By David Milstead
Your check is not in the
mail. In fact, you may never see it again.
The reason: Check Clearing
for the 21st Century Act, better known to bankers as "Check 21." The
law, which goes into effect Oct. 28, gives legal standing to a "substitute
check," a reproduction of the original.
This allows banks to transmit
electronic images of checks, rather than the original, through the payment system.
Any bank that doesn't fully embrace Check 21 and wants to handle paper instead
will get a printed "substitute check."
It is the biggest change
in the way the banking system handles payments in 30 to 40 years, bankers say.
Yet many consumers who maintain
a healthy balance in their checking account and who don't ask for their checks
back every month may notice little after the law goes into effect.
However, people who live
paycheck to paycheck, playing the "float" between bill-paying time
and payday, might find that their quick- clearing checks are now bouncing like
SuperBalls. And traditionalists who pay extra to get those original checks back
each month will now find the "substitute check" copies - or no originals
at all.
Banks who put the millions
into new Check 21-capable systems can cut transportation costs and profit in
the long run. They can also offer their commercial customers new systems that
enable instant check deposits and faster crediting - a service that might undercut
smaller community banks.
"Check 21 has eliminated
this incredible transportation issue, with millions and millions of checks transported
each day," said Bruce Alexander, CEO of Vectra Bank Colorado, which currently
must put checks deposited in its Western Slope branches onto a plane every day
to get them to its processing facility in Denver. "It will have a profound
impact."
Roots in 9/11
While serious efforts to promote electronic transmission of checks began in
2000 or earlier, it was the terror attacks of Sept. 11 that accelerated the
Check 21 law. For years, banks used airplanes and trucks to transport checks
from one bank to another. In the days following Sept. 11, as all air traffic
was grounded, checks languished, uncashed, illustrating the vulnerability of
the check-clearing system.
Congress passed the law
in October 2003, giving banks and their customers a year to get ready. With
implementation now just weeks away, most consumers are still in the dark.
A number of consumer groups,
notably the Consumers Union and the various Public Interest Research Groups,
including Colorado's CoPIRG, are warning bank customers about the potential
effects of the law.
Chief among their concerns:
Consumers need a copy of check that meets the legal definition of a "substitute
check" in order to preserve their full legal rights in case of a dispute.
Also, they say, consumers' checks will clear faster, while no change has been
made in the law to ensure consumers' deposits are credited any faster.
"The only way consumers
will know if there is a problem with their accounts is to read their statements
carefully and check everything that is returned with the statement," said
CoPIRG's Ben Davis. "If you see a problem, remember that all copies are
not created equal, you will need to specifically ask for a substitute check
- not merely a copy - to legally resolve any dispute with a merchant or creditor."
Davis said an image is not
a substitute check, and not every paper copy is a substitute check.
Davis' advice: Always check
bank statements against the register.
Banks confident
The Consumers Union has called on banks to adopt a number of consumer- friendly
policies, including waiving bounced-check charges for the rest of 2004.
The Rocky Mountain News
asked four of the major banks operating in Colorado a series of similar questions
about their Check 21-related policies. Most say they either already have policies
in line with the policy requests, or that Check 21 will not have the dramatic
effect that the consumer groups think.
"We don't think float's
going to decrease in the short run," said Steve SaLoutos, a Milwaukee-based
U.S. Bank senior vice president who oversees the bank's consumer products. U.S.
Bank already processes checks in an average of 1.1 days, he says, and it's hard
to do it much faster, he said. "Oct. 29 is going to be much more like Oct.
27 than people realize."
Also, the banks have no
plans to relax bounced-check fees. After all, "If you write a check and
you don't have the money in your account, technically that's a fraudulent transaction,"
says Ed Herman, the director of the global payments portfolio of computer company
EDS. Texas-based EDS and Wisconsin- based Fiserv, along with the Federal Reserve,
are the major providers of check- processing services in the new Check 21 era.
Opinions are divided on
Check 21's potential effects on fraud. Critics are concerned that the increased
destruction of checks, before they get back to the consumer, makes it more difficult
to prove fraud.
