Check 21. Sounds like the beginning of a long-count on third down by Brett Favre. Instead, it is a new law that went into effect yesterday that may cause severe heartburn for small business folks for the next few months. I first posted about Check 21 last summer.
The initial reports about this new law focused on that fact that by speeding up check processing, it would be the end of “float” as we have known it. As NFIB reports:
“Under the law, banks can now transmit electronic images of a check rather than wait for the original paper checks to make their way through the banking system. As a result, float times — which gave business owners and consumers a day or two to ensure that funds were available in their accounts to cover checks — are gone.”
Cash flow in this country was effectively sped up by few days yesterday as Check 21 went into effect. Given its timing right before the end of the month, it could catch many small businesses by surprise over the next couple of weeks, as the time just before and just after the beginning of each month can be a time of creative cash management for many entrepreneurs. Float can become a way of life (I hope all of you parents of college-age children are paying attention to this new law!!).
Although checks are getting processed at the speed of light, deposits are not, which will only add to the problem for many cash-strapped entrepreneurs (and college juniors).
“Unfortunately, though, banks don’t have to make your funds available any sooner when you deposit checks. ‘Money’s leaving your account faster than before, but it’s probably coming into your account at the same rate if your bank applies a hold. And that’s what creates the new risk,’ said Gail K. Hillebrand, a senior attorney with the Consumers Union.”
However, there is another outcome of this new law that could have an even more far reaching long-term impact on how we engage in transactions. The hassle created by implementing this new law is leading many businesses to just stop accepting paper checks. Signs reading, “We will no longer accept checks beginning 10/28/04,” are popping up on store counters across the country. The end of the paper check may be a lot closer than we all thought.
“Because Check 21 makes use of electronic transactions that occur faster than the old process of physically moving checks from bank to bank, there’s the possibility that mistakes can be made….The law also eliminates the return of original checks. Banks no longer have to hold onto them….Instead, they will issue ‘substitute checks,’ which are paper reproductions of original checks that contain an image of the front and back of the check….However, one of the limitations of substitute checks is that they make it more difficult to detect forgeries and check alterations since there often is no original check to compare with the substitute check.”
A footnote: Having lived for a few years in Minneso-cold I believe that because of Check 21 the economy up there could come to an abrupt stand still! Why? Well, they seem to write checks for everything and anything up there. When we first moved there I was astonished to watch a women write a check for $2 to pay for a beer. And nobody at our table even blinked an eye, as that is the socio-economic norm up there. However, check writing as a way of life in Minneso-cold may have just come to an end….
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