Beginning today, a new law will make it possible for checks to be cleared days faster, which could mean bounced checks for consumers if they’re not careful.
Before the change, banks needed the original check in hand before withdrawing money from a customer’s account. That required paper checks to be physically transported between banks, which sometimes took as long as five days when checks had to be flown across the country.
Check Clearing for the 21st Century Act, or Check 21, paves the way for banks to electronically transmit checks and do away with the travel time. The law requires banks that can’t receive electronic images to accept a paper reproduction of a check, called a substitute check, as if it were the original. Under Check 21, an out-of-town check will be able to clear within 24 hours.
Consumer advocates have raised the alarm of the potential consequences of the new law. Money will come out of customers’ accounts faster, but Check 21 doesn’t guarantee that consumers will get access any quicker to their money when they deposit checks. That could lead to bounced checks and hefty fees. And Check 21 may open the door to more errors or new kinds of fraud, they say.
Bank officials, though, say the change won’t be radical.
“We really see change from Check 21 as evolutionary, not revolutionary,” said Betty Riess, a spokeswoman with Bank of America in San Francisco.
Many of the largest handlers of checks won’t begin to electronically move checks until mid-summer or later next year, said John Hall, a spokesman with the American Bankers Association.
Bank of America, for example, will launch a pilot program at the end of this year involving less than 1 percent of the checks it handles.
The move to reduce the shuttling of checks from bank to bank has been long and slow. Congress authorized the Federal Reserve to speed up the check clearing process in 1987, but financial institutions couldn’t agree on how to do it, experts said. The matter gained momentum after Sept. 11, 2001, when airplanes were temporarily grounded and check movement stopped.
“Sept. 11 demonstrated the risk inherent in the way we clear checks today because it relies on physical delivery,” said Stuart Williams, director of product management and strategy with CheckFree, a provider of electronic commerce services.
Congress passed Check 21 a year ago, and institutions have had a year to prepare.
Consumer advocates’ big complaint is that the new law is one-sided. Money will fly out of consumers’ checking accounts faster, but banks can keep the same hold on customers’ paychecks and other deposited checks. Under Federal Reserve guidelines, out-of-state checks, for example, can be held for up to five days, or longer if the account is new or the check is large.
“The concern is that consumers might be blind-sided by the speed-up in funds leaving their accounts with no matching speed-up over when funds come available,” said Gail Hillenbrand, senior attorney with Consumers Union in San Francisco.
Bounced check fees range from $20 to $35 and have been rising faster than the cost of living, said Jean Ann Fox, director of consumer protection for the Consumer Federation of America.
Pinnacle Financial Services, a financial-services consultant, estimates that by mid-summer almost 7 million more checks per month could bounce, potentially triggering $170 million in fees.
Check 21 requires the Fed to assess down the road whether holding periods should be shortened as checks clear faster, and banks say they routinely make money available faster than the Fed suggests.
Another concern of consumer advocates is that errors, such as double debiting of accounts, will increase with paper checks and their electronic images floating around.
Check 21 does create a new consumer right involving errors with substitute checks. If a consumer reports an error related to a substitute check, and the bank can’t resolve the problem in 10 business days, the customer’s account must be credited for up to $2,500 while the investigation continues.
Mark Budnitz, a law professor at Georgia State University, said once banks electronically transmit a check’s image, the original will be destroyed. If fraud does occur, the loss of the original would make it impossible for law-enforcement officials to do fingerprinting or handwriting analysis, he said.