It's quite the predicament: You want to go out with the gang on a Wednesday but you won't have enough money to cover the excursion until Friday.
So you write a check. Hey, it's probably not going to be processed for a few days anyway, right?
Um, maybe not. Banks have long advised against floating checks, and on Thursday, that foolhardy yet time-honored practice — the cause of oh-so-many overdraft fees — becomes even more risky.
Banks will begin implementing the federal Check Clearing for the 21st Century Act, or "Check 21." The law will require banks to accept "substitute checks," similar to a photocopy of the original, that can be sent between financial institutions electronically. The change will allow banks to move checks faster by processing more checks electronically instead of physically transporting them.
Industry officials predict that within three to five years, the time between writing a check to when those funds are deducted from an account will drop from several days to less than 24 hours.
"What Check 21 does is bring check processing from the Pony Express era to the computer age," said John Hall, a spokesman with the American Bankers Association (ABA), in Washington, D.C.
Here are some frequently asked questions and answers that can help you understand the change.
Q: How'd this all come about?
A: The Federal Reserve and many of the nation's 15,000-plus banking institutions for years have considered the nation's check-processing procedure ineffective.
Oftentimes, the checks go from consumers to retailers to banks to clearing houses to banks. And it costs billions to transport the estimated 40 billion checks consumers write each year. Meanwhile, not all banks are on the same page. Some already transmit information electronically.
Sept. 11, 2001, served as a catalyst for Check 21 legislation, said Hall. As air transportation was brought to a halt for several days, check processing was affected, too. Deposits weren't getting cleared, bills weren't getting paid.
With the widespread ability to transfer images electronically, the Federal Reserve and banking industry stressed to lawmakers that a change could save money and streamline check processing.
Q: To whom does Check 21 apply?
A: All banks and their customers are required to participate. Check 21 applies to all types of checks.
Q: What changes will consumers notice?
A: "Frankly, for most bank customers, Check 21 will be a non-event," says the ABA's Hall, "because most people don't float checks and most don't get checks back in their statement."
The 36 percent of bank customers who get checks back with their monthly statements will begin seeing a mix of original checks along with copies of "substitute checks" (see below).
Also, consumers will notice some of their checks processed faster. "Under the new system, some checks can be processed within 24 hours," Hall said.
Q: What checks are likely to be processed that fast?
A: In the next eight months to a year, said Hall, consumers may notice that some of the checks they write while out of town or state will be processed in about a day, as opposed to the several days it may have taken in the past. Many checks written locally are already processed in about a day.
Q: Can I still mail my bills so they arrive the day I'm paid?
A: Yes. Consumers can still count on the delay of mail. "Check 21 doesn't change how the postal service delivers mail but you're still taking a risk," Hall said.
Q: What's a "substitute check?"
A: A slightly larger paper copy of the front and back of the original check that's legally the same as the original. If a consumer needs a canceled check for any reason, they can go to their bank and get the substitute check.
Q: So what happens to your original checks?
A: Because banks will be accepting substitute checks and processing checks electronically, many — but not all — will simply take electronic images of your original check, enter it into a database and then destroy it, a process called "check truncation." Many banks, however, are not going completely electronic and will still require other banks to send them paper copies of checks.
Q: Are there any concerns about Check 21?
A: The Consumers Union, the nonprofit publisher of Consumer Reports, has a few. For starters, said Gail Hillebrand, Consumers Union's senior attorney in San Francisco, "banks will save money ... but there's no guarantee those savings will be passed along to customers."
Among other Consumers Union concerns:
• With checks clearing sooner, the number of people who've never bounced a check will increase.
• There may be less consumer protection: Electronic images and copies don't show things like how hard a forger may have pressed down, for example, in the investigation of stolen checks.
• With both paper checks and electronic images out there, there's the possibility of "double payments," in which a bank pays on the same check twice.
Q: How are banks informing their customers about Check 21?
A: Many have already begun notifying customers. As part of the Act, bank customers must be notified of changes within the month after Oct. 28.
Q: What's the bottom line?
A: Float time is going to decrease, so plan accordingly. "We've never encouraged people to float, it's just not a good practice. And now that we have another method of check processing, it's even more ill-advised," said Washington Mutual spokeswoman Lisa Margolin-Feher.
"We strongly encourage everyone to be cautious of the checks they write so they have enough money in their account."
J.J. Jensen: 206-464-2761 or jjensen@seattletimes.com.
