Check 21 Could Turn Check-Floating Into Automatic Check-Bouncing

Bank consumers need to make a huge adjustment in how they write checks.

As of October 28, 2004, The Check Clearing for the 21st Century Act or “Check 21” took effect and is expected to reduce the time it takes your bank to clear a check from about three days to a few hours. Check 21 closes the door on the possibility of check floating.

Check floating occurs when you write a check to a company today, but it may not actually clear back to your bank account until several days later. The days it would take for the check to reach your bank account is called “float time”. If the funds where not readily available in the account when the check was written, the float time would allow buying time to put money in the account before it was ready for clearing. This would allow time for funds to be deposited before banking fees were accessed.

Check 21 was signed into law by President George W. Bush to help the nation’s check clearing system run more smoothly in cases of disasters and national emergencies as sited by 911. The banking industry is hopeful that this legislation will increase security, cut down on check fraud and reduce the transportation costs of moving checks.

In the past, a counterfeit check could take up to a week to be discovered because it might have to move from state to state to be cashed. With Check 21, banks could discover the fraud in one day or less.

Prior to Check 21, checks were transported by courier planes, trains and automobiles in order to get processed. Now, the process will be accomplished electronically. The original check will no longer physically move from bank to bank. Instead, an electronic image of the check will fly through cyberspace and clear within 24 hours.

For example, if you choose to write a check at the grocery store, they would in-turn translate your written check into a “substitute check”, which is an image of the original. In most cases, consumers who receive their checks with their monthly statement will now receive a “substitute” instead.

With the new law taking effect, there will be a period in which consumers will need to adjust. This has some consumer advocates concerned. Particularly businesses, which do most of their money transactions via floated checks, which are sometimes sent out of state. All sorts of checks are included such as: personal, business, corporate, government, U.S. Treasury checks, money orders, payroll, and traveler’s checks.

Some are concerned that Check 21, will elevate the number of bounced checks to new heights and that financial institutions will raise fees to capitalize on the lack of check floating. As a result, some consumers may have to go through great lengths to cancel checks if they need to.

With the new Check Clearing for the 21st Century Act, it is important to remember and adjust to the new check law to avoid bounced checks that can result in enormous fees and negative credit consequences.