WASHINGTON – A federal banking rule that takes effect today will speed check processing, but at the same time it could increase the likelihood of checks bouncing, consumer groups say.
The Check Clearing for the 21st Century Act, dubbed Check 21, will force banks to accept a duplicate image, or “substitute check,” in lieu of original checks that now pass between banks.
The change means bank customers will no longer get canceled checks in their monthly statements. But of greater concern to consumer advocates is the fact that it will shorten “float” — the window between the time a check is written and the time it is cashed.
“It’s pretty clear that a lot of people are going to have checks bounce,” said Cheryl Hystad, executive director of the Maryland Consumer Rights Coalition. “They aren’t used to checks clearing in one day and it (the new rule) will mean little or no float.”
Currently, float can be anywhere from a day or two to several days, depending on the banks involved. The old rules required banks to present a paper original of a check if one of the banks involved did not accept electronic copies.
The new rules will require all banks to accept the substitute check, which will have the legal weight of the original.
The switch to electronic transfers had been under consideration for a number of years, but it gained steam after the Sept. 11 terrorist attacks. When flights were grounded in the wake of those attacks, it halted check processing at banks that required paper originals, said Maryland Bankers Association spokeswoman Sarah Lifshin.
“Millions of checks sat on the ground until flights resumed, while electronic transactions went forward,” Lifshin said. “It demonstrated a weakness with the paper check system” that helped spur Check 21 into law.
Jeff Fowler, a spokesman for Denver-based electronic check processor First Data, said float currently averages 1.5 days. He said the new rule should trim it further, albeit modestly, in the coming years.
“Technology has reduced float greatly over the last decade, so the new law can only reduce it so much more,” said Fowler, whose company processed 3.6 billion transactions worth $182 billion last year.
Fowler said consumers already realize that float is not what it once was and most are not willing to run the risk of bouncing a check by betting against float.
A survey of 11,000 consumers by First Data’s STAR Network division earlier this year found that only 47 percent preferred checks to electronic debit cards, and that only 8 percent of those who favor paper do so because of float.
But Hystad and others warn that more bounced checks and overdraft fees are on the way because the new rule disadvantages consumers in other ways.
Consumers Union senior attorney Gail Hillebrand said the problem of reduced float is compounded by the fact that while the new rule speeds transfers between banks, it does not require those banks to put the money into their customers’ accounts any faster.
While that is true, John Hall of the American Bankers Association said “banks’ standard operating procedure has been to make the funds available more quickly” to their customers.
Federal rules require that banks credit local checks to their customers accounts within two days and out-of-town checks within five days. Hall said most banks credit funds well in advance of those deadlines.
Bankers and consumer advocates agree that customers should not write checks for more than existing account balances.
“Banking clients should only write checks for the amount of money they have in their accounts,” said Lifshin. “That should have been the case even before Check 21.”
Lifshin said Maryland banks have worked actively over the past year to educate clients about the changes.
But that was disputed by Consumers Union, which accused banks of doing little to warn customers about the changes. The law only requires notices for bank customers who currently get canceled checks with their statements, and those notices did not have to start going out until today.
“A lot of banks have started to send something out, but only after the media focused on it this summer,” Hillebrand said.
-30- CNS 10-27-04