A new era for banking: substitute checks

8/18/2004

Bank statement mailings may be a lot slimmer this fall because of changes in how checks are processed.

Starting Oct. 28, a new federal law gives banks the option of replacing original paper checks with substitute checks that are made from digital copies of the originals, with the check information traveling between banks over computer lines.

That differs from the common practice now, which has actual checks being returned to a customer s bank by plane, train, and automobile, and then having that bank either send back the actual cancelled checks or imaged copies.

Such electronic processing is not mandated, but many banks will probably opt for it because it will cut down on the time and money it costs to process checks, said John Hall, a spokesman for the American Bankers Association in Washington.

This brings banking from the Pony Express era to the computer age, he said.

The substitute checks will be accepted as legal copies of the originals and a typical period between when a check is cashed out of town and when it is cleared by the authored bank of four to eight days should be cut to 24 hours. The change will make it more difficult to embezzle from a bank using this type of float fraud, said banking experts. The clearance time for a check cashed in town will remain 24 hours, they said.

The new law, called Check Clearing for the 21st Century Act, will help banks, saving them millions of dollars in check processing costs, experts said. One estimate said the cost is as high as $250 million a year nationwide.

Consumers, however, will see less of a benefit. Experts said it will be more certain their bills are paid, given the electronic transaction rather than transportation of the checks.

Just over a third of bank customers receive their cancelled checks with their statements, said Mr. Hall of the bankers association. And many of them pay $2 to $4 a month for that arrangement.

Once banks make the switch this fall, customers will be able to request photocopies of the front and back of a check.

What most people want to use their [cancelled] checks for is to balance their account, and these will satisfy that need, Mr. Hall said.

For banks, a key benefit is faster information and the better chance of catching fraud, either check forging or kiting, said Mark Kneirem of KeyBank.

For users, it should help, too, a National City Bank spokesman said.

This will actually speed up the availability of funds for customers ... and there are fewer errors that will happen, said Jeff Langenderfer.

Those aspects are attractive to business owners, many of whom will have the option of installing equipment that will allow them to capture check images at their place of business and transmit the electronic check files to banks around the clock, eliminating the need for late-night deposit runs.

Businesses would need to buy computer software to handle such activity, costing $200 to $15,000, a Huntington National Bank spokesman said.

Contact Mary-Beth McLaughlin atmmclaughlin@theblade.comor 419-724-6199.