VIEWPOINT-OP/ED CHECK 21: NO TIME FOR PANIC, BUT PAY ATTENTION…OR PAY Check writers need to be aware; banks, credit unions need to prepare

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The Check Clearing for the 21st Century Act -- Check 21 -- takes effect Oct. 28 and is going to catch many unwary check-writing consumers off guard. Although not immediate, many financial institutions will now be able to clear a check almost instantaneously, eliminating the "float" and creating fees and penalties for accountholders. The changes, the result of Federal Reserve System action after banking problems following 9/11 terrorist acts, will result in huge savings for participating banks and credit unions. Overdraft programs may help consumers avoid additional bounced check charges and help automate the payment decision by the institutions. The author offers suggestions, beginning with: "Don't Panic."

“Paperless banking,” far, far from a total reality, takes another step forward Oct.28 when the Check Clearing for the 21st Century Act becomes effective. “Check 21,” as the Act is known, is already raising some critical questions, however.

•Are accountholders fully aware, much less prepared, for life without “the float?”

•Are banks and credit unions poised for increased bounce check activity and the attendant management problems?

For the vast number of American consumers about to hit the panic button, don’t. Not every one of the estimated 18,000 banks, thrifts, S&Ls and credit unions in the land is prepared to take immediate advantage of the Check 21 provisions implemented by the Federal Reserve Board. Maybe 5%. Expect a gradual implementation over the next few years.

For individuals at those banks and credit unions implementing immediately, prepare for “real-time” check clearing. “Float” is that time between writing the check and the payee cashing it, as long as five days in the past. If they are depending on float to get adequate funds into their accounts, they may be surprised at the speed of electronic banking. Two or three days of float will become one day or less… almost as instantaneous as an ATM transaction.

Check 21 allows financial institutions to electronically exchange checks (or “share drafts,” if a credit union) through digital imaging, as opposed to previous requirements demanding physical transport and processing of paper checks. The institution can destroy the paper version it receives and create a “substitute check” that legally performs all the functions of a canceled check.

The new rules are not mandated, but the early adopters believe more customers/members will be encouraged to use online (Internet) services, which are capable of displaying check images to service subscribers. Substitute checks, or print-outs of the processed images which are identified by special markings, will still be returned to requesting accountholders, but there may be a fee charged. Banks are required to keep the images for seven years.

The Federal Reserve System, which serves as the check clearinghouse, has already hastened the time it takes for checks to clear by streamlining many of its processes. Check 21 will let banks work directly with each other to settle accounts without involving the Fed. That could sharply reduce the handling of a single check – now as many as 12 times -- according to Mario Villarreal, chief technology officer of US Dataworks, a check processing and conversion software firm in Houston.

The Fed took steps to change traditional check handling after the 9/11 terrorist attacks during which checks sat on grounded planes for days, significantly slowing the nation’s flow of commerce. The delays swelled the float to $47 billion, almost 100 times its normal size, since aircraft transport a significant share of the 40 billion paper checks written annually by consumers (50.9%) and businesses (32.3%). (Source: American Bankers Association) Banks process an estimated $200 billion worth of checks daily.

A study for KeyBank National Association shows the financial services industry spends about $250 million annually to transport (plane and truck) paper checks—an estimated 101 million checks (163 tons) daily. According to industry estimates, the institutions may invest $10 billion in check imaging equipment in the next three to five years, with a potential savings of $2 billion to $3 billion annually.

Cyndi Koan, SVP-Operations for Denver-based SunCorp, which provides financial services to 540 U.S. credit unions, told the Denver Business Journal: “Only 30 percent of the large banks and small banks are image-enabled, while 40 percent of the midsized banks are image-enabled, she said. So the process of conversion nationally will take a while to implement. By 2007, all of the large banks, 80 percent of the midsized banks and 40 percent to 50 percent of the small banks are expected to be image-enabled.”

Consumer advocates argue that if checks clear sooner, deposits to accounts should speed up, too.

Check 21 May Stimulate Overdraft Programs

Although only 2,000 to 2,500 of the nation’s financial institutions have formal and communicated overdraft programs, all have some kind of penalty, fee or charge for nonsufficient funds (NSF) items – checks, share drafts or ATM withdrawals – when an account lacks adequate funds.

Automated, nondiscriminatory overdraft privilege programs, also known as “courtesy pay” and “bounce protection,” offer distinct advantages to accountholders and the institutions. Such programs help accountholders avoid embarrassment, inconvenience and additional costs when retailers or others present that same check for payment more than once.

For institutions, such programs will ease the decisioning burden on paying or returning the check. It also reduces item processing by 10% to 30% and improves non-interest income. Much of that income is not new, but simply redirected fees from accountholders who might otherwise utilize and pay credit cards, payday lenders, check cashers, etc. for short-term assistance.

Accountholders, educated on their overdraft limit and accepted use of the program, could still experience a higher number of overdraft charges if they do not realize that “float” is becoming an endangered species. The charge on an NSF item ranges from $17 to $35, averaging $22.50 in 2003. Studies indicate the average accountholder writes about 3.4 NSF items per year.

The top tier providers of check overdraft programs have been diligently working this past summer to educate their clients about the impact of Check 21. Many banks, credit unions and thrifts in turn have been communicating the coming change to their accountholders through advertising, local media coverage and with inserts in monthly statements.

From my experience and that of my national staff, we believe the financial services industry is working diligently to assure consumers do not experience multiple charges by the merchant and the bank with the advent of Check 21. No depository executive wants to see a customer/member’s credit record blemished or consumer-merchant relationship tarnished. Dissatisfaction and frustration over bounced checks and fees will make account retention difficult.

Fraud Prosecution: More Difficult?

A potential drawback to electronic processing may be in the area of fraud prosecution. Some law enforcement agencies contend it will be harder to convict the majority of check-writing felons without the original check to examine for paper stock, color, printing techniques, fingerprints, handwriting characteristics and pen pressure points.

Some industry executives respond that the faster electronic processing will actually help fight fraud by leaving less “getaway room” for check forgers. Accountholders who can see their checks posted more quickly on Internet-enabled financial sites will be alerted to fraud more quickly.

If that argument is valid, electronic “banking” will make a major stride, since studies now show that only about 30% of accountholders even bother to open their monthly statements. One may wonder, then, how many persons ever balance their accounts, as well as realize why overdraft programs are enjoying growing popularity. Now, will they check their activity online?

“Do the math,” has never been a popular admonition in American society. But come Oct. 28, many consumers may quickly and painfully learn that electronic check clearing and traditional float no longer add up to three days.

Steve Swanston is EVP-Sales for John M. Floyd & Associates, Inc. of Houston, a leading provider of non-interest income products to financial institutions, including the JMFA OVERDRAFT PRIVILEGESM program used by more than 750 banks and credit unions., 800-809-2307.


Preston F. Kirk, APR, Kirk Public Relations, Austin TX, 830-693-4447;

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