Banks prepare for Check 21 to take hold

Next month banking customers will lose a friend called float.

When the Check Clearing for the 21st Century Act goes into effect Oct. 28, bank customers will no longer have the unofficial grace period - known as the float - between writing a check and having money taken from their account. Customers who are used to getting their checks back in monthly statements will now receive a mix of substitute checks and original checks or, depending on their bank, not receive checks back at all.

Also known as Check 21, the act allows financial institutions to process checks electronically. Digital images of checks and printouts of those digital images will have the same legal weight as original paper checks. By the Oct. 28 deadline, all financial institutions are required to accept substitute checks, or paper copies of original checks.

Though it's a big change for many customers and banks, some local community banks switched to check imaging on their own. New Orleans- based Gulf Coast Bank & Trust invested in a $300,000 proof machine nearly three years ago and began using check imaging for monthly statements two years ago, said Joe Spampneto, data processing manager.

Once the new law is in full effect, it could cut the amount of checks Gulf Coast Bank processes each day to 6,000 from as many as 19,000 on a busy day, Spampneto said.

The law is intended to streamline the process of cashing checks by eliminating the system of air and ground transportation it takes to get paper checks from one bank to another. Check 21 allows banks to destroy the original paper check after taking a digital image of it and then transmit the image electronically.

The Sept. 11, 2001, terrorist attacks emphasized the vulnerability of the system when planes were grounded and checks had to be transported by trucks. Many smaller banks faced financial difficulty when they couldn't clear checks quick enough.

It's also an environmental issue, said Guy Williams, president of the Louisiana Bankers Association and president and chief executive officer of Gulf Coast Bank. Why in today's modern era are we flying hundreds of planes every night and burning hundreds of thousands of gallons of fuel to transport checks when it can be done electronically?

The American Bankers Association estimates U.S. banks process more than 40 billion checks a year. Check 21 will cut costs for banks by up to $2 billion a year by some estimates. The ABA says the new system will help combat fraud because quicker processing will lead to quicker detection. The ABA also says banking customers may have quicker access to funds and more convenient access to information about their checks through online images.

According to the ABA, about half of the nation's community banks already offer image statements, and another 19 percent plan to soon.

Resource Bank, based in Covington, switched to image statements more than a year ago, said Patricia Connell, assistant vice president of systems in the operations department. Resource Bank is training its 75 employees how to handle substitute checks and alert customers.

At first it seemed very overwhelming because it's so new and so widespread around the country and such a huge change in the way everybody does business, Connell said. But once we evaluated what we have to do, we realized we were already 90 percent there by having images of our checks returned to customers.

Liberty Bank and Trust Co. is ready for the deadline, said Alden J. McDonald, president and chief executive officer.

We've made a lot of necessary changes and it cost us a few bucks to do that, but it's something we don't have a choice on, he said.

Any additional technology costs banks may incur will be offset by the elimination of transportation costs, Connell said. Check 21 also will reduce postage costs for banks because they'll no longer mail out statements packed with weighty stacks of checks.

The biggest change in processing will take place at the federal level, said Dan Digby, president of Community Bankers of Louisiana in Baton Rouge.

Right now the Federal Reserve is paying for overnight shipments by air all over the place. That's what a big portion of this cost is, he said.

The new law requires only that banks be able to accept electronic images of checks. It doesn't require that they switch to electronic processing.

According to an ABA telephone survey in January, about 40 percent of the 1,000 consumers surveyed still receive canceled checks in their monthly account statements.

Check 21 will drastically reduce the amount of paper processing most banks do, Connell said.

We're becoming more and more a checkless society, she said. It's all a part of the paperless society we've heard about ever since we've grown up.

Holly Miller writes for New Orleans CityBusiness, a sister paper.

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