Robbing Peter to pay Paul just got a little harder to pull off.
The Check Clearing for the 21st Century Act, or Check 21, will go into effect Thursday, Oct. 28, allowing banks to transfer funds electronically from one institution to the next for payment — and immediately debiting the check writer’s account.
Under the old order, banks hauled tons of paper checks to the various source institutions before funds were released, a process that often took days. The new law puts a crimp in “kiters” or “pay-day bandits” who write a check on Wednesday, hoping that it won’t clear before Friday.
Arkansas Bankers Association CEO Ken Hammonds says that the new law makes it possible to write a check at the grocery store that morning and have it clear by lunch, but adds that he doesn’t think the average consumer will see that much difference.
“You can’t hardly beat a check to the bank anymore anyway,” he says. “Our check processing has gotten so quick over the last two years. Banks don’t close at 2 p.m. every day like they used to. Checks are going through on the same day as it is.”
The biggest difference, Hammonds adds, will be in shrinking the processing time of out-of-town checks and virtually eliminating hold times on deposits.
“Used to, you’d make a deposit and a 3- to 5-day hold would be placed on it, but now it could clear in the same day,” he says.
At an average $33 a pop for hot check charges, consumer advocate groups say Check 21 will have Americans bouncing an estimated 7 million more checks and paying $170 million in fees each month.
Little Rock single mother Karen Holloway says she won’t be contributing to that figure.
“Making money is what business is all about, so I don’t blame the banks,” Holloway says. “I honestly don’t think it will affect me that much. However I would be lying if I said I have never used my checking account as a credit card due to lack of funds. I know a lot of people that do that. I suppose I have to manage my finances better so I don’t depend on a check to get me through till my next pay period.”
Consumers Union, a national watchdog group, wrote letters to banks across the country asking them to waive overdraft fees for a two-month adjustment period, but Hammonds says any leeway is solely up to the individual institutions.
“I can bet banks are going to work every way in the world that they can with the customer,” Hammonds says. “I just don’t think the customer is going to see that drastic of a change. It will be more gradual. I can see where it can have a negative impact, but that’s where overdraft protection products come into play.”
Consumers aren’t the only ones bearing the brunt of Check 21. Banks have spent millions of dollars upgrading technology and training staff to implement the new measure. And, for now, most Arkansas banks still offer the option of including the paper checks in monthly bank statements, essentially keeping two processes — and expenses — going at the same time.
“There is going to come a time when we can’t do that any more. It just won’t be an option,” says Bryan Hill, vice president of retail operations for the National Bank of Arkansas. “Not a lot of customers are still asking for originals.”
But under Check 21, “original” has a loose translation. According to the Federal Reserve Board, banks can destroy original checks and replace them with “substitute” checks — an exact front and back image of the paper version with the electronic “clearing” marks that make it authentic.
“You can use a substitute check in the same way as an original,” Hammonds says. “You will always be able to get a certified imaged check for legal reasons, of course, but they’re going to eventually want the customer to do away with paper checks altogether.”
With an estimated 101 million paper checks weighing 163 tons being hauled around the country each day, the transportation industry will feel a loss. The banking industry thinks the new rule could eventually save millions in shipping charges.
As with any technological advance, advice and coping tools abound. The Federal Reserve Banks offers a free online Check 21 seminar to community bank executives, as well as several not-so-free software packages.
Hammonds says most Arkansas banks already offer their customers financial management training and various tools, including overdraft protection accounts.
“It’s just not going to be like turning on a switch all of the sudden,” Hammonds says. “My greatest advice, though, is to not take chances on beating your check to the bank. You should have money in the bank before you write the check.”