While critics of a new federally mandated check-processing system for banks set to go into effect next month are highlighting what they see as serious downsides for the millions of Americans who write checks every day, the companies who are helping financial institutions comply with the plan are confident it will benefit both banks and consumers.
Last year, Congress passed the Check Clearing for the 21st Century Act, which was driven by the Federal Reserve. Supporters note the plan passed both houses of Congress unanimously. It goes into effect on Oct. 28 and represents the first major change in check processing since 1957.
Though the plan was first conceived in 1999, the legislation gained momentum when the 9-11 terrorist attacks grounded planes for several days, causing delays in getting checks back to their banks of origin.
Rather than sending each customer a statement along with all the checks written in the month, banks will begin using “image replacement documents,” or IRDs. Under the new rules, an IRD will be considered a legal equivalent of the original check, which in most cases will be destroyed at a bank other than the one from which it was drawn. The law does not require the receiving bank to keep the original for any length of time.
 An image replacement document (Image: American Bankers Assoc.) |
One of the biggest complaints about the new plan is the fact that with Check 21, the length of time between when a check is written and when the amount is debited from the account – the “float” – will lessen. Consumers, then, will likely bounce more checks as the processing gets quicker.
The nonprofit group Consumers Union predicts that under the new system 7 million more checks per month will bounce than do now. Supporters of Check 21 dispute that number, however.
“Don’t write a check unless the funds are already in your account,” advises Consumers Union. “The checks you write will clear faster, but banks aren’t required to speed up the time when they make funds available from the checks that you deposit.”
Some supporters of the system say banks will eventually lessen the time a deposited check is “held” before it is credited to a customer’s account.
“That’s the direction [banks] will be heading as they contemplate the products,” Richard Winston, a partner with Accenture Financial Services Group, told an online briefing on Check 21 today. “That positive [shorter hold times] will potentially offset what would be perceived as a negative, the other side of the equation.”
John Lettko is the CEO of Viewpointe, a firm describing itself as “the leading provider of check image and ‘Check 21’ related services to the nation’s top financial institutions.” After speaking at the briefing, he told WND “floating” is not a consumer right.
“If you’re writing a check on funds that aren’t in your account, you’re breaking the law; it’s as simple as that,” he said.
He predicts banks might develop products that allow people to “float” checks for a fee, like a paycheck loan.
Consumers Union also expresses concerns about bank fees, saying that though the system will save the banking industry billions, costs could go up for customers who want to receive IRDs. The group advises consumers to request that the substitute checks are returned every month.
“If your bank charges too much for an account that returns substitute checks every month, look for another bank,” the group’s website states.
Consumers Union decries the new law because of inconsistencies regarding when a consumer can request that misappropriated funds be recredited to his account.
“When a so-called ‘substitute check’ is provided to a consumer, Check 21 gives the consumer a right to have funds of up to $2,500 recredited to the consumer’s account in 10 business days if the check is paid twice, paid for the wrong amount, or otherwise paid in error,” the group states on its website.
“The statute is ambiguous about whether this new right applies when a paper substitute check is used in the processing of the check but is not returned to the consumer. The regulations restrict the right of recredit only to checks where the consumer was provided with a substitute check.”
The group warns that not all substitute checks will be considered the legal equivalent of the original. A customer who does not have an account agreement that requires substitute checks may get a copy of a check, but that copy would not be considered a legal equivalent. Many consumers, especially in the West and South, do not receive their canceled checks back even under the current system.
Consumers Union sums up its dismay with the new plan:
“Consumers can be harmed in several ways by the processing of an electronic image rather than the original check. First, both the paper check and the electronic image might be paid (double payment). Second, transferring the check back and forth between paper and electronic formats creates a risk that the amount on the paper check might be changed when it is turned into an electronic image for processing. Third, it may be impossible to prove that a check has been forged or altered without the original check. The switch to electronic imaging of checks means that the original check would not be held by the consumer or the consumer’s bank. Instead, one of the other banks in the collection chain would have the original check. It is likely to take longer to find the check, and to get it back if it has not been destroyed, than if the consumer or the consumer’s bank were holding it.”
