The Check’s Not in the Mail

Published on: November 4, 2004

by Matt Bell

A new banking law has just taken effect that will impact everyone who writes checks. The Check-Clearing Act for the 21st Century, otherwise known as Check 21, now allows banks to process the 40 billion checks written each year electronically. That means an end to the “float.”

Previously, checks had to be sent back to the issuing bank before the money was deducted from people’s accounts. For the banking industry that was a highly inefficient way to do business, since it usually takes two to five days (the float) to transport a check back to the issuing bank. Sometimes, such as in the case of bad weather, or in the event of a disaster like the terrorist attacks of 9/11/2001, it can take much longer.

But what was inefficient for the banking industry was seen as a bonus for many check writers who liked to “play” the float – that is, they would write checks knowing they didn’t have enough in their accounts and then try to make a deposit by the time the check cleared. Under Check 21 the two to five day check clearing process may shrink to a matter of hours. So, goodbye float.

This system will not only make the banking industry more efficient, it could generate a lot more fee income for banks – both from people who bounce checks and those who seek to avoid bouncing checks by purchasing bounce protection insurance. To avoid problems resulting from Check 21, here are a few suggestions.

First, get used to not seeing your cancelled checks – at least not the actual checks. If you’re among the 40 percent of banking customers who still get cancelled checks back, that practice will start phasing out. In their place, you’ll receive miniature photocopies of your checks – as many as 10 checks copied onto a single sheet of paper.

Second, don’t opt for the bounce protection plan offered by your bank. Consumer advocates say they are nothing but high cost loans. Fees range from $20-$35 per bounced check. Plus, there can be fees for every day that the amount is not covered. One consumer watchdog group estimated that someone who bounced a $100 check and left the amount uncovered for 14 days would end up paying the equivalent of more than 500 percent interest for the loan provided under a typical bounce protection plan.

That leads to the third recommendation, which is for people who are accustomed to living on the edge with their checking account balance: Check 21 will make that a much more dangerous and potentially costly habit, so now’s the time to keep a bit more in reserve.

Last – and this may be the most radical call to action resulting from Check 21 – it’s time to do something that only one in eight people now do: Keep your checkbook balanced.