Check Processing Going Digital

A law taking effect late next month permits banks to convert checks into digital images and pass the information along electronically, instead of transporting the actual checks from bank to bank.

The measure, dubbed the Check Clearing for the 21st Century Act, or "Check 21" for short, is expected to save banks some $2 billion a year.

And The Early Show financial adviser Ray Martin says you'll notice big differences, too.

Banks are already sending out notices to customers, informing them of the pending changes. Martin says consumers should be aware of those changes now, to properly prepare for them.

Check 21 will affect consumers in two basic ways.

First, if you are one of those people who still receives cancelled checks with your monthly bank statement, expect that practice to end. Because your check will be passed along electronically, the physical paper check will be destroyed - probably shredded or burned.

Instead, you will receive a "substitute check." This check will look similar to your original check and will contain all of the important information that appeared on your original check. "Non-essential" details, like the picture of puppies or a blowing flag that might appear in the background, won't necessarily appear on the substitute check.

Second, you will no longer be able to "play the float." The days of writing a check for the rent on Thursday, knowing that you won't be able to pay the charge until your paycheck enters your account on Friday, but also realizing that your rent check won't come out of your account until Saturday or Monday, are over.

No more leeway. Instead of taking a few days for checks to clear, it will take a few hours. In other words, when you hand over a check, you'd better be sure the money to cover it is available in your account.

And, Martin points out, this is no trivial matter: A recent study found that consumers will potentially be bouncing an extra 7 million checks a month. If you assume each of those bounced checks carries a $25 fee, banks could be accumulating an extra $170 million a month.

You may not notice the changes associated with Check 21 immediately. Banks will be phasing in the changes over time. However, due to the huge financial savings in store for banks, expect most institutions to begin the transition this fall.

"It is anticipated by industry watchers that the period from October 28th through the end of December could be the most difficult adjustment period for check writers and their banks as they become acclimated to the new Check 21 clearing process," Martin notes.

In case you're wondering, the new law was actually spurred by Sept. 11: Checks today must be physically transported to the bank that issued them to be cleared for payment - even if that involves flying them across the country. But millions of checks sat on airport runways for two to three days after the 2001 terrorist attacks, prompting the eventual switch in procedures.

In order to ease any transition pains, Martin recommends that consumers take the following steps:

DON'T "PLAY THE FLOAT": Assume that as soon as you write and give your check as payment, the funds will be withdrawn from your account. Under the new rules, another person's bank can process your check and deduct the money from your bank within hours of receiving it. Avoid writing "payday checks" - checks written several days before payday - as these checks are more likely to clear before the paycheck is deposited in your account.

CHECK YOUR STATEMENTS FREQUENTLY: As banks adjust from sending and receiving paper checks to electronic ones, their mistakes could involve paying an incorrect amount or paying the same check twice. Ask your bank when it is converting its check-clearing process and be extra vigilant about monitoring your account activity and statements during this time.

REQUEST SUBSTITUTE CHECKS: The new "substitute checks" are the legal equivalent of an original cancelled check. That means substitute checks will carry the same legal standing under federal law as valid proof of payment. Having these substitute checks in hand is important: If the bank makes a mistake and overpays or double-pays a check, having the substitute check allows you to demand that the bank credit up to $2,500 to your account within 10 days. Be aware that your bank may decide to charge you for these substitute checks.

USE DIRECT DEPOSIT: Consumer advocates are angry that while Check 21 allows banks to take money from your account more quickly, it does not insure that you can access money deposited in your account more quickly. Direct deposit is the fastest, most secure way to have money deposited in your account.

GET OVERDRAFT PROTECTION: If you routinely run your checking account down to near zero, you should look into adding an overdraft credit line or linking your checking account to your other savings at the same bank. This may involve a monthly fee, but that's certain to be less than paying several bounced check fees.

USE CREDIT FOR LARGE PURCHASES: It's always been a good idea to use a credit card as the form of payment for larger buys, and now credit cards have even more advantages over checks. For example, it will be more difficult to stop payment on a check when you have a dispute with a vendor. Credit cards provide protections allowing consumers to dispute incorrect charge amounts before paying, and offer additional warranty protections and rewards programs. During your bank's Check 21 transition period, it might be advisable to use your credit card more often.