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 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.

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FAQs

Does Using a Check Guarantee Affect the 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.