Money: That Check Won't Float

Nessa Feddis, a lawyer for the American Bankers Association, just got rid of all her canceled checks. Twenty years of grocery, mortgage, car-repair payments... shredded. "You just don't need them," she says, convinced that we're moving to a paperless financial future. That future starts arriving on Oct. 28, when a new federal law kicks in that will change the way checking accounts work. "Check 21" was designed to speed check clearing and allows banks to process payments without physically moving checks. It will cut processing time (and your float) from days to minutes and eventually reduce the number of canceled checks you get back.

That's good for banks. But for us? Consumer groups see the likelihood of more fraud, error, bounced check fees and inconvenience. "Banks will save billions under Check 21, but consumers stand to lose," says Gail Hillebrand of Consumers Union.

The devil, as always, is in the details. The new procedures allow banks to transmit electronic images instead of paper checks. In cases where the receiving bank can't accept an image, or when the consumer wants his canceled checks back, the law says banks can create a "substitute check," which will look like the actual check and have the same legal weight as the paper check. But the law doesn't say anything about what banks will do with those original checks once they've been copied and processed. Some banks are already working on systems that would allow merchants to process and present the checks without ever taking them to a bank at all.

That's what worries consumer lawyers like Mark Budnitz, a professor at the Georgia State University College of Law. He believes that with all those original and substitute checks around, there's more chance of the same checks being cashed two or even three times, either fraudulently or by honest mistake. Consumers can fight back, but it may not be easy.

Bankers say that any mistakes will be quickly fixed, and that most consumers--63 percent don't get their original canceled checks back even now--won't notice any difference. That may be true, but how quickly and painlessly will depend not just on where you bank, but on how the people you pay process the checks they receive. That's why check writers should pay some extra attention to their bank accounts in the coming months. Here's how:

Forget the float. That check you write for your haircut will clear fast enough to make your newly coiffed head spin. Don't write checks unless you know they're covered. Line up overdraft protection, just in case. And if you ever want to stop a check, you'd better get to the bank fast. Banks are also still permitted to hold deposits for five days or more before crediting them to your account.

Keep the checks coming. Eventually, real paper checks probably will disappear altogether, but during the transition it wouldn't hurt to get your originals back. You'll start to see substitute checks (stamped legal copy) mixed in with the canceled checks you get, and that's a good thing: banks are required to fix mistakes by recrediting your account within 10 days if you've received that substitute check, and the unofficial photocopies that come with most statements won't necessarily get you that same protection. If you discover a problem in your statement, and didn't receive a canceled check or substitute check for the troubled transaction, ask for one. Look for a bank that won't levy charges for substitute checks.

Stop writing so many checks. They're not worth the trouble. Debit cards and credit cards offer stronger consumer protections than paper checks. So use a credit card, and pay it off every month. You can dispute charges and get mistakes fixed without messing up your checking account. You'll save time at the shredder, too.

Money: That Check Won't Float | News