Checkless in October

The Check Clearing for the 21st Century Act, or Check 21 as it's called, was signed into law last fall. Check 21 now allows retailers and their bankers to create a new negotiable instrument — the substitute check — which can be used to facilitate the presentation of checks using an electronic image.

Soon, instead of sending each physical check to the bank, retailers will be able to submit an electronic image of all checks received. The local bank can then rely on that electronic "substitute" check, or an electronic image created by it, for almost instantaneous transmission to the clearing bank.

The accounts receivable conversion (ARC) program currently allows large retailers to process consumer checks under $500 in a similar manner. Under Check 21 all checks, business or personal, can be processed electronically. However, the new law ensures that individuals or banks that don't want to accept electronic images can still receive a paper check. In other words, not every gift retailer will use substitute checks, but they have to accept them.

Many gift and decorative accessories retailers will be able to take advantage of this faster, cheaper system for processing and collecting checks. Naturally, not every gift shop, nor even every bank, will choose to immediately spend money on imaging and storing these documents. But everyone will feel the effect of this simple legislation, which will open the door to a list of new innovations.

Every retailer who receives a portion of the 42.5 billion checks that are processed every year will be in for a number of surprises — and may reap a share of the savings expected to result from Check 21. The first surprise may occur when your bank announces that hard copies of cancelled checks will be available by request only. Initially, you may not know which banks are using substitute checks or which aren't. Therefore, you'll have to assume that there will no longer be any "float time" to depend on. Those accustomed to writing a check on Wednesday to be covered by Friday's deposits will be out of luck. That check could clear as fast as Wednesday night.

By October, when the law takes effect, banks and retailers will be able to scan any check, and transmit the electronic file to the paying bank. A gift retailer, for example, will be able to convert checks at the point of sale, and transmit just the digital images to the bank. Banks, in turn, will be able to present the digital version of a check anywhere nationwide within seconds. That's why the clearing float will disappear, and settlement will accelerate. Banks' cost and the risk of physically transporting checks will evaporate, as may some of the security devices embedded in the check stock.

With the system so widespread, no one will be able to opt out. Banking experts predict that clearing images instead of paper checks will save enough time and money that banks will eventually truncate virtually every digital check.

Lawmakers claim that consumers will also benefit from Check 21. How? With a greater number of checks imaged and posted on the website of a bank, for example, customers will be able to review their accounts on a "real-time" basis, enhancing fraud prevention and consumer convenience.

Of course, there will also be adjustments for bank customers, such as the virtual elimination of float time. In addition, banks will send longer statements, but return fewer cancelled checks thanks to the new digital imaging. Under Check 21, if either the retailer or consumer needs to see the actual check, a substitute can be printed. However, either the retailer or the bank can be held liable if a substitute check is created without all of the necessary information. Bank customers who like getting their checks returned to them each month would likely receive substitute checks instead of the originals.

Unfortunately, Check 21 also raises some red flags. For one, it's going to open up a whole new avenue for fraud. With imaging equipment so readily available, it could be possible for enterprising criminals to replicate substitute checks. Banks would have a difficult time identifying a fake because it won't carry the marks of a financial institution that processed the check along the way.

Bank customers will have 40 days following the issuance of account statements to register claims against alleged improper charges. Banks must investigate all claims within ten days of receipt of the check — or credit the customer the full amount, pending completion of the bank's investigation. Legal action could be affected by truncation. Court battles over alleged check forgeries will have to be argued using the electronic image file because original checks will have been destroyed in most cases.

Gift retailers need to give a great deal of consideration to Check 21. There will be opportunities available for using substitute checks to speed up payments. But you'll also have to consider the matter of coping with substitute checks used by your bank. An awareness of the possibilities and the protections afforded under this new system will go a long way toward helping you and your business profit from Check 21.