New Bank Laws End Float

Write a check in the morning, and put money in the bank at noon to cover it. Everybody's done it, and it usually works. But no more. The Check 21 Act now permits banks to clear checks electronically within minutes of them being submitted--a technique by which the banks do wonderfully, but consumers lose out.

It seems like a no-brainer, and in fact, it's good technology. Instead of requiring banks to exchange paper checks with each other, this piece of legislation allows banks to exchange a digital image of the paper check called an image replacement document (IRD). As a result, banks no longer have to rely on couriers, and the inherent delays of the old process, to clear checks. It saves banks a lot of money in check handling costs, and it allows them to clear checks a lot faster. Electronic imaging of checks will also minimize fraud, since banks will be able to put software in place that will automatically compare signatures and flag possible forgeries.

But "Check 21" was not designed to be consumer-oriented legislation. It was designed to help the banks, and only the banks. Although the financial institutions can now clear checks within minutes, they are under no obligation to pass this time savings onto the consumer. Traditional check "hold" times are often still in effect, with banks holding an out of town check for as much as ten days--despite the fact that it's clearing the bank within probably ten minutes. This gives the bank substantial "float" at the expense of banking customers. In reality, this technology is meant to allow the bank to hit your account almost immediately after you write a check. But the same technology also allows the bank to clear the checks you deposit immediately. To the industry's credit, a handful of banks do give customers access to funds from deposited checks faster than they used to before Check 21, but many don't, and there's no obligation for them to do so under the legislation. When a bank receives money in the form of a deposit, and they get to use that money for a period of a few days or a week before giving the banking customer access to it, the bank is getting free money--in essence, an interest-free loan from their customers.

What's the result of Check 21? Obviously, banks are reaping the benefits, but industry estimates predict that by the middle of 2005, bank customers will be bouncing up to seven million more checks per month than they were before the legislation, and paying the banks up to $170 million in related fees as a result.

In the near future, larger companies will be able to generate digital images of checks right from their accounting department, and electronically transmit them for deposit. The concept of remote deposit may be one way the consumer wins from this technology. Although larger corporations will be the first ones to use electronic remote deposit techniques, competitive pressures will inevitably lead to remote deposit techniques that can be used by smaller depositors as well. The day a consumer can fax a copy of his or her paycheck to the bank, and have access to the funds immediately, will be the day Check 21 becomes truly useful to the American public.