W. Alan Beckelheimer "Something To Think About ..." Published Nov. 5, 2004

Customers lose, banks win with Check Clearing for the 21st Century Act

Consumers who have become used to writing checks in the expectation of having at least a couple of days to cover them with a deposit may soon be in for a rude awakening.

Under a federal law that took effect last Thursday, banks were given more leeway to process checks electronically, and subsequently this will undoubtedly translate to shorter or even nonexistent float times, the grace period between the time checks are written and when the money is debited from the account.

As banks begin making digital images of checks, shred the originals and use the images for processing, customers will see several changes besides the faster clearing. Consumers will receive fewer of the original checks in their bank statements as well as an increase in paper substitutes, which will be printed when checks are handled the new way. Most banking customers already receive statements with images of their checks or lists of them.

But the new law, which is called the Check Clearing for the 21st Century Act and known as Check 21, does not change the length of time that banks can hold checks deposited by their customers. It is this mismatch between existing check holds and the prospect of faster clearing that has helped turn Check 21 into a focal point for consumer groups, which have added it to a growing list of grievances against banks.

These groups say Check 21 will create confusion among consumers and that there will be more room for fraud, like counterfeiting and identity theft, when banks start routinely converting original documents to images, which can be harder to read.

Law enforcement officials express concern that check images, which include a copy of the bar code, will be easier to replicate, and that the absence of the original document will frustrate efforts to use fingerprints and other standard methods to catch criminals.

A major impetus for Congress to pass the legislation was the 9/11 attack, when the grounding of airplanes disrupted the payment system because checks could not be flown to their banks of origin. But the banking industry, which has long sought to save money on check processing and rely less on paper (which costs the industry an estimated $5 billion a year), had already been moving in the direction of more electronic processing.

Consumers Union, the publisher of Consumer Reports magazine, has collected 15,000 signatures for a petition that asks banks for various safeguards as they put the law into effect, including the suspension of bounced check fees for the first two months and a promise to return funds to a consumer's checking account within 10 days if something goes wrong.

It is my opinion that banks will be saving a considerable amount of money through the efficiencies that the law will bring about, but instead of passing along the savings to customers, they will be reaping extra fees for bounced checks. This is shameful considering the current state of our nation's economy.

When customers are at the retail checkout, they understand that debit transactions are going to come out of their account quicker than a check, but that will be increasingly untrue. We need to treat every one of our checks as if it is the one that's going to clear today, and that's new and disturbing.

Some retailers, like Wal-Mart, have already started taking images of customers' checks at the cash register, handing back the cancelled item, and processing the purchase electronically. That system still takes a day or two.

But bankers and retailers envision that in a few years there could be a near-instantaneous system of checks being converted to images in a store, sent electronically to the banks that need to process the transaction, and settled in mere hours or minutes.

Because there will be a shorter window to place a stop order on a disputed check, or perhaps none at all, Consumers Union and other groups already recommend that people use credit cards instead for some purchases.

The technologies are all advancing, but consumer protections are not. I know that there are going to be a lot more bounced checks, a lot more fees paid to banks, and a lot more angry consumers.

Bankers have been busy reminding their customers that regardless of Check 21, they are never supposed to write checks unless there is enough money in the account to cover them.

Eventually float will shorten, and shorten dramatically for out-of-town checks.

While official hold times on customers' deposits will not change - banks must make funds available on local checks in two days, and five days on out-of-town checks - most banks do not make their customers wait that long.

Technically, what Check 21 does is create a new negotiable instrument called a substitute check, which permits a bank to take an image of a check that is presented for deposit and process it electronically. There is no need to transport the check to the bank against which it was written; that bank can print a substitute itself and send it to its customer.

Bankers say that most consumers will not notice the effects of Check 21 right away. Consumers and small-business owners who use returned checks for record-keeping will see a mix of originals and paper substitutes, which may cause surprise or dismay.

People have an emotional tie to their checks or feel an emotional connection to their checks being returned to them and rightly so. The banks may handle our money but increasingly it seems as if many banks have forgotten this. There is a sense of security in knowing that check that I sent off in the mail for a bill comes back to me in its original form, just voided. Not getting these checks back forces me to put a lot of trust in an electronic banking system which has done me more harm than good.

One critic of Check 21 is Frank W. Abagnale, who spent time in jail for a check fraud spree and has spent the years since his release trying to promote fraud prevention. Mr. Abagnale, who was played by Leonardo DiCaprio in the 2002 Steven Spielberg movie Catch Me if You Can, says "that placing check images online and in mailed statements will abet criminals by giving them the look and feel of the documents."

On the other hand, some bankers say that Check 21 will actually reduce check fraud.

Consumers are now getting a sense that checks will clear faster and on the deposit side they're going to be asking, "if you (the banks) are getting it faster, how come you're not going to give it to me faster?' and I think that's something that banks are going to have to grapple with. This may cause banks to reconsider availability policies, which they should do considering the amount of money they will be saving because of Check 21.

Although I agree with the overall policy change brought on by Check 21, even though it will be hard for some people to get accustomed to, I do not agree with the fact that it seems that banks are utilizing this new law to all but take advantage of their customers. Why shouldn't the customer be able to benefit from some of the savings the banks will amass because of this legislation?

As most of you already know, banks skilfully take more than their fair share of our hard-earned dollars (which are worth increasingly less in our over-burdened economy) through account maintenance fees, check service fees, overdraft fees, etc., and it seems that they are quite content to continue their imperialistic march over my poor wallet.

If you agree with this at all, please take the time to write your legislators and let them know that you, the concerned electorate, want some kind of equality imposed upon the banking industry so that they pass some of their savings back to the customers that keep them in business in the first place.

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W. Alan Beckelheimer is a Crossville Chronicle staffwriter. His column appears each Wednesday in the Chronicle.