The group has written a letter to banks suggesting seven measures they could take to better secure the rights of their customers.
In the online briefing, Lettko hailed the new system, emphasizing that the process “provides the ability to reduce the inherent inefficiencies in the current system.
“You remove the paper – it promotes the use of the digital image, and it improves the overall reliability and speed of processing.”
Lettko showed a slide comparing the current process and the new one mandated by Check 21. The left side included images of transportation modes representing the movement of paper checks around the country; the right side represented electronic processing technology.
“The left-hand side is a system dominated by trains, planes and automobiles,” he said, noting the system “stops operating when planes can’t fly.”
The media event was for both reporters and bank personnel. In fact, one subject promised to be covered, mentioned on an introductory slide, was “How banks can exploit Check 21.”
“Starting on Oct. 28, checks will start disappearing in the traditional sense,” Lettko said.
Added Winston: “Banks will need to invest significantly in the next two or three years” to comply with the legislation.
Though the two presenters said some banks would drag their feet on making changes, they encouraged bank executives to invest as much capital as possible early on to reap the benefits of the system sooner.
Lettko’s firm, Viewpointe, is bank-owned and provides “a national archive service,” he said. “The only one that does something similar to that is the Federal Reserve.”
The company has ten large banks that are its only customers, institutions it has helped with the Check 21 transition for four years. Lettko says smaller banks are typically going to contractors to help them make the transition.
IRDs, or substitute checks, are just a stop-gap measure that will only be in use until banks can process all transactions electronically, noted Lettko.
“They will cause a significant amount of heartache,” he said, “both in processing them and in customer response to them. … It does not look like a check – it’s sort of an oddity.”
Lettko mentions that the “tool of choice” for many banks, rather than the use of IRDs, will be an “image statement.”
“The bank will take your checks and put eight, ten or twelve of them on a page and simply hand you back pictures of your checks,” he told WND, describing the image statement as a “bridging tool.”
Bridging to what? Total electronic banking: “Ultimately its self-serve, online, where if you want to see the checks, you just bring up the checks you want,” Lettko said.
“That’s clearly where everyone wants to end up. And it’s extremely popular – consumers love it [electronic banking].”
Lettko and Winston encourage banks to “pro-actively communicate” with customers about the new process, warning that do-nothing banks will suffer.
Banks, they say, should get the message out to their customers that this is not something “that’s being done to you,” but that this is “just legislation we’re responding to.”
The ultimate goal is “real-time posting” so a check is processed immediately. Right now, that process can take from five to seven days.
“It’s conceivable that a customer could present their check for payment to a merchant,” Lettko said, “the merchant processes that check at that point and it processes all the way through to that customer’s demand deposit account.”
This kind of real-time processing is “less than five years out,” Winston said.
Lettko said by 2006 perhaps 50 percent of the banking industry will be fully converted. The question is when the second half of banks will get up to speed. He pointed out the legislation has no time frame for full implementation.
“You can use IRDs till the cows come home,” he said.
Lettko dismissed criticism of Check 21.
“So far, it’s enormous puffery,” he stated.
“When you think today that physical bags of checks are exchanged in the crudest environment known to man – planes, trains, buses, vans in parking lots. Bags of checks get lost when planes have problems.”
He says the security problems are in the current system, not the new one.
“The system today is not very secure or very friendly from a consumer point of view,” he contends. “We’re coming from a system that is mediocre at best to one where there actually is security and we actually do maintain incredible levels of redundancy. … You’re going from the dark ages to the light ages.”
Said Lettko: “I don’t see any fact to date that would back up opponents’ contentions.”
Consumers Union begs to differ and is hoping to mobilize bank customers by offering an online petition. The group hopes to get banks to establish customer-friendly policies in the wake of Check 21: “Sign our petition and tell the banks to adopt policies to improve the new check processing law for consumers.”
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