Legislation to speed check clearing, but industry slow to make switch

"I will gladly pay you Tuesday for a hamburger today."

Wimpy's plea for a sandwich is representative of how many Americans have handled the cash flow in their checking accounts. However, all of that is coming to an end.

The Check Clearing for the 21st Century Act -- commonly known as Check 21 -- went into effect last week and represents the biggest change in the banking industry in decades.

"Check 21 clears the way for banks to process checks faster," said Pete Villareal, senior vice president of information systems at PlainsCapital Bank. "But the truth is most banks today do not have the necessary imaging technology in place."

What Villareal is referencing is the technology that allows financial institutions to convert paper checks into electronic images called substitute checks. They are the legal equivalent of an original paper check, which is then taken out of circulation and destroyed.

The substitute check is then negotiated between banks -- often in the same day -- eliminating the possibility for people to rely on the float of their check in anticipation of a future deposit. A portion of the 40 billion paper checks that are written in this country by individuals and businesses every year depend on the four or five day float to balance their budgets.

"Contrary to the hype surrounding Check 21, most people won't notice an immediate difference in how their checks are processed," said Villareal. "However, those customers who rely on float should realize that the grace period between the time they write a check and when that check actually clears their account is narrowing."

It is estimated that only about 30 percent of large and small banks are ready to switch to substitute checks. About 40 percent of medium-sized banks have the technology in place. However, by 2007 the industry should be completely up to speed.

The need for the new system is a result of the events on Sept. 11, 2001. After the attacks on the World Trade Center and the Pentagon, much of the U.S. transportation system was shut down. As much as $47 billion worth of checks sat on grounded airplanes for several days. Check 21 will ultimately eliminate the physical movement of paper checks.

"For decades, checks have been processed only after traveling hundreds or thousands of miles on cargo carriers," said Janet Lampkin, president of the California Bankers Association. "As the recent wave of hurricanes in Florida has shown us, sometimes our check processing is slowed or even stopped because our cargo carriers are grounded. We are confident that this new way of processing checks will provide consumers with greater fraud protection, as well as the continuity they expect and deserve."

But not everyone in the industry believes the new system works for the benefit of the consumer.

"Check 21 has upped the fraud ante," said Gary Cawthorne, vice president and managing partner of global banking at Unisys Corp. (NYSE: UIS). "As criminals get smarter and use more high-tech weapons, banks must deploy faster and more advanced fraud detection systems to identify the patterns of these cyber-thieves and stop them before they wreak havoc."

Unisys processes half of the world's checks and warns that criminals can use illegally obtained passwords and not only access check signatures but also methodically analyze bank statements and customer check writing patterns to plot crimes that bypass most traditional check fraud systems.

"Check 21 will be a boon for the banks who will save billions of dollars once it's fully implemented," said Gail Hillebrand, senior attorney with Consumers Union. "Consumers could end up losing out if they're not careful and if banks use the new law as an excuse to bounce more checks and collect more fees."

The group has begun an online letter-writing campaign urging banks to adopt a set of policies that will make the new law consumer friendly. So far, more than 16,000 consumers have participated.

The banking industry has responded by saying that writing a check in an account where there are insufficient funds is illegal. They encourage people to have payments like paychecks and other regular receipts transferred into their accounts electronically. That speeds the process and ensures money will be in the account to pay checks that are received.

Chamberlin's financial analysis column appears each Monday in The Daily Transcript. Chamberlin also reports daily on stocks and local business on NBC 7/39 and on "Money In The Morning" on KOGO 600 AM.

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