Check guarantee definition
/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
There are several advantages associated with using a check guarantee service, which are as follows:
Higher sales. 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.
Reduced losses. Check guarantee services keep a merchant from incurring losses due to bounced checks or closed checking accounts.
Increased customer convenience. Some customers prefer to pay by check rather than with a credit card or cash. Offering check payments with a guarantee service can attract these customers, giving them an additional payment option.
Disadvantages of a Check Guarantee
Check guarantees provide assurance that a check will be honored, but they also introduce several operational and financial drawbacks, which are as follows:
Higher processing costs. Check guarantee services typically charge merchants transaction fees or service fees. These costs can exceed those associated with other payment methods, reducing the net value of the transaction.
Risk of fraud and abuse. Although guarantees reduce the risk of insufficient funds, they do not eliminate fraudulent activity. Forged checks, stolen guarantee cards, or identity theft can still result in losses or disputes.
Administrative complexity. Merchants must follow specific verification procedures when accepting guaranteed checks. Failure to follow the required steps may void the guarantee, increasing the risk that the merchant will not receive reimbursement for a dishonored check.
Related AccountingTools Courses
FAQs
Does using a check guarantee affect a customer's credit?
Using a check guarantee service does not directly affect the customer's credit at the point of sale. However, if the check is returned and the guarantee provider cannot collect payment, the unpaid debt may be turned over to a collection agency. At that point, the collection activity could appear on the customer's credit report and negatively impact their credit score.