|Check 21: New law ends checking
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.
Check 21, shorthand for Check Clearing for the 21st Century Act, went
into effect Oct. 28, 2004. It is designed to modernize the way checks
are processed. The bank, or the company you sent the check to, can
turn the paper check into an electronic image and speed its image
and data through the system. In addition to saving the banking industry
billions of dollars in transportation and processing costs, it will
avoid situations where transportation grinds to a halt due to weather
or more dreadful reasons such as Sept. 11.
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
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
Washington Mutual, one of the 10 biggest banking institutions
in the country, is just dipping a little toe in the Check 21 waters.