Depositor Dilemma: Dealing with the Check Clearing for the 21st Century Act

IRDs
Whether a financial institution decides to adopt image exchange technology or not, every depositor of every bank and credit union will be affected by it. The law mandates that although the financial institution does not have to accept images for payment, it must accept substitute checks instead of original checks, that are created from those images if the depositary bank - or any collecting bank - chooses to convert the checks to images. It is more than a possibility, then, that depositors will not receive all their original, personal checks in their statement. Some of those will be substitute checks, or, as they are known in the new world of Check 21 - Image Replacement Documents (IRD). There is also the possibility that the customer has deposited a check that somewhere in the collection process was converted to an image, and then was returned by the drawee bank. The returned check that you will send back to your depositor will be an IRD. If he/she decides to redeposit the check, the teller should be able to recognize it as a legitimate item. Because of the effect on the consumer, industry experts are recommending that financial institutions begin to consider how they are going to educate their employees and depositors so that the changes will not be unexpected, and will be more acceptable. Bankers who were around when imaging first came into practice can appreciate how big an education problem this can be.

Clearing Times
Another important consideration that will have a great deal of depositor impact is the clearing time of checks. Small businesses that count on float will find themselves having to rethink their bookkeeping methods as collection times shorten. A check deposited on Tuesday in New York could be presented in Los Angeles by Tuesday night, refused, and the depositor in New York presented with the substitute returned check (IRD) on Wednesday. As NSF fees increase because of shorter clearing times, front line will be left to deal with irate depositors.

Reg CC
On the other side of the coin, Regulation CC will still be in effect on deposits, though the changes mandated by the Check Truncation Act are meant to make funds available to consumers more quickly. The law goes into effect by the end of October, 2004, and one of the provisions of Check 21 says that within 30 months of that time the Federal Reserve Board will submit a report and recommendations to Congress on what changes need to be made to the Expedited Funds Availability Act. That means that for two and a half years after Check 21 goes into effect, financial institutions will still have the ability to put holds on deposits that may be unnecessary. This, too, could lead to some customer confrontation.

Image Quality
The third thing that worries industry watchers is concern about image quality. If the image is correct, readable, and matches the payment information every time, problems would be few. Not even the most optimistic of Check 21 proponents expect that. The total acceptance of image exchange may be based on the quality of the initial efforts. The production of quality images to date has been very successful.

Fraud Reduced
The biggest "plus" to Check 21 will be reducing check fraud. Security officers will know much more quickly that bad checks are being deposited and returned, and will be able to take action immediately. The only drawback is the dubious possibility of obtaining original items as evidence.

Copyright © 2004 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 13, No. 10, 1/04