E-Money, Cash Flow and Check 21 - Part 1

On Oct. 28, 2004, the Check Clearing for the 21st Century Act (passed on the same date in 2003) became effective. Supported by the banking industry, this legislation, also known as Check 21, is being marketed to check-writers as just another welcome step toward paperless, more efficient processing of financial transactions. Detractors such as the Consumers Union (publisher of Consumer Reports), have reservations about how these types of changes will affect consumers and businesses. In this two-part series, we will examine what money is, how financial transactions have traditionally been processed, and how the digitizing of financial transactions is changing the way we buy and sell.

Check 21 allows for legal acceptance of paper reproductions of original checks, such as substitute checks, which are reproduced from digital images of original paper checks. Traditionally, banks incurred transportation costs from transporting checks through the banking system, postage costs from enclosing them with statements mailed to depositors, and labor costs from filing and processing paper checks through proof machines, which encoded the MICR numbers and symbols along the bottom, enabling machines to route the item.

The Check 21 law provides potential cost savings to the banking industry by removing the obligation to transfer the actual, original check through the system and substituting a digital image, which can be electronically processed instead.

In the world of digitized information, money is losing its physical presence and becoming an intangible item. People are tactile creatures. Most of us prefer reading an actual book to scanning the same words on a computer screen.

In the same way, there is comfort, and a little pride, in having a roll of bills in your pocket, knowing that you can buy what you need without worrying about overdrawing your checking account or paying high credit card interest charges.

Credit and debit cards changed the feel of money and made it easy to spend money we don't really have. Movements to make the penny and the dollar obsolete have gained support, and futuristic spending technologies are already being used in Europe, such as a subway payment system whereby your “Dick Tracy” wristband is scanned at the turnstile.

Is cash dead? There are still some vendors and retailers who do not accept credit cards and some people who don't even have checking accounts, much less plastic credit cards.

But there are also establishments where bills over a certain denomination are not accepted, even though, as legal tender, the customer is entitled to present them. The expansion of online buying and selling makes payment by check look cumbersome by comparison, as we look for ways to create “instant” transactions.

How hard was it to use cash, anyway? Paper currency alleviated the need of a barter system. It's lighter than gold bars and rocks, but easily lost or stolen. Society might become safer without cash, when there are no safes or cash registers to attract armed robbers. Using hidden transactions might improve the security of financial assets.

Not exactly. Computer hackers are replacing armed robbers; though less likely to kill or maim you physically, they can steal more of your assets faster than someone picking your pocket or cracking your safe. Protecting financial assets is still a cat-and-mouse game, but the players are now hackers and security software system designers.

Security considerations aside, consider the potential advantages and disadvantages of electronic processing. As a professional electrical contractor, your primary goal is making a profit and that profit is delivered through your cash flow. You probably don't actually collect much cash, but you are used to receiving checks for most projects.

Years ago, I worked in a small bank in a small town as a teller, bookkeeper and proof operator. Checks deposited were processed through the teller window, encoded and balanced through the proof machine, bundled and placed into a suitcase, taken by courier to a correspondent bank 100 miles away and distributed from there through the closest Federal Reserve bank.

Eventually, checks would return to the bank upon which the funds were drawn. The following morning, the suitcase was returned with items drawn on our bank, which were then tallied, filed and eventually sent back to customers with their monthly statements.

Clearing times ranged from three to 10 business days, overdrafts were processed by hand and the float time for clearing tempted many people to commit the felony of check kiting. Yes, it's actually a federal offense to write a check and send it out before you have the available funds in the account on which you have written the check.

Electronic banking reduces the float, or clearing time, as well as the cost of processing these paper items. It also creates efficiencies for your business. Check 21 is one more step in the process. Next month, we'll consider the advantages and disadvantages of expediting processing, reducing paper and eliminating float. EC

NORBERG-JOHNSON is a former subcontractor and past president of two national construction associations. She may be reached at bigpeng@sbcglobal.net.


About the Author

Denise Norberg-Johnson

Financial Columnist
Denise Norberg-Johnson is a former subcontractor and past president of two national construction associations. She may be reached at ddjohnson0336@sbcglobal.net .

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