Hawai'i banks aren't rushing to clear checks faster
By Deborah Adamson
Advertiser Staff Writer
A federal law that lets banks clear checks electronically takes effect today, but Hawai'i banks are not yet participating.
The Check Clearing for the 21st Century Act, known as Check 21, allows banks to send images of checks electronically to each other, speeding up the withdrawal of money after a consumer writes a check.
Historically, banks have sent checks by airplane or ground transportation. But the new system allows checks to be cleared in hours instead of days. By sending checks electronically, the U.S. banking industry stands to save about $2 billion a year, according to Consumers Union in Yonkers, N.Y.
But the shortening of the "float" could lead to more bounced checks, experts say. It also will be harder to stop payment on a check and, over time, consumers will get back only substitute checks, not the original canceled checks.
However, Hawai'i's largest financial institutions are adopting a wait-and-see attitude about Check 21.
Bank of Hawaii has no current plans to adopt electronic exchange, said Sheila Gomes, senior vice president and manager of the transaction processing and services center. Central Pacific Financial — which owns Central Pacific Bank and City Bank — and American Savings Bank have no immediate plans to participate. First Hawaiian Bank is not participating, but eventually will adopt the system, said Duane Chun, vice president of the information management group.
Since financial institutions process a huge volume of transactions daily, they would want to fully test a new system before they use it.
Banks also need to have agreements with one another to clear checks electronically, local banking executives said.
"We don't have electronic agreements. Not at this time," said Bank of Hawaii's Gomes.
The electronic check-clearing system would not affect transactions between local banks since check clearing within the state is already done on the same day or overnight.
But many consumers also send checks out of state — to pay bills from a credit card or store card, or send money to relatives in the Mainland. If the Mainland bank clears checks electronically, even though the local bank does not, local consumers could lose part of their float.
This is how it works: Let's say you write a check to your credit card company in Minnesota to pay a bill. You write the check against a Hawai'i bank account and the credit card company deposits it in a Minnesota bank that is participating in the new system.
Before Check 21, the Minnesota bank would take your check and present it to a third party such as the Federal Reserve of San Francisco. The Fed would forward the check to the Hawai'i bank for payment. Once the local bank verified the check, it would authorize the Fed to pay the Minnesota bank.
Under that scenario, the consumer would enjoy a grace period of a few days before the check was cashed.
But if the Minnesota bank decides to electronically send the check, the Fed will get an image of the check within hours, not days. The Hawai'i bank isn't participating in the electronic exchange, so the Fed still has to mail a legally binding "substitute check" to the local bank.
The result: Consumers won't get their checks cashed on the same day but the float still will be shortened.
Lisa Lee Freeman, deputy editor of finance for Consumer Union's Consumer Reports magazine, believes that Check 21 is anti-consumer.
"Only banks benefit from it," she said. "Consumers end up with the short end of the stick — as usual."
Not only will the float be shorter, but there's no corresponding change in check holding laws, Freeman said.
Check 21 doesn't reduce the holding period allowed for checks, which is covered by another law, Freeman said. However, the Federal Reserve Board said if Check 21 increases the speed of processing, it will reduce the maximum hold allowed for checks as well.
As for getting back your canceled checks, the practice may eventually disappear.
About 10 percent of American Savings Bank customers choose to get back their canceled checks, said Abel Malczon, senior vice president of operations at American Savings.
While Hawai'i banks aren't joining the electronic exchange bandwagon for now, they are mandated by Check 21 to accept substitute checks.
When a bank that uses electronic check clearing gets a check, it scans the check into the computer system. An image of the check is sent to the issuing bank.
If the issuing bank still clears paper checks, it could print out the check's image it received. You can use the substitute check as proof of payment, according to the Federal Reserve.
The copy is a legal equivalent of the original paper check, according to the Hawaii Bankers Association.
Charlie Vesely, a retiree in 'Ewa Beach, said Check 21 won't change the way he and his wife pay bills.
"It doesn't affect us one way or another. We write very few checks," said the 67-year-old former schoolteacher. "We do our banking online."
Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.