On the flip side, proponents
note that the faster a check clears and shows up on a statement, the sooner
a bank customer realizes that a fraudulent check has been written, or an error
made.
"I used to be a securities
fraud investigator, so I know the importance of having the original check, the
envelope, the possibility of fingerprints on the check, proof of tampering,
et cetera," says Barbara Walker, executive director of Independent Bankers
of Colorado. "Starting at least 10 years ago, big financial institutions
were destroying checks and imaging them within a month or less of collection.
Imaging changed that world back then, so this is absolutely nothing new; it
simply closes the loop."
Walker says the most important
message to consumers: "If you don't use duplicate checks, you should do
so to have a record of what you did and when you did it. And you must, must,
must go through your statements every month."
Competitive advantage
While consumers may not notice the effects of Check 21 immediately, small businesses
will soon likely have banks knocking on their doors, selling systems based on
the new law.
Vectra Bank Colorado is
trying to sign up customers for its remote deposit product. The business purchases
a check scanner and software package, created by Vectra's Salt Lake City- based
sister company NetDeposit, for an upfront investment from hundreds of dollars
up to about $3,000. The service costs about $40 each month.
Curt Morgan, Vectra's head
of treasury services, says customers who use remote deposit eliminate the need
to hire a courier or use an employee to take checks to the bank at the end of
the business day. The funds become available in one day, rather than in two
to three days. And Vectra cuts 1 cent per item off its normal per-item processing
charge.
Morgan tells clients they'll
see a return on their investment in two to three months. Danne Buchanan, CEO
of NetDeposit, says "banks of all sizes, if they embrace Check 21 aggressively
and deliver new products, will gain market share; the others will redefine their
franchises with what's left."
Not all small banks are
on board.
"Many community banks
are waiting to see how it all works and hoping the necessary software goes down
in price before jumping on board," says Walker of the Independent Bankers
of Colorado. "For years the biggest banks essentially had adopted a Check
21-type processing among themselves. Check 21 essentially gives legitimacy to
those checks and places in the law protections for financial institutions that
now have to accept them."
EDS' Herman says banks with
more than $10 billion in assets realize "the most significant savings,"
with benefits dimishing "on a sliding scale" as banks get smaller.
For perspective: Wells Fargo had roughly $410 billion in assets at the end of
the second quarter, Bank One had about $330 billion, and U.S. Bancorp had just
under $200 billion.
By comparison, FirstBank
Holding Co. is Colorado's largest bank company, with $7 billion in assets on
June 30. Four other companies top $1 billion; the remainder of the state's 87
bank holding companies have assets below $1 billion, with nearly half below
$100 million in assets, according to data from the Federal Deposit Insurance
Corp.
Checking the effect on customers
The Rocky Mountain News
asked four of the biggest banks in Colorado a series of questions about how
Check 21 will affect their customers. The responses below came from e-mail or
telephone interviews with representatives of each of the banks:
Will your customers be able
to have a checking account that provides original and/or substitute checks back
every month for the same fee that you currently charge for an account that provides
the original checks back?
• Wells Fargo: Over
the next several months, new options, including image statements and access
to images via wellsfargo.com, will become available to customers and will eventually
replace check return. Until that time, check-return customers will continue
getting their original checks with their monthly statement. However, check-return
customers will not receive a paper version of substitute checks in their check-return
statements. Instead, a special notation will be made on check-return statements.
• U.S. Bank: U.S. bank
has check images available for customers on its Web site. Customers who currently
get their checks back will not get substitute checks as part of the mix once
Check 21 goes into effect.
• FirstBank: Yes, the
fee is the same whether you are receiving substitute checks, the original items
or a combination of both.
• Bank One: Yes.
Will there be any change
in policy or amnesty program for bounced checks as consumers learn that the
"float" has decreased?
• Wells Fargo: No.
"Float" has been going away for some time already. At Wells Fargo,
float time averages less than one day for retail transactions even prior to
Check 21. As always, consumers need to make sure that they have enough money
available in their accounts to cover the checks they write. Wells Fargo reminded
all retail customers in a Check 21 educational brochure that now checks might
clear faster and to write checks only if they have sufficient funds in their
accounts.
