Updated: May 3, 2013 12:14PM
Originally published: September 23, 2004
Forget playing the float. If you’ve been sending out your paper checks a few days before your paycheck gets deposited, you could be pretty sure that your checks wouldn’t bounce. Now all that’s about to change.
Soon you’ll receive a notice in your monthly statement about a new system called “Check 21.” Pay attention, because if you don’t understand how it works, you soon could be paying big fees for bounced checks. Float time is shrinking in the new world of electronic banking.
“Check 21” is a financial industry project that’s designed to eliminate an estimated $2 billion in costs that the banking industry incurs as it transports the 40 billion checks written every year between banks and processing centers around the country.
Online bill payment has already cut into the volume of paper checks, and caused the closing of two of the Fed’s regional processing centers. Now the industry is embarking on a new technique that will make writing paper checks even less attractive. It’s all part of the trend toward faster access and less paper.
The trend toward electronics
The banking industry’s goal is to turn your piece of paper into an electronic item at the very first opportunity. Debit cards used at retail stores were the first major step in this process. But some people still insist on writing a paper check. So the banking industry has come up with a solution that many retailers will now start to use.
They’ll simply scan your paper check at the register, and return it to you! Your payment is in the system, and there’s no need to transport the paper. They’ll turn your check into a one-time debit card
If you’re still paying your bills by mail, using hand-written paper checks, the system has another new solution. When the check is first deposited by the retailer, it will be scanned and turned into something called an IRD -- an image replacement document. That IRD can be transmitted electronically to your bank, where the encoded MICR numbers at the bottom of the check can be read by your bank’s processor. Then the money can be deducted from your account
Bottom line: The money that your check represents can be transferred through the banking system electronically overnight. The check you write today, can be deducted from your balance tomorrow.
And your paper check is likely to disappear quickly, perhaps shredded, once it has been transformed into an IRD -- a legal check replacement document that moves electronically, instead of in mail sacks. The banks estimate they’ll save more than 4 cents per check in transportation and storage and sorting costs.
I know the two questions you have in mind:
“What if I need my paper check as proof of payment?”
That answer is simple. The IRD has been declared a legal document. It recreates both the front and back of your check, but unlike paper, it is stored electronically. The bank can send you a copy online, or print it out and mail it to you.
“If the bank can deduct my check payments on an overnight basis, does that mean my deposits will be available overnight, as well?”
Sorry, but this is a one-sided advance in electronic banking. Fund availability is governed by Federal Reserve Regulation CC. It’s an incredibly complicated formula, but basically it says that the first $100 of any deposit must be available the next day. Checks written on local banks must also be available the next day. But out-of-state checks can be held for at least 5 business days, except for the first $100. And if the bank “suspects fraud,” any check can be held for a longer period of time.
Try direct deposit
So far, Reg CC isn’t changing. But many banks compete for your business by promising good customers that even out-of-state deposits will be considered “good funds” in a day or two. So it’s an important question to ask your bank, especially if your paycheck is drawn on an out-of-state bank. The other alternative is to ask your company to provide direct deposit of payroll checks.
And that brings us back to the simple fact that paper checks -- whether the ones your company uses to pay your salary, or the ones you write to pay your bills -- are on the way out.
One day very soon, the paper check will look as quaint as a rotary dial telephone. And that’s The Savage Truth.
Terry Savage is a registered investment adviser, and appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast. Distributed by Creators Syndicate.