Check 21 brings changes, opportunities to business

Big companies or small companies, start-up or long-term player, Check 21 will have an effect on how you do business. Are you prepared to handle the increased opportunity for fraud and changes to your cash flow after Check 21 is implemented?

Check 21, which went into effect Oct. 28, has been under consideration for some time by the Federal Reserve Bank. When planes were grounded after Sept. 11, 2001, the physical transportation network, which the system relied on, proved to be inadequate. So, Check 21 was designed to increase the efciency of the check processing system and make it less susceptible to delays. Under the new law, Check 21 will allow any bank or party involved in processing a check to convert it into an electronic image, or a "substitute check." This eliminates physical handling of paper checks, as that image is then electronically shuttled from one location to another.

Now that the new law is in effect, you may see "substitute checks" in your bank statement. Substitute checks are a legal copy of the original check and may be used the same way you would use an original check. Banks, businesses and individuals must all accept substitute checks. No one can opt out of accepting them.

Since Check 21 will not change everything overnight, these substitute checks will appear along with original checks in your bank statements or just like other check images in an image statement. The checks will have a variety of new codes designating that they are substitute checks and showing their routes through the clearing process.

The process through which the original check is imaged and removed from the payment stream is called truncation. It is the truncation process itself that will streamline the payment system, allowing checks to be presented for settlement much sooner than they are now. Eventually, same-day settlement may be common practice.

While many industry innovations must occur before Check 21 reaches its full potential, there are several things a business owner should consider.

If you have relied on check stock as your primary source of fraud prevention, you may be leaving yourself open to harm. Many of the fraud control mechanisms currently in use today may not survive conversion to image and then re-conversion to a substitute check. Others may survive, but will not be as effective.

As these security features disappear, account reconcilement and Positive Pay will become even more valuable tools to deter fraud and avoid the inadvertent errors caused during check conversion. These services can help you detect fraud and inaccuracies earlier to minimize the impact on your business.

Using float as a cash management strategy has never been a good idea, but now it is even more important to manage your account like the check will be drawn on the day it is written. If you have been relying on float, you should speak to your commercial or small-business banker about how a line of credit can help you manage cash flow when money gets tight.

Depending on how you write checks, your funds availability may or may not change. If you receive a high percentage of checks drawn on non-local banks or you deposit a high number of checks, Check 21 will likely have a favorable impact on your cash flow. But if you write a high percentage of checks to non-local payees, or if you issue a large number of checks, the impact will likely be unfavorable.

Many new technologies are in development or initial testing phases. The ATM you use will eventually be designed to image deposits, and bank tellers will be able to image checks when they are presented at the counter. Plus, businesses large and small may have a terminal at their registers, which will allow checks to be converted at the point of purchase.

Many of the changes coming may not have an impact on your business in the near future, but you must take steps now to be prepared. Check 21 provides many opportunities for banks to invest in and share technology to improve their customers'cash management. And the passage of Check 21 itself insures the payment system will function even when terrorists or Mother Nature do their best to bring commerce to a halt.

Whitney Morrow has more than 20 years of banking experience. She is a certied treasury professional and senior vice president/treasury services manager of Commerce Bank, Springeld Region.