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A new era in banking begins

Beginning Oct. 28, consumers will receive "substitute" checks like this one instead of canceled checks from their banks.
Beginning Oct. 28, consumers will receive "substitute" checks like this one instead of canceled checks from their banks. American Bankers Association
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Every night, millions of cashed checks fly around the country, headed for their home bank.  Starting Thursday, technology will begin grounding many of those flights.  And it may ground some consumers, too — those who try to sneak an extra day or two of "float" out of their checking accounts.

A new era in banking has begun as the Check Clearing for the 21st Century Act, commonly known as Check 21, takes effect. Banks will slowly get away from the business of flying checks around the country each night. Instead, checks will be cleared electronically, and often destroyed when they are cashed.

"We are bringing the industry out of the Pony Express era," said John Hall, spokesman for the American Bankers Association.

But the new law might have some surprising — and unwelcome — side effects for checking account customers. Consumers trying to stretch their money have become accustomed to taking advantage of "the float" — the time it takes after they write a check for banks to deduct from their accounts. It's a bit of a secret loan, but Check 21 means it's about to be shut down for good.

Also about to be historical artifacts: bank statements packed with canceled handwritten checks. 

Congress passed the legislation authorizing the change last year. The Check Clearing for the 21st Century Act cleared the way for the simplified process by allowing digital images of checks to be deemed legal representation of payment — so-called substitute checks can now be presented to angry landlords or telephone companies as proof of payment.

The drive to clear checks electronically was fueled in part by the 9/11 attacks. While all flights across the United States were grounded, banks couldn't process checks, holding up a vital cog in the commerce system. Bad weather can have the same effect, said Ed Bachelder of Dove Consulting. The new Check 21 process can't be stopped by grounded flights.

"Think of it as being able to fax a check," said Bachelder said. Meanwhile, banks will see immediate savings from Check 21; the nonprofit Consumers Union estimated the banks' savings at $2 billion.

"It's a very expensive proposition at $50 a barrel to be flying paper around the country," Bachelder said.

Unhappy surprises
While there's little argument that the old check clearing process was outdated, some consumer advocates are concerned the changeover to Check 21 might lead to some unhappy surprises.

"It's never been a good idea to write a check before the money is in your account," said Consumers Union attorney Gail Hillebrand. But consumers who go grocery shopping on Thursday and write a check, expecting their payroll check to cover them when it clears on Friday, might suddenly end up paying for overdrafts. 

Banking industry insiders say such worries are much ado about nothing. Changeover to the digital system will come very gradually, they say. Most banks will operate both paper and image systems for years to come, according to Bank of America's Betty Riess. 

"It's not as if Oct. 28, a switch is flipped," said Hall of the American Banker's Association.

The most immediate impact will be seen by those who write out-of-town checks, Hall said. Float time on those could be sharply reduced.

But some estimates say up to 95 percent of checks clear in one day anyway, said Jeff Fowler, spokesman for First Data's Telecheck, which helps retail outlets verify check payments. Still, taking advantage of the float is common, he said. In a consumer survey taken by the firm this year, 8 percent of respondents said they write checks "because they like float."

How many checks will bounce as Check 21 takes hold is in dispute. Consumers Union suggests 7 million additional checks will be hit with overdraft charges each month; Hall says the number is an exaggeration. But consumers who are used to sneaking in under the wire will certainly face some surprises, Fowler said.

"Checks will likely clear sooner. That is something that people need to be aware of ... It's true more checks will bounce," he said. "A check is not a loan, and it never has been."

More concern about packrats
Check 21 will likely be noticed most by packrats who save all their canceled checks in shoeboxes, Hall said.

Teledata's survey indicates about one-third of checking account holders still get their checks mailed back to them at the end of the month.  Most tend to be older, or in the Northeastern states, he said. Beginning at the end of October, those consumers will get a mixture of traditional canceled checks and substitute checks.  Eventually, canceled checks will completely disappear. 

The images will actually be larger than the original check, meaning shoeboxes just won't hold them, Hall said.

Bachelder said surveys have shown that consumers who are in the habit of getting back their old canceled checks get instantly frustrated when they are taken away.  But others in the bank industry say consumers have had plenty of chance to get used to checks that are processed electronically. Many retail stores, including Wal-Mart, scan checks immediately and convert them into electronic funds transfers. Consumers who use online bill paying are used to seeing images of their checks on bank Web sites.  In fact, the usage of checks is currently in slow decline, giving way to various types of electronic transfers, including debit cards.

But the nuisance of finding larger boxes to store the checks might not be the only headaches for consumers. The Consumers Union also warned that banks may use the opportunity to increase fees for accounts that return canceled checks or their substitutes. Currently, many banks on the West Coast already charge $1 a month to receive canceled checks.

"It should be cheaper, not more expensive, to provide substitute checks," she said. The consumer group is calling on banks to keep their current fee structures as they are, and not charge consumers extra for substitute checks.

Banks are expected to begin notifying consumers about the changes this month; they haven't discussed possible fee changes. But Hall expects that for consumers, the Oct. 28 date will come and go as quietly as the Y2K computer switch.

"Change comes difficult," he said. "But like Y2K ... most people will notice nothing."