Check 21 law to speed up transactions

by Ashleigh Behlmann

SBJ Contributing Writer

sbj@sbj.net

The Check Clearing in the 21st Century law aka Check 21 will allow banking transactions to take place at a faster pace than before. This legislation, which will take effect nationwide Oct. 28, requires that all banks and checking account holders accept electronic reproductions of original checks. The bill was passed into federal law as a result of inefficiencies in the existing check clearing system made evident by the Sept. 11 terrorist attacks.

In the previous check clearing system, checks mailed by consumers made several physical stops before arriving in the account holder's bank statements.

"Let's say you write a check to pay a bill and mail it to Seattle, Washington. What would happen under the old system is the company receiving the check would deposit it in their bank in Seattle," said John Cox, executive vice president at Commerce Bank in Springfield. "That bank would have some way of getting that check back to Commerce Bank, if that was your bank of account. They would encode the amount of the check with an encoding machine, then send the check via airplane to a processing center, which in our case is in Kansas City.

"We would then take that check and deduct it from your account. The check then would eventually be put in a statement and mailed back to you. So that physical piece of paper has to move all over the country."

This system may be slowed down or brought to a halt entirely by foul weather or any other event such as Sept. 11 attacks or pilot strikes that would interrupt transportation systems. However, Check 21 effectively circumvents the majority of these problems. It also will decrease lag or "float" time in the system, causing money to come out of consumer accounts more quickly.

"Using the same example, under the new law you would mail the check, and when it is received the bank creates an electronic image of that check. The image is transmitted to our processing center, and we then send the electronic image on your statement. So the piece of paper stops at the first place it hits. You have the free flow of checks without having to be dependent on an airplane flying or a courier driving. It greatly expedites the movement of payment in the system," said Cox.

While the Check 21 mandate is a significant advance in the banking industry, as well as a significant change in the way people do business, neither Cox nor Commerce Bank's Whitney Morrow, vice president of treasury services, anticipate serious difficulties with the transition.

"Legally, everyone within the network has to accept these image-replacement documents you as a consumer, the banks but there is nothing mandating that banks have to create these images and send them," said Morrow. As a result, it is difficult to predict when local banks will shift entirely to the new system, or what the cost to these institutions will be.

Banks, including Commerce, must weigh the initial start-up costs of these new systems against long-term savings.

"There will be significant cost involved in acquiring software and equipment to do this, but I think the whole industry will find significant savings over time. We pay all kinds of air carriers to move checks all over the country, and couriers to take them to every bank imaginable," said Cox.

While initial costs may be high, banks may have the option of hiring third-party firms to act as clearing houses for smaller financial institutions. "It will be affordable, one way or the other, to everybody," said Cox.

For smaller banks, such as Old Missouri National Bank, the transition to a fully electronic system will take more time. "I think most of us right now are doing a lot of investigating on how it is going to affect us," said June Wilson, executive vice president at Old Missouri National Bank. "A lot of the larger banks already have some of the imaging technology in place. We will be able to accept the images, but we don't produce them. We will still be sending any of the checks we receive to a clearing house." Wilson said Old Missouri National Bank is considering forming a type of account for which they would receive the images.

Morrow believes consumers are primed for the transition, as electronic transactions have become a staple in everyday financial transactions through ATMs, as well as debit cards and point-of-purchase technology, which allows retailers to encode checks and immediately return them to the consumer.

"Electronic transactions are growing all of the time. People are issuing fewer checks and going electronic," Morrow said.

While the Check 21 system is arguably more secure and swifter than the previous system, it does still raise some concerns. Bankers will have to learn to deal with fraud in a new medium.

"Bankers have for years gone to the paper check to determine if it is a fraud. Often there is a clue on the physical check that it is a fraud. The offset to that is that the check is going to be processed through the system much faster than before," said Gary Farrar, senior managing consultant at BKD Technologies. BKD Technologies acts as a consulting agency for financial institutions to assist them in determining how to select which technological options are most appropriate for their businesses.

Farrar cautions that banks must begin as soon as possible to market these changes favorably to their clients.

"Come October, customers will see a change. They'll start to see those replacement checks in their statements. I'm sure some people are not going to like it, but the banks have no choice in the matter. So they have an opportunity right now to market this transition so that it goes more smoothly," Farrar said.