‘Check 21’ act: dramatic changes to use of checks

On the Money
From the November 5, 2004 print edition

The Check Clearing for the 21st Century Act went into effect Oct. 28. The Act, known as “Check 21,” encourages the banking industry’s use of image technology to create electronic versions of checks, called Image Replacement Documents (IRD).

The law also changes the manner in which checks are processed and returned to the creator.

This new law removes the requirement that banks handle paper. Instead, banking institutions may process electronic images of your original checks.

The time between writing a check and it being paid is known as “float.” Under Check 21, checks that you write will be processed in a matter of hours (maybe even seconds), not days. In the past, typical float times were between two and four days. That time lag is now virtually gone.

Businesses and individuals commonly utilize float to their advantage. Banks themselves even offered predictive services so customers could keep their funds in interest-bearing accounts until the last possible moment.

Float taken to the extreme is called “kiting.” Kiting is the process of moving imaginary money within the check-clearing cycle. For example, you have $10 in bank A but you write a check on the account for $500 and deposit it in bank B. Before that deposit can be processed, you go back and tell the teller at bank B that you want to withdraw $400. The teller gives you $400 in cash, and you disappear before the check bounces.

Another service that will change is the “stop payment.” With such fast processing times, it will become harder to prevent a check you’ve written from being paid. With just a few hours to enter a stop-payment notice, the ability to control purchase rescission and high-pressure conflict situations is greatly diminished.

Under the new act, any bank in the processing sequence can convert your paper check into an electronic image, discarding the original.

Canceled checks that are converted into an IRD won’t be returned with your statement and are unrecoverable from your bank.

However, IRDs have the same legal standing of an original check. Presenting an IRD will serve as presenting the original. Banks routinely save copies of canceled checks (and IRDs) for seven years.

On the other hand, there isn’t yet a limit on what banks will be allowed to charge for providing electronic checks. You may also have more difficult time proving fraud. Pen pressure or ink color variations are common fraud-detection techniques.

The banking industry has known for quite awhile that electronic check processing could save perhaps as much as $2 billion a year. Under previous law, financial institutions normally needed to return paper checks to the issuing bank in order to be paid, moving them by air, truck and courier. Check 21 eliminates this transportation cost. At $200 billion in checks processed every business day, this is a enormous savings for banking institutions.

Another important piece of the Code of Federal Regulations, namely Title 12, Section, 205, Regulation E, now becomes even more critical. The Electronic Fund Transfer Act, ” … establishes the basic rights, liabilities, and responsibilities of consumers who use electronic fund transfer services and of financial institutions that offer these services. The primary objective of the act and this part is the protection of individual consumers engaging in electronic fund transfers.”

Here are some recommendations for dealing with the changes brought about by Check 21:

• Use a debit card for in-person transactions. Debit cards are covered under Regulation E, which gives you the powerful “right of re-credit.” If a mistake is made in the transaction, the bank must resolve the problem or put the disputed amount back in your account within 10 business days.
• However, if the card will be out of your sight, such as at a restaurant, use a credit card instead. Though banks will restore any money stolen using your debit card within a few days, you may have to live with an empty checking account if you’ve used a direct debit card.
• Use automatic debit for recurring bills. Although still resisted, you actually have more rights under Regulation E to deal with any errors related to automatic debit than when writing a check. Now that float will be a thing of the past, the advantage to paper checks has disappeared.
• Use online bill payment. Again, Regulation E protects electronic payments. If you use online bill payment, take steps to keep yourself safe, such as not using public computers or wireless hotspots for financial transactions and keeping your anti-virus software up to date.

For more information and suggestions, visit NACHA, the Electronic Payments Association at ecc.nacha.org.

© C. Stephen Guyer for American City Business Journals Inc. All rights reserved.