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New federal law eases way to electronic banking
It's Not in the Mail

Running a little low on funds at the end of the month? Better not count on the "float"--the time between writing a check and the time it clears the bank.

A new federal law allowing banks to eliminate the traditional grace period went into effect October 28, said Robert Coalter, the Comptroller's assistant director of Treasury Operations.

"The Check Clearing for the 21st Century Act, known as Check 21, allows banks to stop returning the original paper checks to check writers' banks," Coalter said. "Banks can continue to send paper checks if they choose, but they don't have to. They can send an electronic image of the check, which is much faster and cheaper than the cost of physically transporting checks."

Consumers who bet on the float could bounce more checks, Coalter said.

The demise of the float depends on how quickly individual financial institutions begin using electronic image exchange, said Diane Holloway, Dallas Federal Reserve Bank assistant vice president.

"A consumer might see a float of several days reduced to hours, but there is no way to predict what any one consumer will experience in the beginning," she said.

Grounded on 9-11
On September 11, 2001, when the government grounded the nation's air traffic, the banking industry's check transporting operations ground to a halt. With checks stuck at airports across the nation, banks had no paper checks to process.

On a normal day in the United States, about $350 million is in float. That means consumers have written $350 million in checks, but the checks haven't cleared, so their accounts don't reflect the deduction. From September 11 to September 14, 2001, the float escalated to $47 billion, Coalter said. To prevent a similar disruption, the Federal Reserve Board encouraged Congress to enact Check 21, Coalter said.

The new law allows banks to turn any paper check they receive into an image that can be transmitted electronically.

If a bank refuses an electronic image, the bank that sent it must provide a substitute paper check. All institutions, including law enforcement agencies and courts, must accept a substitute check as the true legal document for checks drawn on U.S. banks in U.S. dollars.

Consumer crunch
By eliminating the cost of moving, clearing and returning checks, Check 21 may save the nation's banks an estimated $2 billion annually, according to Consumers Union, a nonprofit consumer advocacy organization. But banks are not under any obligation to speed up consumer's deposits.

"People may make a deposit in the morning and write a check in the afternoon and find that the check cleared before the deposited funds became available," said Gail Hillebrand, senior attorney with Consumers Union's West Coast office.

By mid-2005, consumers could be bouncing nearly 7 million more checks each month and paying an additional $170 million in fees for them, according to Houston-based Pinnacle Financial Strategies.

At first, the biggest impact of Check 21 will be to the consumers who are accustomed to getting their original paper checks back with their bank statement, said Rich Hickman, Bank of America senior vice president.

When more banks participate in image exchange, Hickman believes the biggest impact will be more efficient check clearing systems, which means banks can reduce the cost of paper checks, move money faster and create a more economical electronic infrastructure.

"I think we're going to have paper checks for a long time, but this legislation is the first step to all-electronic banking," Hickman said.

Pam Wagner