Check Clearing For the 21st Century
Subject Check Clearing
Topic Money and the Financial System
Key Words Check Clearing, Float, and Hold Time
News Story

A new law, called the Check Clearing for the 21st Century Act, and known as Check 21, will change the way that the banking system will clear hand written checks. Under the new law, banks will have more leeway in processing checks electronically. The result: a decrease in, if not elimination of, the "float": that grace period between the time a person writes a check and when the money is debited from the account. Many people who live from paycheck to paycheck and who thus depend on the float could see it disappear completely.

Under the new law, banks can make digital images of checks, shred the originals and use the images for processing. Checks will be cleared faster and customers will receive only images of the processed checks on their statements instead of cancelled originals. Many banks already return only check images to customers, but now the images are actually used in the clearing process-the original check need not return to the bank of origin. A major push for the legislation came after 911, when grounded airplanes prevented checks from being flown to their bank origin-and preventing checks from clearing, holding up millions of normal business transactions.

Check 21 does not change the length of time that banks can hold checks deposited by their customers; this mismatch between hold time and faster clearing has raised issues of fairness to consumers. Consumer groups such as the Consumers' Union say there will be more room for fraud, like counterfeiting and identity theft, and that, at least initially, banks will reap the benefit of increased fees from bad check charges when the checks clear before customers can deposit the funds to cover the checks.

"When they're at the retail checkout, people understand that [a] debit [such as from a debit card] is going to come out of their account quicker than a check, but that will be increasingly untrue," said Gail K. Hillebrand, a senior lawyer for the Consumers' Union. "We need to treat every one of our checks as if it is the one that's going to clear today, and that's new."

Bankers and retailers agree that in a few years a near-instantaneous system of check clearing will be firmly in place, in which the original check will be converted to an image in the store and sent electronically to the bank that needs to process the transaction. The customer will be handed back the original, the float will be eliminated and the account will be settled in hours, if not minutes.

"Consumers are now getting a sense that checks will clear faster," said Richard W. Burke Jr., Senior Vice-President for deposit operations at Commerce Bancorp of Cherry Hill, N.J., "and on the deposit side they're asking, 'Well, if you're getting it faster, how come you're not going to give it to me faster?' and I think that's something that banks are going to have to grapple with. This may cause banks to reconsider availability policies."

(Updated December 2004)


Why would consumers be concerned about the difference between hold time and actual check clearing?

2. What does the term "float" mean?
3. Write a short paragraph describing your preference between receiving a cancelled original check as opposed to an electronic image.
Source Jennifer Kingson, "Float Time on Checks Shortens, as of Thursday," The New York Times Online, October 28, 2004.

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