by Julia C. Reischel

The bank voted best in Somerville by the readers of The Somerville News is gearing up for Check 21, a law that Oct. 28 changes how it process checks.

“Check 21 takes it to the next level,” said Jonathan G. Sloane, the
president of Century Bank.

“Here you have, in effect, a process that will become almost instantaneous in the next several years. Checks will become just like a debit action—within hours you’ll know,” Sloane said.

The law, which was passed by Congress a year ago and applies to all banks nationwide, will not have this effect overnight, said Janice A.
Brandano, the bank’s senior vice-president of operations.

Brandano said she is part of the team working to implement requirements for Check 21.

The changes will evolve gradually—and it is likely that next month, most consumers won’t even notice them, she said.

Check 21 is intended to streamline the checking system by allowing banks to turn paper checks into electronic images. Though today many individuals do much of their banking electronically, banks are still dependent upon the physical handling of paper checks because the law requires that the original paper check be presented for payment at the check-writer’s bank, she said.

This means that every check that is written must travel back through a series of regional financial institutions to the bank where it originated, sometimes across the country, she said. “A check is touched by all these hands and they’re physically transported.”

About 40 billion checks a year are touched by human hands, and each check is handled an average of 13 times, she said.

Sloane said the flaws of this system were starkly illustrated during the four days following Sept. 11, when bundles of uncashed checks on planes were stalled on the ground, effectively freezing millions of transactions.

“A combination of forces—the Federal Reserve, Congress, financial institutions—got together and said this could have been a major disaster,” said Sloane.

Check 21 is the government’s solution to this cumbersome checking system. With the new system, the check won’t fly anymore, said Sloane.

Instead, anywhere along the check forwarding process, financial institutions will be able to convert the paper check into a digital image, he said.

The original paper check itself will be stopped—”truncated”—when it is made into a digital image, and will be kept or destroyed by the bank that truncated it. The digital image then will travel in minutes the journey that would take a paper check days to complete, he said.

In addition to permitting electronic check processing, the law also
creates a new negotiable instrument called a substitute check, or, officially: an Image Replacement Document, he said.

Sloane said a substitute check is an image of the original check that bears identifying numbers and the legend: “This is a legal copy of your check. You can use it the same way you would use the original check.” It should not be mistaken for a receipt or photocopy.”

A bank that is not equipped to accept an electronic check can create a substitute check. The bank will print out an official paper copy of the electronic image of the check, which then becomes the legal equivalent of the original, he said.

When the check is reconverted back to paper in this way, a bank can process it as it would any normal paper check, he said.

Before Check 21, Brandano said, banks didn’t have a negotiable instrument like the substitute check—only the original paper copy of a written check would do.

Now that printed-out digital images of checks are the legal equivalent of the original, checking will be liberated from the timetables—and costs—of airplanes and the postal service, she said.

The new law does not require banks to use electronic checking, nor does it require that consumers be e-savvy, Brandano said. “Congress knew that it couldn’t mandate every bank to do this. It would be far too costly to banks and take too much time to get the systems ready.”

Check 21 simply gives permission to banks to engage in electronic exchange, while giving banks that cannot do e-checking a new tool—the substitute check—to help them integrate themselves into an increasingly electronic checking system, she said.

For Century Bank, the passing of Check 21 meant it had to make a choice about whether to digitize its own checking system.

“Strategically, we’re not planning to engage in image exchange until the mega-banks work out the details,” said Brandano.

“It takes time to work out the kinks. We’ll let the big banks do that—then we’ll come quietly within the next two years when there’s an economic benefit,” she said.

She said that the bank’s choice was clear: “Do you want to be on the leading edge of technology, or employ it at the right time at the right price for the right reasons?”

Still, for Century, Check 21 means a lot of work, she said. “Check 21 mandates us to accept substitute checks, so even though we’re not taking advantage of the full possibilities of the law, it still affects us.”

Brandano said that the biggest headache of the new law was educating its staff, the public, and the media about its implications.

Century’s employee training department, customer service area and customer contact division are all learning how to teach questioning consumers about Check 21, she said.

Century has purchased some new equipment to comply with deposit regulations, has established an official policy on the law, and has created pamphlets to educate its customers, she said.

Check 21 will affect all residents of Somerville in two noticeable ways, Brandano said. First, people who receive paper checks in their bank statements will no longer get back all their original checks, she said.

“Instead, they’ll receive some combination of original checks and substitute checks,” said Brandano.

For people who don’t receive original checks back but instead receive photocopied images of their checks, the change will be even more subtle: “You’ll just see images of substitute checks versus images of original checks,” said Brandano.

The second noticeable effect of Check 21 is that some of the checks you write after Oct. 28 will be charged to your account more quickly than before, she said.

This is because some of your checks will be converted into digital images, which will then travel much faster to their destinations than paper checks can, she said.

Check-writers will no longer be able to count on float, the cushion of time before a check draws on an account, which can be as long as several days, she said.

“Depositors need to make sure that there is money in their account before they write a check,” Brandano said.

After Oct. 28, there will be no way to know whether a check will be processed by a bank with electronic capabilities—and therefore processed faster—or not. Therefore, if you are counting on a few days to get money into your checking account, your check might bounce. “If you play the float game, you’re going to get caught,” she said.

Because the Check 21 Act allows two legal paper copies of the same check—the substitute check and the original—to exist at the same time, some consumers are concerned that Check 21 is will create new opportunities for some types of fraud.

Brandano said that because Check 21 will decrease the amount of time it takes for a check to cash, it might actually help consumers and banks fight certain types of fraud by allowing them to notice suspicious activity more quickly.

“But as with any new technology, there may be opportunity for the criminal element to operate,” she said. “Criminals will generally find the holes, but the banks respond equally as quickly.”

One of those holes might be the lack of regulation about what happens to the truncated copy of the original paper check when it is digitized. “There are no regulations about how long we’ll have the original checks,” Brandano said.

“Each bank decides how long to keep them. Eventually what will probably happen is that after about 60 days the bank will destroy them,” said.

Both Sloane and Brandano said they insist that customers should not worry about the simultaneous existence of two valid checks because the liability for any mistakes arising from the use of substitute checks rest with the bank.

“The banks will be penalized,” said Brandano. “Consumers don’t have to worry about there being two checks bearing their name, because there is an express warrantee in the law that says consumer accounts won’t be charged twice.”

Sloane said, “I don’t think it will be a problem for us, because we’ve put in the time, the money, and the new policies that the law requires. Depositors don’t have to worry about it.”

Brandano said, “All the consumer has to do is tell the bank about a problem—the bank has to turn around and take care of it.”

While Check 21 will ultimately cut costs for banks by eradicating costly shipping fees for paper checks, Sloane and Brandano said that Century Bank will not see a windfall for several years.

“Every time there’s a new regulation it costs banks money.” said Brandano. “Right now, it’s still cheaper for us to clear paper.”

Century, like many banks across the country, is sticking to paper checks for now. It will have to invest in new technology in order to process electronic checks, Sloane said.

Century has recently spent $2.5 million to get up to speed on its imaging technology, Brandano said. The bank needs additional software before it can process checks electronically.

“You try investing in all this infrastructure,” Brandano said. “We will definitely not be making money as a result of Check 21. In time, yes, they’ll be an economic benefit—but it’s definitely going to take some time.”

For now, Century Bank’s policy is to advise Somerville residents to remember that substitute checks are real negotiable checks, and to never rely on float for time when writing a check, she said.

Brandano said that with these things in mind, you will not feel a lot of impact from Check 21.