Check 21-A revolution in the making

Check 21 is right around the corner-legislation that will revolutionize the check-processing world. It will certainly make its presence felt, from processors to banks and credit unions, and most important, on the consumer. The Check Clearing for the 21st Century Act is the official name of the legislation. It was formerly known as The Check Truncation Act, but today it is commonly known on the Hill and to industry players simply as “Check 21.” The Federal Reserve originally wrote the bill a few years back. This year it was introduced and passed in the House-unanimously. It subsequently also passed the Senate-unanimously. This show of strong support is virtually unheard of for such legislation. After resolving minor differences in a conference committee, the bill was signed into law by President Bush on October 28. The final version calls for an effective date 12 months after enactment. Next October 28, 2004, substitute checks could be a reality! A clear purpose Check 21 is designed to create efficiencies in the payments system by fostering check truncation-the process of capturing check information at the point of capture and transmitting the check info electronically in a data file. The original paper item is eventually destroyed. Although check truncation is a central component of Check 21, the bill does not mandate the process. In drafting the language, the Fed recognized that it must give the most advanced check processing shops an opportunity to grow, while simultaneously not “punishing” smaller processors that are not image enabled. With the Check 21 substitute check concept, check truncation is not mandated. If an institution that is not image-enabled receives a truncated check, it can print out a substitute check from the image and process that piece of paper as it would the original check. Specifically, the bill: 1) Introduces the concept of “substitute check” into the check clearing system; and 2) Removes the requirement that “banks” (check processors) negotiate an agreement to process checks without the original paper check (i.e., truncate the check). In the legislation, the substitute check is literally, a print out of the image of the truncated check. In order to qualify as an official (legal) substitute check, the bill mandates certain size and readability requirements, as well as a disclosure printed on it. But, for all practical purposes, the substitute check is the legal equivalent of the original check. The bill also contains warranties and indemnities pertaining to “reconverting banks.” These are defined as banks that create a substitute check out of an image, and vice versa. The next step is for the Federal Reserve to issue regulations to implement the new law. Given the short time frame, the Federal Reserve plans to issue a proposed regulation by year-end with a comment period of 60 days. Credit unions should stay involved during the regulatory process and provide input to the Federal Reserve on the Check 21 regulations. Impact to the consumer As one would expect, Check 21 contains consumer protection provisions. However, it is important to note that current check law, including the Uniform Commercial Code will continue to prevail. The consumer protection provisions outlined in Check 21, called, “expedited recredit,” are very specific to the substitute check. The expedited re-credit provisions are designed to give consumers protection in the event they feel that a substitute check has wrongfully been charged against their account. (Current check law prevails for original checks.) Credit unions will need to become familiar with the expedited recredit provisions if they begin seeing substitute checks in their processes. When it comes to personal money management, consumers will feel the impact of less float time. If, as this legislation encourages, truncated checks become more predominant, then float time will be reduced. Consumers who write checks against their account knowing there won’t be funds available to cover the check for three days, may find that it cleared in two days or perhaps one-hence a bounced check. It’s possible that credit unions could see a slight up-tick in bounced check fees, but after bouncing a few checks, consumers will catch on quickly. Since credit unions have been truncating checks for years, your members are not likely to experience much change, except for the speed associated with clearing their checks and deposits. Processing will be faster. As a credit union, don’t be concerned about making any changes to your operations for Check 21. Operational aspects will fall mainly on check capturing and processing providers like WesCorp. If you process share drafts or collect checks through a provider like us and do not offer non-truncation, there is nothing operationally you need to do. Your provider should complete all the necessary operational tasks. Once Check 21 becomes effective next year, the most immediate change you’ll experience will be earlier notification of return items. As well as receipt of substitute checks for incoming returned items. The law does mandate that every credit union provide customer awareness notices to educate their members on Check 21 and substitute checks. Timing and what the disclosure will contain still need to be fine-tuned in the regulatory process. One action you can take now, however, is to educate members who still request their original checks about receiving a substitute check or no printed checks at all. For example, your processor may offer a CD-ROM service, such as WesCorp does, which provides digitized images of your member share drafts. CDs can hold thousands of check images, which you can use for meeting members needs. For credit union processors, the revolutionary aspects of Check 21 will require more innovation. At WesCorp, we’ve been gearing up to meet the requirements of Check 21 for quite some time. Our belief is that image exchange is the future of check processing. Credit unions are in a good position to reap the full benefits associated with image exchange and Check 21. Today, the business model for check processing is undergoing radical change. New technologies continue to influence the course. Consider ATMs with image capability. In theory, one could deposit a check in to an image-enabled ATM, which could transmit the image and data file to the depository institution. Your funds could be available real time! Or consider imaging at another point of deposit: a branch or a point-of-sale transaction, for example. With Check 21, substitute checks will become a reality. The marketplace will feel a shake up, identifying the real industry players. Providers committed to the long haul in the processing business will clearly begin to emerge. Image capturing and exchange will be the established norm. Most important, our members will be enjoying the added speed and safety that the revolution will usher in. Are you ready for Check 21?