. (See the sidebar “Check Authorization Firms.”) “The more information you get, the better,” says Levinson. “Check the address against what’s printed on the driver’s license.”

Bonus tip: Simply insisting on taking down all of this information may discourage some check-passers from passing one to you.

3. Compare the ID with the customer.

You need to be as sure as you can that the customer is the person indicated by the ID. Remember, the driver’s license gives you two visual clues to help you: the signature and the photo. First, get a “live” signature. “The customer should sign the check in front of a salesperson, who should compare the signature with that on the driver’s license,” says Hayes. This eliminates the possibility that the check was stolen after it was signed by its true owner. If the check is already signed when it’s presented to you, ask the customer to write a new one for you, or to sign another piece of paper so you can compare.

When the customer presents as photo ID, match the photo with the person standing there, says Hayes. “It’s amazing how many people don’t look.”

Bonus tip: Habitual crooks are deterred when they know that a store looks at Ids closely. To show check-passers you mean business, post your ID policy on a sign at the register.

Spotting a fake

Here are some clues for spotting a bad check. Don’t take the check if you see one of the following:

Scratch-outs.
Don’t let the customer scratch out any portion of the check, such as the name written in the “pay-to” line. Ask the customer to write a new check. Reason: Scratched-out names may mean the check was stolen after the real owner made it out to another person. If they won’t (they might tell you they don’t have any with them), don’t take that check.

Mismatched dollar amounts in words and numbers.
For example, if you look closely at “$300,” you may discover that the two zeros are squeezed together–which means one zero was added after the check was stolen. Look at the written portion and you may indeed see “Thirty,” not “Three hundred” dollars. Obviously, it’s easier for someone to change numerals than words, which is why banks use the long line as the governing portion.

Post-dated checks.
A check dated two or three days ahead can mean that the money isn’t in the account. “If the money’s not there, you don’t want the check,” says Levinson. The percentage of postdated checks that are bad is substantially higher than that for checks in general. Why? Too many events can cause the deposit to not be made. This uncertainty increases substantially the chances that the check will bounce.

Amounts greater than the purchase amount.
Don’t take checks made out for amounts higher than the amount of the total sale. “In such cases, customers don’t want your merchandise–they want your cash,” says Levinson.

Second- or third-party checks.
A second-party check is made out by someone other than your customer, payable to the customer. Example: a payroll check or a welfare check. A third-party check is made out to another person, who in turn made it payable to the customer. (Typically, the check is made payable to a relative of the customer.) Never take second- or third-party checks–there is great likelihood that the check is phony. You can’t compare the signature of the customer with the one on the check; and your risk is increased because you don’t have the first check-writer’s word that the check is still good.

Starter checks and homemade checks.
Don’t accept blank checks, starter checks, or checks that aren’t pre-printed with the customer’s name and address. “You just don’t know that the blank checks belong to the person presenting them,” says Hayes. “These have caused a lot of security problems.” Instead, insist on checks that have the customer’s name and address–and the bank branch. With the proliferation of computers, easy software and good printers, people can print their own checks—but some of these people have accounts in imaginary banks. You want to be sure the bank on the check actually exists. If you don’t recognize the local branch, call the bank and ask If you can’t find a phone number for any branch of that bank, consider the check bogus.

Mismatched digits.
The bank’s magnetic-ink number along the bottom of the check and the check’s serial number should match. Within the magnetic-ink number is the bank’s ID number. The last four digits should be the same as the serialized number in the top right corner of the check. “Make sure the numbers match, and that the numbers have not been altered in any way,” says Levinson.

Check-passers often change the numbers at the top of the check for two reasons. First, if the checks have been stolen, the bank may already have reported the serial numbers to the electronic check-verification services. So a thief changes them to thwart detection. Second, thieves alter the magnetic-ink numbers to represent out-of-town bank locations. This slows down the bank’s check-clearing process, which means the thief has more time to pass more bad checks at more stores. In either case, it’s a bad check.

Call the bank.
“When in doubt, call the bank and get clearance,” says Gardner. “In many cases the bank can’t say much.” But if you call and say you have Mary Jane Doe there with you, the bank will do whatever it can to make sure the check is good. The representative may tell you the account is closed or doesn’t exist or isn’t sufficiently funded, or that the customer reported that her checks were stolen last week.

Make it yours.
As soon as you accept the check, stamp “for deposit only” and your account number on the back. Doing this helps protect you if it’s stolen before you get to the bank. And while we’re on the subject, deposit it promptly. This reduces the risk of the check being stolen or misplaced, and helps you collect your funds quickly in case the customer is about to close the account.

Train your staff.
Don’t overlook training your employees in these procedures. “Training at the point of sale is essential,” says Carbiener. “We’ve seen losses at one retailer run 20 percent higher than another of similar size, because of poor employee training.” Each employee approving a check should initial it. This will be helpful later if the check bounces and someone on your staff can identify the check-passer. Also, initials can help you identify employees who aren’t following the right procedures to authorize checks, and are susceptible to accepting more bad ones. This is especially important if your employees work on commission. “Commission salespeople are anxious to make sales, so they’re more willing to take checks,” says Levinson. So make it a point to communicate your check-acceptance procedures clearly to all of your sales associates.

Customers to Watch

Beware of customers whose behavior is inconsistent with the situation, or otherwise over the top. Very often these people are nervous, eager to get going before they get caught. Or sometimes their behavior is designed to knock you off balance so that you don’t notice certain tip-offs. Here are some things to watch for:

In a rush, in a rage.
No one likes to wait, but someone who gets upset at delays your security procedures cause isn’t the norm. “Don’t be intimidated if people get angry and say they’re in a hurry,” says Read Hayes, president of Loss Prevention Specialists of Winter Park, FL. “They do that so you won’t follow the procedure. Don’t abandon due diligence.”

Overly emotional hard luck stories.
For example, a sales rep you’ve never met asks to cash a check–to tide him over till the banks open in the morning. If you think about it, it doesn’t make sense. The reality is that this person’s story is designed to gain your trust and elicit your sympathy. Don’t fall for it.

The haphazard shopper.
Someone who selects unrelated merchandise in a haphazard way or seems unconcerned about prices may simply be using the merchandise as an excuse for cashing a check, or taking your cash by overwriting the amount of the sale.

“For retailers, bad checks represent a big problem that never seems to go away,” says Hayes. But you can reduce your chances of getting stuck with rubber checks, and the potential for financial loss they create. With sound procedures in place and making it a habit to follow them closely, you reduce your risk. “The word gets out– professionals avoid a store that gives them hassles.”

Check Authorization Firms

Check authorization firms are your safety net. They can verify the quality of a check using techniques similar to those the credit-card authorization firms use. The firms offer two main services: Guarantee and verification. Under guarantee, the firm eliminates all of your bad check risk by warranting all of your checks if you abide by the firm’s security guidelines when you accept checks. Typical charge: 1.3% of the value of all checks taken. In verification, the firm simply provides a computerized look-up data bank of bad check writers. Typical charge: 0.1% of the value of all checks taken. Monthly minimums fall in at around $25-$30 a month for guarantee and $10-$15 for verification. By the way, you can usually use your credit card terminal to clear checks. The typical lease cost for a terminal is $10-$12 a month.

Leading check authorization firms include:
Equifax
Telecheck
SCAN: Shared Check Authorization Network: 888.USE.SCAN

Phillip M. Perry

Perry is a freelance writer based in New York, NY.
Publications of ICSC

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