The “Check Clearing for the 21st Century Act” took effect on Oct. 28, 2004. Recall from last month's discussion that this act, also known as Check 21, is intended to allow for paperless processing of financial transactions. The American Bankers Association (ABA), promises Check 21 will “reduce the time, risks and costs associated with paper check processing.” The Consumers Union (publisher of Consumer Reports) warns of potential limitations to customer rights, higher fees and increased fraud resulting from its implementation.
Paper checks date back to 14th-century Holland, although they were not seen in the United States until 1681, when Boston businessmen used them to draw funds created by mortgaging their land.
Banks process more than 40 billion checks each year, with an average value of $925 (2002 Federal Reserve Retail Payments Research Project). Checks still make up 15 percent of point-of-purchase payments by consumers, and businesses write one-third of all checks.
The day after Check 21 was passed by Congress, Federal Reserve Chairman Alan Greenspan supported the law as part of an effort by the financial industry to find innovative ways to use digital imaging and archiving to modernize the country's payment and collection systems.
There are already 40 billion electronic transactions, such as funds transfers and debit-card transactions, processed each year. Digitizing paper-check processing will reduce losses and delays resulting from weather, natural disasters and transportation problems as well as handling and overhead costs.
How will Check 21 affect electrical contractors? Electrical contractors should understand their rights under the law and watch for pitfalls.
First, continuing an ongoing trend, you will no longer automatically receive your actual checks with your statement. Any bank in the processing chain may decide to keep the original paper check, and your bank may not even be able to provide the original. Banks have the right to destroy the original at any time [UCC 4-406(b)], as long as a legible copy is kept for seven years.
Substitute checks have the same legal status as original paper checks, demonstrating proof of payment. In case of an error, such as payment of both an original check and its digital image, only a substitute check will entitle you to a recredit.
A recredit must be requested within approximately a month, be issued within 10 business days, and is limited to the first $2,500. Do not sign up for voluntary truncation (nonreturn of your checks), or you will give up the right to receive substitute checks.
Second, float times will shorten, so make sure there are funds in your account. Unfortunately, hold times are not shortened under the law, so you will not necessarily receive expedited use of your deposited funds.
A mandated study after 30 months will determine whether banks have expedited availability of funds. For now, the shortened float times reduce your cash flow as a payer, but you receive no advantage as the recipient of payments.
Third, banks have no obligation to lower fees to you, so costs saved from efficient processing do not automatically flow to the customers. You must content yourself with the knowledge that you have helped save a few trees or find a bank willing to lower fees.
Fourth, the effect on check fraud cannot be predicted. Although check images will contain all information on the original check, including signatures and endorsements, the inability to determine pen pressure makes proving forgery or alteration impossible and handwriting analysis less useful. Alteration may actually be easier with digital formats.
You have time to adjust, since the changes will occur over several years. America Bankers Association spokesman John Hall advises small businesses to continue to monitor cash flow, since the check float will eventually shorten to 24 hours.
During the transition, do not confuse Check 21 with electronic check conversion (e-check). Check 21 provides optional digital images, processed through the banking system. E-check converts a payment into an “electronic funds transfer,” which is routed through the Automated Clearing House network (the system used for direct deposit).
On your bank statement, an e-check is listed with other electronic funds transfers and all checks are listed together.
Make sure your bank is providing the payee's name on your statements, as the Internal Revenue Service will require this in order to accept the statement as proof of payment, in lieu of a cancelled check.
Finally, it might be time to reevaluate your banking relationship. For more information on Check 21 and related issues, visit the www.aba.com, or read “Banks No Longer Will Return Original Cancelled Checks,” at www.consumerlaw.org/initiatives/check21.shtml. EC
NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached at email@example.com.