Check 21: New law ends checking traditions
By Laura Bruce • Bankrate.com

Watch out for bouncing checks. The Check 21 has taken effect and it could mean that your checks will clear much faster than you're used to. If you don't keep your checking account adequately funded, you may find non-sufficient funds fees piling up.

Some consumer advocates emphasize that checking account customers will no longer have the right to receive their original canceled checks and the float will be reduced, threatening some consumers with a maelstrom of bounced check fees. But people within the banking industry say Check 21 will be evolutionary rather than revolutionary and that many customers will hardly notice the changes.

"The old law said paper checks had to be presented (for payment), but that was written before computers," says John Hall, spokesman for the American Bankers Association. "The whole checking system is being brought from the Pony Express days to the computer age. The current system is clunky, antiquated and it's being made more efficient with cheaper overhead."

Check 21 creates a new negotiable instrument called the substitute check (image source: American Bankers Association). It is a paper reproduction of the original check and contains an image of the front and back of the original check. It must carry the legend: "This is a copy of your check. You can use it the same way you would use the original check."

If you receive an electronic image of your check and it doesn't have that legend, it's not a substitute check.

When you mail a check to pay your utility bill, the check winds its way through local and regional banks before ending up at your bank, where it's deducted from your checking account. Check 21 allows any business or financial institution along that path to stop, or truncate, the paper check, turn it into an electronic image and destroy the original. A substitute check can be created from the electronic image if an institution along the path says they don't accept electronic images and instead wants to be sent a substitute check.

Check 21 only requires that banks accept substitute checks; they don't have to create substitute checks or exchange electronic images, says ABA's Hall.

"A lot of banks aren't doing it because of cost. It's a laborious change for some banks. It's very expensive and takes time. Check 21 doesn't mandate electronic check processing. Electronic and paper systems will coexist for a number of years to come."

Washington Mutual, one of the 10 biggest banking institutions in the country, is just dipping a little toe in the Check 21 waters.