Check Isn't In Mail

A new law will speed up the check-clearing process by relying on electronic imaging. But consumers who "play the float" could get burned.

October 27, 2004|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

Beginning tomorrow, a new law will make it possible for checks to be cleared days faster than they are now, which could mean bounced checks for consumers if they're not careful.

Banks now need the original check in hand before withdrawing money from a customer's account. That requires paper checks to be physically transported between banks, which sometimes takes up to five days when checks are being flown across the country.

The Check Clearing for the 21st Century Act, or Check 21, paves the way for banks to electronically transmit checks and do away with the travel time. The law essentially requires banks that can't receive electronic images to accept a paper reproduction of a check, called a substitute check, as if it were the original. After Check 21 goes into effect, an out-of-town check can clear within 24 hours.

Consumer advocates have raised an alarm about potential consequences of the new law. Money will come out of customers' accounts faster, but Check 21 doesn't guarantee that consumers will get access to their money sooner when they deposit checks. That could lead to bounced checks and hefty fees. And Check 21 could open the door to more errors or new kinds of fraud.

Bank officials say the change won't be radical.

"We really see change from Check 21 as evolutionary, not revolutionary," said Betty Riess, a spokeswoman with Bank of America Corp. in San Francisco.

Many of the largest handlers of checks won't begin to move checks electronically until midsummer or later next year, said John Hall, a spokesman with the American Bankers Association.

Bank of America will begin a pilot program at the end of this year that will involve fewer than 1 percent of the checks it handles. M&T Bank, a major institution in the Baltimore area, expects to introduce electronic transfers and substitute checks in the middle of next year.

Hall said the shift will be gradual, like the switch from VHS to DVD. Check 21, he said, "will be a non-event for most people, next month and next year."

Beyond a speedup in check processing, the most noticeable change for consumers will be that they will get a mix of original and substitute checks with their monthly statements if they currently receive their canceled checks. About 36 percent of consumers do.

The move to reduce the shuttling of checks from bank to bank has been long and slow. Congress authorized the Federal Reserve to speed up check-clearing in 1987, but financial institutions couldn't agree on how to do it, experts said. The matter gained momentum after Sept. 11, 2001, when airplanes were grounded and the movement of checks stopped.

"Sept. 11 demonstrated the risk inherent in the way we clear checks today because it relies on physical delivery," said Stuart Williams, director of product management and strategy with CheckFree Corp., a provider of electronic commerce services.

Congress passed Check 21 a year ago, and institutions have had a year to prepare.

Consumer advocates' big complaint is that the new law is one-sided. Money will fly out of consumers' checking accounts faster, but banks can keep the same hold on customers' paychecks and other deposited checks. Under Fed guidelines, out-of-state checks, for example, can be held for up to five days, or longer if the account is new or the check is large.

"The concern is that consumers might be blindsided by the speedup in funds leaving their accounts with no matching speedup over when funds come available," said Gail Hillenbrand, senior attorney with Consumers Union in San Francisco. "It's this one-way speed."

Floating risk

Those particularly at risk of bouncing checks are consumers who play the "float," the time between when a check is written and it shows up at the consumer's bank. Consumers may no longer be able to count on writing a check one day and covering it a couple of days later when they get paid. Bounced check fees range from $20 to $35, and have been rising faster than the cost of living, said Jean Ann Fox, director of consumer protection for the Consumer Federation of America.

Pinnacle Financial Services, a financial services consultant, estimates that by midsummer almost 7 million more checks per month could bounce, potentially triggering $170 million in fees. That's still a tiny percentage of the 42 billion or so checks written each year, said Pinnacle's chief executive, Joe Gillen.

Check 21 requires the Fed to assess down the road whether holding periods should be shortened as checks clear faster, and banks say they routinely make money available faster than the Fed suggests anyway.

Banking experts also point out that checking account transactions have been getting faster over the years, and consumers have adapted. Local checks now clear in a day. Retailers can scan checks and get quick access to customers' money. Consumers widely use debit cards that immediately deduct cash from their accounts.

And playing the float always has been a risk for consumers, experts added.

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