Financial Planning for October 2004

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Check 21 - There Goes the Fun of Cash Management!
For many, the college years were a fun, if stressful, time. Remember the thrill of writing a check for books knowing the money wasnít in the bank, but would be in two days. That was no problem since the check generally took three days to clear. Then came the early period in many peopleís careers and, well, everyoneís been there when we are tapped out for the month, the landlord wants the rent and payday is tomorrow. No problem, the check wouldnít clear for a few days so why not make the landlord happy?

We could probably go through each stage in a personís life and come up with a time when a check was written and the funds werenít in the bank. Most of us reasoned that the money would be in the bank when the check cleared, so we did not view it as writing a "hot" check. That little cash management technique is called float and the thrill of living on the financial edge was almost as good as a game of roulette in Vegas. Come on, admit it, couldnít you just feel the adrenaline pumping when you stopped to pick up groceries at the store and started the race of which would come first - your deposit or the check you just wrote?

Ok, maybe some of us had a little more fun with float that others did. Well, for once, Congress has managed to actually legislate a cure for the addictive disease known as Compulsive Floating (CF). Congress passed a bill known as "Check 21" and the President signed it into law. This miracle cure goes into effect October 28, 2004.

Unfortunately, this miracle cure will not allow those addicted to CF to gradually taper down on their habit. No, this law will immediately eliminate float or drastically reduce it. Hereís how itís going to work.

Letís say you send a check that takes one day to arrive at your creditorís place of business in a neighboring city. The creditor then deposits the check that is written on your bank that is in your town. The way the creditorís bank now gets its money is to send it back to your bank through the Federal Reserve System. By the time your bank gets the check and takes the money out of your account, itís taken maybe two, three or more days. Meanwhile, you keep earning interest on the money in your account (if there is money in the account) or you have time to deposit your paycheck to your account.

This system has worked for years, so Congress figured it was time to fix it. What will happen now is that check you sent to the creditor will be electronically scanned and reduced to electrical impulses that will essentially give the creditorís bank immediate access to the funds and take them immediately out of your account. Pretty neat system, donít you think? Thereís just one major problem in all of this new technology - Congress didnít change the rules on how fast the bank is required to give you credit for your deposit. It is conceivable that you could deposit your paycheck today; the bank could credit your account, but only allow you access to $100 of the funds in one day and the balance in three days. The fees that banks could generate from the additional bounced checks are enormous. Add to that, the added time a bank can earn money on your money and possibly charge you for the new convenient, less-hassle bank statement and you have an enticing pot of gold out there for banks. Oh, by the way, did we mention the $2 billion banks would save from not having to send tons of paper all over the country?

Now to be fair, most banks will realize that they are still in the business of buying your money and selling it to someone else. That means they will not likely go overboard with the fee thing and with denying you use of funds they obviously know are good. The great news is the law requires a study be made in 30 months to determine if any of these abuses are happening.

So, letís take a look at how this will affect your pocketbook. Obviously, you now know float has gone out the proverbial window. Since your check will be sent immediately to your bank electronically, this also means you wonít have time to change your mind about the expenditure and, therefore, the ability to stop payment on the check will be lost.

Because you will no longer receive your original check, you will need to require the bank provide you with a "substitute check" in the form prescribed by the law. This "substitute check" will allow you the right of recredit up to $2,500 in 10 days on any check you properly feel was double posted to your account or is in any other way fraudulent. Any amounts in excess of $2,500 do not have to be recredited until the bank has verified your claim. Unfortunately, you wonít be able to prove forgery as easily because you wonít have the original document.

Given that the only paper you may get is a "substitute check," which is considered proof of payment for all legal purposes, do not, under any circumstances agree to "voluntary truncation." In essence, this means the bank wonít have to send you a substitute check. Only the substitute check will have the aforementioned recredit rights. Your original checks, debit cards, etc. wonít have this protection.

How can a check be double posted? Remember, until the bank holding your check disposes of the check, there will be two "copies" of your check - both equally valid under the law. Suppose the original was sent back through and the electronic version hit also. You would get hit twice for the same check. For this reason, watch your bank statements carefully in the coming months.

The bottom line is that the banking industry and Congress have found a way to take advantage of modern technology. Ultimately, this could be a very good thing for all concerned, but until we have worked with the system for a while, all the kinks wonít be worked out and errors will occur. Make sure you catch any errors your bank doesnít. And all kidding aside, this is a reasonable attempt to bring the function of paying bills into the 21st century. If we all remain vigilant in the coming months, things should work out well.

Have a great October and donít forget to vote on November 2.

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