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On its surface, the Check Clearing for the 21st Century Act - Check 21 as it is better known - is simple.
As of next Thursday, instead of sending the check you write to pay your mortgage or for groceries all the way through the system, a merchant, bank or check processor will be able to make a substitute check, destroy the original and send the image of your check for payment.
"The biggest change that customers are going to see is that checks are going to post faster," said Helen Todd, spokeswoman for Regions Financial Corp. of Birmingham, the owner of Union Planters Bank of Memphis.
That won't happen with every check right away.
"It will be the end of the decade before the preponderance of checks will be processed electronically," said Jack Walton, an executive with the Federal Reserve in Washington.
Nonetheless, checking account holders will start seeing some changes immediately.
If their banks, or others along the way, create substitute checks, they'll receive those back instead of the real check.
That won't affect everyone. Many people aren't getting canceled checks back now - industry estimates are that covers 60 to 80 percent of accounts.
People will also have to stop living on float - that is, writing checks before they make a deposit to cover the payments.
Some of that has disappeared already, said Jim Blasingame, executive vice president and manager of the bank operations division at First Tennessee Bank.
More than 99 percent of the checks that go through the First Tennessee processing center in Memphis clear customers' accounts in one day, he said.
For other customers, the float they have enjoyed will erode over time, said Darrell Royal, executive vice president of Carreker Corp., a payment technology firm in Dallas.
James McLaughlin, director of regulatory and trust affairs for the American Bankers Association, believes it will be a year and a half before banks see an increase in bounced checks because of Check 21.
As that happens, the float period may go from three days to one, said Todd Vanderpool, president of Collierville-based BankTennessee, the subsidiary of Civitas BankGroup of Franklin, Tenn.
"Our advice is that people discipline themselves and not play that float game," he said.
Banks stand to gain by investing in the technology needed to create images of checks.
"A financial institution can clear checks faster, cheaper and better if they convert to an electronic, digitized image," said Ted Umhoefer, senior vice president of product management and industry relations for Fiserv, a financial technology company based in Brookfield, Wisc.
Now, most imaging goes through check-processing centers, but a number of banks are working on systems to exchange images directly, which will speed up check handling even more, Umhoefer said.
Large companies, like insurors, are putting together systems to allow them to transmit check images to banks, allowing them to save money by consolidating dozens of local bank accounts into one national account.
For banks that comply with it, "Check 21 takes the geography out of check clearing and accepting deposits," said Blasingame.
Instead of shipping checks to processors like First Tennessee, banks may use tabletop scanners to send images, create substitute checks and use those documents as if they were the real thing,
"This is going to be very, very gradual," said McLaughlin, talking to bankers at the ABA convention early this month.
For one thing, using substitute checks is optional - companies and banks have the right to use them, but the law doesn't require it, Royal said.
Also, about 70 percent of checks are local - the writer and the receiver have bank accounts in the same area - McLaughlin said. The rest have to be sent, normally by truck or airplane, to be processed.
Transportation was a key motivation for the new law.
"What really drove Check 21 was 9/11. After 9/11, planes didn't fly for three days."
That meant checks weren't flown from city to city for processing and the Federal Reserve absorbed about $47 billion in float because the cash to cover those checks couldn't be moved, either, he said.
Now, substitute checks may be turned into electronic images and sent from place to place without the worry of a transportation system shutdown.
Check 21 will be a two-edged sword for dealing with fraud.
To the extent it speeds up check processing, it will allow banks to know more quickly than before if a check is the result of fraud, such as identity theft, or if it is written on a closed account, Royal said.
"You can take action to pursue it more effectivley if you know it sooner," he said.
But, image technology may make it more difficult to identify a counterfeit check than having the paper check available, Royal said.
Watermarks, encrypted keys and other check features can't be read as well on images as on the original, he said.
"Any fundamental change gives fraudsters a chance to be creative," Royal said.
That makes the best protection against fraud verification that the check is coming from a trusted source, he said.
- David Flaum, 529-2330
Photo; Caption: Mark Weber/The Commercial Appeal ^T Keith Seay prepares to place checks into a sorting machine at First Tennessee's Banking Center on Prescott Road. Such a process will become dated when the "Check 21" federal law takes effect next Thursday, expanding electronic imaging of checks rather than processing paper checks. A machine at First Tennessee takes a picture of the checks and sends a copy to the payee and in the customer's bank statement while the original is destroyed.
Credit: David Flaum [email protected]
Copyright Memphis Publishing Company Oct 21, 2004