Method and system for verification of checks at a point of sale

Details Method and system for verification of checks at a point of sale Method and system for verification of checks at a point of sale

1999-03-02

2004-06-29

Chilcot, Richard (Department: 3627)

Data processing: financial, business practice, management, or co

Automated electrical financial or business practice or...

Finance

C705S039000

Reexamination Certificate

active

06757664

ABSTRACT:

BACKGROUND OF THE INVENTION
1. Field of the Invention
This invention relates to computerized verification methods and systems. More particularly, this invention relates to computerized methods and systems for checking the availability of funds in a checking account at the point of sale. The methods and systems are implemented in computer hardware and software.
2. Background Information
For many years consumers have paid for goods or services at the point of sale in stores by writing personal checks. Merchants who accept these personal checks typically assume that the checks are valid, and thus the merchant bears the ultimate risk of loss for fraudulent checks and for checks for which insufficient funds are present in the checking account. Because a significant amount of time is typically required to process checks (e.g., on the order of several days) and the merchant bears the ultimate risk of loss, some merchants are unwilling to accept personal checks as payment for goods or services.
FIG. 1
illustrates the typical path of a personal check 10 from presentation to a merchant 12 to payment from the consumer's bank 20, which may also be referred to as the issuing bank or the payor bank. The Uniform Commercial Code, as well as various federal laws, typically govern the liability of the parties involved in the presentment, collection, and payment of checks 10. The consumer first proffers the check 10 to the merchant 12 at the point of sale as payment for goods or services. The merchant 12 will then provide the check 10 to the merchant's bank 14, which may also be referred to as the depository bank or collecting bank. The merchant's bank 14 typically makes a provisional settlement with the merchant 12 so that the check 10 is credited as a deposit to the merchant's account. The merchant's bank 14 has a set period of time (which may vary depending on circumstances such as the law or location of the banks involved in the transaction) in which it may take back the credit of a provisional settlement.
The merchant's bank 14 then presents the check 10 for payment to the consumer bank 20. This presentation of the check 10 to the consumer bank 20 may be done by direct presentment between the banks, or by collection and presentment using the Federal Reserve Banks 18. If the merchant's bank 14 presents the check 10 directly to the consumer bank 20 (this path is not illustrated in FIG.
1
), the consumer bank 20 has a set period of time in which it must refuse to honor the check 10 and notify the merchant's bank 14. If the consumer bank 20 does not dishonor the check 10 within this period of time, payment on the check 10 is made final and the consumer bank 20 will be liable if the check 10 is a bad check.
If collection and presentment through the Federal Reserve Banks 18 is used, as is commonly done when banks are not located in the same geographical area, the path shown in
FIG. 1
is followed. The merchant's bank 14 forwards the checks 10 to the automated clearing house 16 (ACH). The ACH 16 sorts the checks 10 by their issuing banks 20, electronically forwards information on the checks 10 to the Federal Reserve Bank 18, and forwards the checks 10 to the appropriate issuing banks 20. The Federal Reserve Bank 18, in turn, transmits the electronic information pertaining to the checks 10 to the consumer's bank 20. The Federal Reserve Bank 18, therefore, acts as an intermediary between the merchant's bank 14 and the consumer bank 20 to facilitate presentment and collection for checks 10.
After the consumer bank 20 receives the information on the check 10, it has a set period of time in which it must report that the check 10 has not cleared if insufficient funds are available in the consumer's account or if the consumer's account has been closed. If the consumer bank 20 does not issue such a report in due time, it bears the risk of loss on the check 10. If the consumer bank 20 reports that the check 10 has not cleared, the merchant's bank 14 will typically deduct from the merchant's account the amount of the check 10 (which had previously provisionally settled with the merchant 12 by posting a credit for the check 10 to the merchant's account when the merchant's bank 13 assumed that the check 10 was valid). Although the merchant's bank 14 is liable for the bad check if it does not notify the merchant 12 in due time, it is the merchant 12 that bears the ultimate risk of loss for bad checks 10.
There are numerous problems associated with the typical method of processing checks described above. The problems affect the consumer, the merchant 12, and the banks involved in the transaction. Consumers frequently pay the costs associated with bad checks. One report found that bad checks cost consumers around $5.6 billion each year. The FSA Facts, a service of the Financial Stationers Association, Issue 18, Jul. 23, 1998. Many consumers with accounts at consumer banks 20 assume incorrectly that they have sufficient funds to cover the amount of a check. If the consumer bank 20 covers the amount of the check in spite of sufficient funds, the consumer bank 20 will typically charge the consumer a service charge, frequently on the order of $20 to $25 per check. Such hefty payments may make it difficult for some consumers to afford bank accounts. Many banks are also not willing to open accounts for risky consumers, because the bank may bear the risk of loss on bad checks if it does not respond within set periods of time for bad checks.
The consumer bank 20 (or the issuing or payor bank) may also be harmed by bad checks. The consumer bank 20 may not pay a check unless it is properly payable, and a check is not properly payable if it has a forged drawer's signature or a forged endorsement. If the consumer bank 20 charges the consumer's account for a check that is not properly payable, it must typically recredit the consumer's account. On these checks, therefore, the consumer bank 20 carries a risk of loss if a check has an unauthorized signature. Because it may be difficult for consumer banks 20 to determine if certain checks have forged signatures, consumer banks 20 have no practical method of avoiding such problems aside from refusing to open accounts for risky consumers. Consumer banks 20 and merchant's banks 14 may both bear the risk of loss for bad checks if they do not act within set deadlines in reporting bad checks.
As noted above, merchants 12 are also harmed by bad checks. If consumer banks 20 and merchant's banks 14 act on bad checks within their deadlines, it is the merchant 12 that bears the ultimate risk of loss. Merchants 12, therefore, may be unwilling to accept personal checks from some or all consumers, and this may result in a loss of business for the merchant 12.
The amount of time typically involved in check presentment and collection can result in decreased efficiency and increased costs in processing checks. Extended amounts of time taken processing checks allows fraudulent check writers an extended amount of time during which they are free to write fraudulent checks before their checking account numbers are added to lists of bad or risky checking accounts. Time delays in processing checks may also affect banks, because banks may be liable if response times are not met in processing checks.
Electronic processing of checks may reduce some of the problems associated with the time delays in processing checks. Magnetic Ink Character Recognition (MICR) readers or optical readers may be used at the point of sale for reading magnetic account information printed on checks. This data may be fed directly into point of sale terminals, and other information, such as the amount for which the check is written may be entered in any convenient manner, such as through a keypad. All of the information for a given check may be combined into a data record which may then be electronically forwarded to the ACH so that presentment and collection of the check between the merchant's bank 13 and c

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