What is a Check Guarantee?

A check guarantee is a service provided to merchants, ensuring that a check will be paid. If a check bounces, the guarantor steps in and pays the amount of the check to the merchant; the guarantor then pursues payment of the check. In exchange for this service, the guarantor charges a fee to the merchant. The guarantor minimizes its losses by comparing the account number on each presented check to a database of known bad check writers. The guarantor will only pay a merchant if it follows a predetermined check processing procedure, typically involving the use of a check scanner to upload presented checks to the guarantor's database. An alternative approach is an audio response system, whereby the merchant calls a phone number, enters requested information, and receives either an authorization number or a decline. If the check subsequently bounces, the merchant uses the authorization number to obtain reimbursement from the guarantor.

Check Guarantee vs. Check Verification

A check guarantee service promises to reimburse a merchant if a check bounces. This is not the case for a check verification service, which only verifies the validity of the check being presented or verifies the history of the checking account holder (or both). Thus, a check verification service is less expensive, because it provides no guarantee to the merchant. A merchant uses a check guarantee service if it wants to offload the risk of losses from bounced checks, and uses a check verification service if it elects to accept this risk.

Advantages of a Check Guarantee

Check guarantee services can increase sales for merchants, which might otherwise refuse check payments entirely, or refuse certain types of checks, such as checks written on out-of-town banks. These guarantees also keep a merchant from incurring losses due to bounced checks or closed checking accounts.

Disadvantages of a Check Guarantee

Check guarantee services charge a monthly fee, as well as a per-check transaction fee in exchange for their services. These fees may be excessive if a merchant receives very few check payments per month, or only for small dollar amounts. In these situations, it could be more cost-effective for a merchant to simply disallow all check payments.