• U.S. Bank: No. We
don't think float's going to decrease in the short run. There's some likelihood
large-dollar checks moving across the country will move faster.
• FirstBank: Check
21 will be implemented over time, and as a result, there will not be an immediate
change in the speed at which all checks clear customer accounts. We already
waive the overdraft fee for the occasional overdraft and think this existing
approach will cover the transition period for our customers.
• Bank One: No.
Will your customers' deposited
checks be credited any faster than before?
• Wells Fargo: The
vast majority of funds from deposits are available to customers either the same
day as the deposit is made or the next day. In fact, at Wells Fargo, holds are
placed on less than 1 percent of deposited items. Federal law sets the amount
of time a financial institution can hold a deposited check to ensure funds are
available. We understand that the government wants to see Check 21 in action
before deciding whether to shorten allowable hold times or not.
• U.S. Bank: We give
customers next-day availability anyway, and that's going to stay the same. The
exceptions are a five-day delay for new customers, and an extended hold, in
rare circumstances, for suspicious checks.
• FirstBank: As a general
rule, we allow access to deposited funds on the next business day. This is more
aggressive when compared with many other banks. Check 21 will not change this approach, as the next day
is the quickest most deposited items can be collected under the new law.
• Bank One: Not in
the beginning stages of Check 21.
Will there be any fee for consumers who request a substitute check? How will
this differ from the fee you currently charge your customers to obtain an original
check?
• Wells Fargo: The
fee for receiving a copy of a substitute check or original check will be the
same.
• U.S. Bank: Customers
can get two per month and can access images for all their checks online. There
will not be a fee unless customers ask us to go back in time for large numbers
of checks.
• FirstBank: The fee
is the same whether you are requesting a substitute check or the original check.
• Bank One: Answer
not provided.
Large banks are expected
to save money in the long run through the implementation of Check 21. How will
these savings be passed along, if at all, to consumers?
• Wells Fargo: Check
21 will make check processing more efficient and reduce transportation costs;
however, financial services companies, like Wells Fargo, at the same time are
making a large investment in image technology. We cannot predict the costs of
establishing an image exchange network, the cost to print substitute checks
or the costs of maintaining a fully populated image archive. Without knowing
these costs, we cannot estimate cost savings - if any - for customers at this
time.
• U.S. Bank: The expectation
is the banking industry saves money because we'll be able to reconfigure the
transportation system. But when the price of a free checking account is free,
it's hard to lower the price on that. We ask whether it's a better deal to bank
at U.S. Bank than it was a year ago. And with us now offering a complete image
statement and check images on our Web site - customers didn't pay any more for
that.
• FirstBank: Like any
other cost savings, it will be evaluated along with market information to determine
any change in the pricing of our services.
• Bank One: Cost savings
will come only after our initial $100 million investment in image enabling and
processing equipment. There will be enhanced services, like imaged checks and
the ability to make an image of the check at the teller window.
What is Check 21?
The Check 21 law, slated to start Oct. 28, gives legal standing to a "substitute
check," a reproduction of an original check.
Why did it become law?
• In the aftermath of Sept. 11, as airplanes were grounded across the U.S.,
the banking system slowed to a halt as paper checks were stranded, unable to
be sent back to the paying bank. By giving legal standing to a substitute check,
Check 21 allows banks to send an electronic image of a check, not the original
paper item, through the banking system for payment.
What's going to happen?
• Many banks will begin converting your checks into electronic images in
order to process them.
• Even if your bank
doesn't fully implement Check 21, another bank that handles your check may turn
it into an image.
Can I still get my checks
back?
• No. While many banks will offer the chance to see images of your checks
on the bank's Web site or in your statement, you are no longer guaranteed to
get your original check back.
Will my checks clear faster?
• Most people say yes. Once someone deposits your check, chances are good it
will get back to your bank faster - meaning the money will get deducted faster.
