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Check 21 and You
Check 21 and You

By Bruce Spitzer

The MBA and regulators are working to create a better understanding of the new Check 21 Act and to simplify compliance. At a special Check 21 conference conducted by the MBA last month, more than 200 bank attendees viewed presentations from the Fed, bankers, and consultants, and had the opportunity to ask numerous questions. The bottom line: start preparing now and be prepared to educate your customers soon.

Last Oct. 29, President Bush signed into law the Check Clearing for the 21st Century Act (Check 21). Originally sponsored by Congressional Representatives Melissa Hart (R-Penn.), and Harold E. Ford Jr. (D-Tenn.), with strong support from the Federal Reserve Bank, the act requires banks to accept, by Oct. 28, 2004, a substitute check in place of actual checks, while continuing to accept actual checks as the system evolves.

For years the Federal Reserve and others involved in the U.S. monetary system have been advocating modernizing the check-clearing process. Currently, about 42 billion checks a year are passing through the Federal Reserve system, largely through a manual process involving bags and bags of checks moving in the air and on the ground every single night. Modernizing this process has been gaining momentum. For many years the use of debit cards, online banking and other forms of electronic commerce have been reducing the number of traditional checks moving through the system. But for many people, not fast enough. Then came the events of Sept. 11, 2001 when the aviation-delivery component stopped completely for days and many people, for the first time, realized there is a better, more efficient way to process payments.

All checks are impacted by Check 21, including consumer checks, business checks, cashier checks, teller checks, Treasury checks and travelers’ checks.

"One of the reasons the recent MBA Check 21 conference was so popular, is because there is a lot of confusion surrounding the issue," said David Floreen, senior vice president of the MBA, and one of the hosts of the conference. "We’re trying to remove the myth and rumor and educate bankers so that together we can all educate consumers before the end of next October." More industry conferences are planned by the MBA in 2004, as are resource materials and a public relations campaign to help banks reach consumers and business customers.

What follows are a few facts regarding Check 21:

• Beginning Oct. 28, banks will be required to receive substitute checks, but will not be required to create their own. Thus, customers will receive either their original check or a newly created substitute check when they receive their statements;

• A substitute check, also known as an Image Replacement Document (IRD), is not the same as a check image or check imaging. Many banks do check imaging now. As of Oct. 28 those that do will "image" both the traditional and substitute check and return images of both in their statements. Substitute checks and traditional checks will coexist until every bank invests in the IRD-creation technology;

• As Check 21 begins, the volume of substitute checks or IRDs is expected to be modest at first. Many checks will continue to be processed as they are today. The decision to convert a check into an IRD will be made by the payee’s bank;

• Once converted, customers will no longer be able to receive their original checks. The substitute checks will be legal documents included in monthly statements. Customers currently receiving images of their checks with statements will continue to receive the original check images and now images of substitute checks. Consumers must be made to understand this. Business customers must understand that they might start seeing substitute checks in their statements;

• The substitute check will include all of the information on the paper original – images of both sides including the signature. In addition, it will be MICR-line encoded and it will contain the legend. This is a legal copy of your check. You can use it the same way you would use the original check. Substitute check recipients will receive special re-credit protection against improper charges;

• The Fed will act as the intermediary as it does now when checks are presented for payment. Banks will receive substitute checks electronically via the Fed. However, down the road, banks may negotiate arrangements with each other to directly exchange the data when all parties are capable;

• Here is how a typical substitute check will be created beginning Oct. 28: A grandchild and Boston customer (the payee) of "Bank A" deposits a check in his bank after receiving it from his grandmother (the payer) in California who holds a checking account with "Bank B." The Boston "Bank A" takes the check and gives it to the Fed. The Fed flies it to California and "Bank B" creates a substitute check. It is then electronically passed back through the Fed and then back to "Bank A" and cleared for deposit in the grandchild’s bank account;

• In the scenario above, even though "Bank A" may have not yet invested in its own ability to create substitute checks, it has—must have—the capability to accept them electronically. At the end of the month it would either return a paper version of the substitute check to the grandson or an image of it with others in the statement mailing. If neither bank has invested in its own ability to create substitute checks, grandma’s check will go through the check clearing process and be returned as it is now;

• Customers may not know which banks are using substitute checks or which are not. Therefore, they must assume there will no longer be any float to depend on. The customer who is used to writing a check on a Wednesday to be covered by Friday’s paycheck will be out of luck. It could clear as fast as Wednesday night;

• It is too soon to tell how cost savings will be achieved. Banks will in the long term save on per-check transaction costs, but in the short term banks must invest in new training and technology. Who will pay? The Fed could elect to adjust deposit fees for banks that are creating IRDs. Moreover, large-volume banks could end up negotiating pricing arrangements with other large-volume institutions, and derive benefits from receiving funds earlier, if direct electronic exchange arrangements are in place;

• The payer-bank has the responsibility to hold any kind of check for seven years. Banks must budget for this storage mandate. (A customer’s own bank will assist, as they do now, in obtaining a traditional check or a substute check in the event that the customer needs it for legal reasons);

• Customers will have 40 days following the issuance of account statements to register claims against alleged improper charges. Banks must investigate all claims within 10 days of receiving a claim, or credit the customer the full amount of the improper substitute check – pending completion of the bank’s investigation;

• There are some significant questions about Check 21 and how it will be impacted by the 25-year-old Massachusetts law pertaining to the return of cancelled checks, primarily with respect to pricing. Stay tuned for further clarifications;

• The Check 21 provisions exclude non-cash items such as passbooks or certificates without routing or transit numbers in metallic ink.

"Clearly, we have some work to do," said Tanya Duncan, director of housing and federal policy for the MBA, and co-host of the recent Check 21 MBA conference. "We will add clarity with the help of regulators in the months ahead and then work with our members to help them pass along as much information as possible to consumers. Many banks now utilize imaging systems as opposed to true check truncation. So there will have to be some adjustments, but we’ll get through it. Vendors are already playing a big role and will continue to work with banks in transitioning to the new system.

"Even if many banks do not begin by investing in complete substitute check capabilities right away," added Duncan, "we believe there will eventually be economic incentives that are strong enough to make them plunge in. It’s hard to ignore progress."

For more information, please contact Tanya Duncan at the MBA offices: (617) 523-7595.       

Posted on Wednesday, March 31, 2004 (Archive on Tuesday, June 29, 2004)
Posted by kdroney  Contributed by kdroney


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