Check 21 may surprise those overdrawn at the bank
mysanantonio.com
David Hendricks: Check 21 may surprise those overdrawn at the bank
Web Posted: 10/06/2004 12:00 AM CDT
San Antonio Express-News
When the U.S. airline system was grounded in the days after the Sept. 11 attacks, the national "float" of bank checks that were stranded and delayed zoomed to an estimated $47 billion.
That's 100 times the normal amount of checks waiting to be processed, and the delay nearly halted national commerce. Even in normal times, the financial industry spends about $250 million annually to truck and fly checks around the country for processing every year.
After September 2001, the industry decided there has to be a better way to clear checks. Technology provided the answer, and on Oct. 28, the physical processing of checks will begin to disappear in favor of electronic processing.
Oct. 28 is the day that Check 21 — the name for the Check Clearing for the 21st Century Act — goes into effect. Banks that have imaging equipment will begin to take digital pictures of checks upon delivery for processing.
Under Check 21, images will have the power of negotiable instruments. Instead of sending checks through the Federal Reserve's clearing system, financial institutions can complete the transactions electronically bank to bank.
That will reduce the float — the time difference between writing the check and the transfer of funds — from two, three or four days to, in many cases, just four hours.
For the millions of check writers who depend on this float to make it from one payday to the next, this will be a huge adjustment. In some cases, a painful, costly adjustment.
Financial institutions using the imaging equipment will see a large number of bounced checks in November as a result of Check 21.
If the banks have overdraft protection programs, they will be able to collect a larger number of nonsufficient funds charges as a result. If they do not have overdraft programs, the merchants will collect the NSF fees. Call it the "November windfall."
Not all financial institutions will start electronic processing Oct. 28. Only about 30 percent of large and small banks have the imaging equipment ready. About 40 percent of midsize banks are ready.
By 2007, all the large banks, 80 percent of the midsize banks and 40 percent to 50 percent of small banks will process checks electronically instead of physically, according to projections from SunCorp, a company that provides services to credit unions.
Check writers need to ask their financial institutions about overdraft policies, said Cheryl Lawson, operations executive vice president for John M. Floyd & Associates, a Houston-based company providing overdraft systems to financial institutions.
Many financial institutions allow customers to draw funds from savings accounts, if they have them, to cover overdrawn checking accounts. This service is called overdraft "protection."
Because many customers have no such backup, some institutions offer another service called overdraft "privilege." The bank in that case extends a loan, up to a limit usually based on past account activity, to cover the overdrawn amount for a fee.
Customers like this because it saves time and embarrassment of settling unpaid checks and NSF fees with merchants.
"Privilege" programs charge between $17 and $35 in fees per overdrawn transaction, an average of $22.50 as of 2003. The average account holder writes 3.4 NSF items each year, said Steve Swanston, sales executive vice president for Floyd & Associates.
But fewer than 2,500 of 18,000 U.S. financial institutions have overdraft "privilege" programs. When funds are not available in accounts, the banks without the overdraft programs send the checks unpaid back to the merchants.
Floyd & Associates is sending out information sheets to banks warning of irate consumer traffic in bank offices. "This traffic might not be the kind you're wanting," it says.
Few, if any, banks are warning their customers about the coming Check 21 change or sending out advice to avoid problems.
"They are waiting to see how big the problem is going to be," said Jared Cahill, national director of alliances at Floyd & Associates.
Lawson and Cahill, who were in San Antonio this week to speak at the Independent Bankers Association of Texas convention, are advising bankers to be prepared to forgive NSF charges in cases when good customers are confused by the Check 21 change.
The best thing check writers can do is find out when their banks will begin electronic processing of checks and what their banks' overdraft policies are.
If not, some check writers could have less money this coming holiday shopping season because of overdrawn bank fees. |
