Posted on: Thursday, August 12, 2004

New law shortens the 'float' on checks

By Albert B. Crenshaw
Washington Post

WASHINGTON — Canceled checks may be headed for extinction.

A big step in that direction will take place Oct. 28 when a new federal law takes effect, making it far easier for banks to use computers to clear checks.

The new law, known as "Check 21," allows banks to transmit check images electronically, then print out these images as "substitute checks." The need to ship millions of pieces of paper from one end of the country to the other will be greatly reduced.

For the majority of checking account holders — who already don't get their canceled checks back — there will be little visible change.

Those who do still receive canceled checks will see instead a mixture of traditional ones and the new substitute checks. The substitutes will show the front and back of the check they represent and will be treated as the legal equivalent of the original.

Banks think this is a really good idea.

The new law, formally called the Check Clearing for the 21st Century Act, "is meant to bring check processing from the Pony Express era into the computer age," said John Hall of the American Bankers Association.

Banks in recent years have had the technology to exchange electronic images of checks, but, because of legal restrictions, broad use of such systems has been impractical. A key provision of Check 21 is elimination of the requirement that, to be paid, a bank must present the paper check to the bank on which it was written, unless the paying bank has agreed otherwise. It also preempts state laws allowing bank customers to demand return of their original checks.

"What the substitute check is really going to be is a catalyst to enable widespread adoption of image exchange," said Jason Hunt, a vice president at Wachovia Corp.

Paper canceled checks would not be forbidden by Check 21, but the industry's "ultimate goal," Hunt said, is to eliminate both regular canceled checks and substitute checks — and the millions of dollars in costs that shipping them now involve.

Consumer groups are less enthusiastic.

Checks, particularly those drawn on distant banks, will clear more quickly, but banks are not obligated to shorten the "holds," or make a depositor's money available any sooner (though the Federal Reserve is required by other law to tighten hold rules if clearing generally speeds up).

At the same time, checks you write also will clear sooner, shortening the "float" that many consumers use to write checks before they actually have the money in their account.