Check 21 slowly endorsed

The new banking law allows transmitting checks electronically instead of the current physical transfer.
Friday, November 5, 2004 | 12:00 a.m. CST; updated 7:10 p.m. CDT, Sunday, July 20, 2008

A new law designed to speed up check processing and put an end to “the float” might worry check-writers, but banking industry representatives say not to expect a sudden change.

The Check Clearing for the 21st Century Act, or Check 21, that went into effect last week, has been described as the death knell for check-floating — writing a check before depositing the funds to cover it. Designed in response to Sept. 11, when stalled transportation caused problems for financial institutions, Check 21 allows banks to transmit checks electronically, freeing them from the obligation to physically transfer the paper check.

“A Columbia resident writing checks locally already has only about 24 hours before the check is processed,” said Mary Wilkerson, vice president of marketing at Boone County National Bank. She added floaters writing a check out of town still may have four or five days before the check clears, but that window will gradually close as more and more banks adopt electronic “image exchange.”

A new check

Many customers will never notice the difference. Industry-wide, 80 percent of individual customers and 50 to 60 percent of businesses don’t receive their original canceled checks with statements.

Specifically, Check 21 creates a new type of negotiable document: the “substitute check,” a legal equivalent of the original check. It’s not just any copy; it has to be formatted in a specific way and contain a statement identifying it as a legal copy. While the law doesn’t require electronic transmission, it legally recognizes substitute checks created from such transmissions.

Any bank along the paper trail can convert the paper check to an electronically transmitted check and destroy the original. This includes Federal Reserve banks or other clearinghouses, the check casher’s bank or the check writer’s bank.

Evolutionary process

Area banks said they expect their transitions to electronic processing to be gradual. Some large banks already have agreements to use limited electronic exchange. Eventually, more and more banks will develop such agreements until the process becomes widespread.

“It’s more of an evolution than a revolution,” said Betty Reiss, a spokesperson for Bank of America. will be sending a small number of image checks — 1 percent or less — by the end of this year. She said how useful and cost-effective image-exchange is depends on how quickly the industry adopts it. Bank of America sent Check 21 information out with its October statements, telling customers they may begin to find some substitute checks along with their cancelled checks.

Chuck Welch, vice president of UMB Bank in Kansas City, said the bank would begin using image exchange in 2005. He said larger banks could afford the $10 to $12 million in hardware costs and were likely to begin using the technology sooner. For now, the hardware is too expensive for small banks like UMB, he said.

Wilkerson said her bank has been utilizing imaging technologies for 10 years, mainly for storage and for allowing customers to look at their checks online. She said it will be at least a year before the bank sends and receives check images electronically.

“We’re evaluating the technology available and deciding which available system is best,” Wilkerson said.

Kim Barnes, director of support at The Callaway Bank, said check image technology has been used there since 1997. The bank will become a full image partner with the Federal Reserve Bank of St. Louis, agreeing to image exchange on a test basis.

Keeping fraud in check

As with all new technologies, Barnes said, the increase of image exchange will mean a decrease in some types of fraud, while providing opportunity for others. Barnes said faster processing will alert victims of fraud sooner. Fraud that depends on lag time, such as “check kiting”— where someone opens multiple accounts and writes bad checks between them — will be severely reduced.

Danielle D’Angelo, a spokesperson for information technology services company Unisys, says online check viewing already has security risks. For example, if third parties obtain a customer’s log-in and password information, they can see checks and signatures, check numbers and other vital information in one place. D’Angelo said her company is urging banks to link paper and online fraud detection resources into a “fraud ecosystem.”

D’Angelo said Unisys is concerned with banks rushing to comply with Check 21, as many have just begun to think about the big security picture. She estimated that by 2007, check image exchange will be broadly accepted.

In any case, the check appears to be on its way out — slowly. A 2003 American Bankers Association survey found that, for the first time, customers used more plastic in stores than checks or cash. Cash and checks combined for 47 percent of purchases, while debit cards accounted for 31 percent and credit cards for 21 percent. Bill-payers still prefer checks, using them in 60 percent of transactions.

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