Changes in checking include less ‘float’

In the next few weeks, consumers will start receiving notices from banks and other financial institutions about changes to their checking accounts.

Some consumers may be told they will no longer be getting all their canceled checks back with their monthly statements. Instead, there may be photocopies of some of the checks.

And most bank customers will learn that the checks they write may clear their accounts more quickly than in the past. This reduction in “float” means consumers risk an overdraft penalty if they try to write checks at the grocery or pharmacy on a Wednesday in the hope they won’t clear until their paychecks are deposited on Friday.

The changes are results of the Oct. 28 implementation of the Check Clearing for the 21st Century Act, better known as Check 21. It’s aimed at having banks clear checks electronically instead of sending paper checks across the country to settle accounts.

“Consumers should get ready for an October surprise from their banks when this new check-processing law is put in place,” warned Gail Hillebrand, a lawyer in the San Francisco office of the nonprofit Consumers Union.

Banking industry experts are more sanguine about the changes, pointing out that consumers have time to adjust their habits.

“For one thing, this is going to be implemented gradually,” said Joe Gillen, chief executive officer of Pinnacle Financial Strategies, a consulting firm in Houston. “There will be some bumps, but people will have time to adapt.”

Let’s say you write a check at the hardware store. In the past, the store would deposit your check in its bank. That bank would send it to the Federal Reserve or a private clearinghouse, which would process it and send it back to your bank for inclusion in your statement.

Under Check 21, the check you wrote at the hardware store could be photocopied by the store’s bank, and then the original check would be destroyed. That photocopy could then be sent electronically through a clearinghouse and back to your bank.

Consumers who have traditional checking accounts will get those electronically cleared checks back as “substitute checks.” These are forms, slightly larger than checks, that will include an image of the original check as well as coding to indicate how it was processed. The form also will say: “This is a legal copy of your check.”

Consumers already getting imaged statements — pages with small copies of their canceled checks — may find that some of the images are of substitute checks. The same is true for consumers who view their statements online.

The Check 21 law makes these substitute checks the legal equivalent of canceled checks, acceptable by the Internal Revenue Service or as proof of payment.

The Consumer Union’s Miss Hillebrand said consumers who don’t get either canceled checks or substitute checks back with their statements should ask their financial institutions how they can get paper proof of special payments, such as a sizable charitable donation or checks they have sent their landlords.

She said consumers should ask their banks: “If I need a substitute check, can I get one? Am I going to be charged for it, and how much?”

The reduced float is another issue. Paper checks now can take several days to clear; with electronic processing it can be done in a day or less.

Jean Ann Fox, director of consumer protection for the nonprofit Consumer Federation of America in Washington, points out that just one in eight consumers say they balance their checkbooks every month. That already makes them vulnerable to overdrawing their accounts.

And many consumers live paycheck to paycheck, sometimes finding themselves short toward the end of the month. That’s when they are most likely to write checks in anticipation of a paycheck deposit in a few days.

“That’s going to stop working,” Miss Fox said. “People who don’t watch out are going to be hit with big overdraft fees.”

ASSOCIATED PRESS