Checks and Balances

Check processing gets up to speed with expanded electronic imaging

By David Flaum
October 21, 2004

Following are excerpts from a Commercial Appeal (a Memphis, Tennessee daily newspaper) article that discusses the impact of Check 21 on banks’ customers.

On its surface, the Check Clearing for the 21st Century Act -- Check 21 as it is better known -- is simple.

As of next Thursday, instead of sending the check you write to pay your mortgage or for groceries all the way through the system, a merchant, bank or check processor will be able to make a substitute check, destroy the original and send the image of your check for payment.

"The biggest change that customers are going to see is that checks are going to post faster," said Helen Todd, spokeswoman for Regions Financial Corp. of Birmingham, the owner of Union Planters Bank of Memphis.

That won't happen with every check right away.

"It will be the end of the decade before the preponderance of checks will be processed electronically," said Jack Walton, an executive with the Federal Reserve in Washington.

People will also have to stop living on float -- that is, writing checks before they make a deposit to cover the payments.

Some of that has disappeared already, said Jim Blasingame, executive vice president and manager of the bank operations division at First Tennessee Bank.

More than 99 percent of the checks that go through the First Tennessee processing center in Memphis clear customers' accounts in one day, he said.

For other customers, the float they have enjoyed will erode over time, said Darrell Royal, executive vice president of Carreker Corp., a payment technology firm in Dallas.

For one thing, using substitute checks is optional -- companies and banks have the right to use them, but the law doesn't require it, Royal said.

"What really drove Check 21 was 9/11. After 9/11, planes didn't fly for three days."

That meant checks weren't flown from city to city for processing and the Federal Reserve absorbed about $47 billion in float because the cash to cover those checks couldn't be moved, either, he said.

Now, substitute checks may be turned into electronic images and sent from place to place without the worry of a transportation system shutdown.

Check 21 will be a two-edged sword for dealing with fraud.

To the extent it speeds up check processing, it will allow banks to know more quickly than before if a check is the result of fraud, such as identity theft, or if it is written on a closed account, Royal said.

"You can take action to pursue it more effectively if you know it sooner," he said.

But, image technology may make it more difficult to identify a counterfeit check than having the paper check available, Royal said.

Watermarks, encrypted keys and other check features can't be read as well on images as on the original, he said.

"Any fundamental change gives fraudsters a chance to be creative," Royal said.

That makes the best protection against fraud verification that the check is coming from a trusted source, he said.