The new process is bad news for those who write checks before they deposit money to cover them. And some say its unfair.
By JEFF HARRINGTON
Published October 28, 2004
Carol Olt of St. Petersburg has a big problem with the banking industry's big overhaul in the name of modernization.
Under a long-anticipated federal law going into effect today, banks will be able to electronically process checks, eliminating the so-called "grace period" between the time personal checks are written and the time they are cashed by banks.
In other words, consumers will lose the float of a couple days that some have relied on to cover a check by putting money into their bank accounts.
The problem for Olt and other consumers: there's no reciprocal promise by banks to eliminate holding some deposited checks for five days or longer before crediting a customer's account.
"It's not that I float checks. . . . It's just a matter of fairness," said Olt, a 58-year-old retiree and homemaker. "Banks have been able to use the float to their benefit for many, many years. Now that account holders will no longer have that advantage, why will the banks still be able to hold the money and keep the interest?"
For their part, banks say they put a hold on out-of-state and sizable checks in order to cut down on fraud. That hold, they say, is separate from the issue of electronic processing of checks.
Both sides can agree on this: the law dubbed Check 21 - short for the Check Clearing for the 21st Century Act - promises to radically transform the check-clearing industry.
Previously, checks had to be physically transported to the banks that issued them to be cleared for payment, even if that meant flying the checks across the country. The rule of thumb today is that a check is handled 10 or more times from when it is written until it is mailed back to the person who wrote the check or stored in a lockbox for eventual destruction.
Under Check 21, banks are no longer required to physically move paper checks if they have the computerized ability to process those checks electronically. An image of the check, front and back, will be sent instantly to the bank where the money will be withdrawn.
That means checks will clear much faster, sometimes in a matter of hours.
Bank customers who have been receiving their canceled checks each month might start receiving a substitute check instead. The substitute is a printout of the electronic facsimile of a check.
Banks say the switch will eliminate check-clearing delays caused by such things as severe weather and terrorism. Consumer groups fear it will lead to a rash of bounced checks and bank fees.
Florida's Chief Financial Officer Tom Gallagher said the new system could hurt people on fixed incomes who might have relied on a grace period when paying bills.
"Always make sure you have enough money in your account to cover the checks you write at the time you write them," Gallagher advised last week.
The truly aggravating situation for consumers arises when they have enough money in their account to cover a check, but part of that money is a recent deposit on "hold" by the bank.
Regulation CC allows banks to hold local checks - those issued by banks in the same metropolitan area where they are deposited - for as long as two days. Out-of-town checks can be held for five days. However, large checks (those for $5,000 or more), checks drawn on new accounts and those drawn on accounts that are consistently overdrawn can be held for as long as 30 days, said John Hall, a spokesman for the American Bankers Association.
So a bank could bounce checks and charge overdraft fees even when customers technically have enough money in their accounts.
Hall doesn't dispute that scenario. But he notes a difference between what a bank can do and what it will do. With 10,000 banks in the United States competing for customers, it behooves a bank to be more consumer friendly by crediting deposits as soon as possible, Hall said.
Although the law allows electronic transfer of checks starting today, the transformation won't be overnight. Most big banks have imaging technology in place, but many have not installed the technology to transmit those images to other banks. One consultant estimated that by 2006, substitute checks will be at the same stage as ATMs were in the early 1980s.
- Times wires and files contributed to this report. Jeff Harrington can be reached at harrington@sptimes.com or 813 226-3407.
